Abstract
This paper examines empirically effects of multimarket contact on pricing in U. S. airline industry. The analysis of time-series and cross-sectional variability of airline fares in 1000 largest domestic city-pair routes reveals presence of statistically significant and quantitatively important multimarket effects—fares are higher in city-pair markets served by carriers with extensive interroute contacts. These findings are consistent with claims of industry experts that airlines live by golden rule; i.e., that they refrain from initiating aggressive pricing actions in a given route for fear of what their competitors might do in other jointly contested routes. During his testimony, Mr. Steven B. Elkins (Senior Director of marketing systems development for Northwest Airlines) cited an example in which Northwest lowered fares on night flights that were flying with empty seats in a number of routes from Minneapolis and Upper Midwest cities to various West Coast cities. He said that Continental Airlines swiftly responded by cutting prices in important Northwest markets … Mr. Elkins's memo advises Northwest pricing analysts: We Will Live by Golden Rule! In his testimony, he explained that, the Golden Rule in that context was that I did not want my pricing analyst initiating actions in another carrier's market like Chicago for fear of what that other carrier might do to retaliate [Wall Street Journal, October 9,1990, p. B1].
Published Version
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