Determinants of airline carrier conduct

Abstract

Since Joe Bain' s seminal work I in 1959, industrial organization research has focused on structure, conduct, and performance. Bain thought that, aside from feedbacks of second order, structural variables determined industry conduct and that, in turn, and conduct determined industry performance. Subsequent scholars seized upon the structure-conduct relationship to suggest that structural theories could be used in antitrust analysis. 2 If structural variables (such as concentration) influence the likelihood of collusive conduct, an understanding of structural characteristics could then be used to (I) focus investigative resources on in which collusion is likely, (2) detect actual instances of collusion, and (3) reduce the likelihood of collusion by changing the itself.' Empirical tests of the ways in which structural variables influence collusion, however, have only been indirect. Dozens of econometric articles have examined the structure-performance relationship4 by regressing structural variables (such as concentration) on performance variables (such as profits). But these structure on regressions have only indirectly tested the relationship between and collusion-by assuming, often implicitly, that abnormal profits stem from collusion. Demsetz noted that often such indirect tests ofconduct are unidentified, because firm-specific efficiency as well as collusion could induce a positive correlation between profits and concentration. This article represents a first attempt to overcome the problems inherent in inferring conduct from performance by regressing estimates of conduct itself on the structural variables that theory suggests induce collusive behavior. Directly examining the relationship between conduct and can test not only traditional structural theories-such as Stigler's hypothesis!> that the number of sellers influences the degree of collusive behavior and Posner's hypothesis7 that collusion is likely to take place in in which the gains from collusion are the greatest-but also newer structural theories that have been explicitly advanced in the airline context, such as the hypothesis that airline routes are contestable markets that will be competitive regardless of concentration. R The tests in this article have important policy implications in detecting and deterring collusion. The analysis not only indicates where collusion has taken or will take place, but it also quantifies the extent to which influences behavior. While many theories predict that more competitors will induce more