Multimarket Contact and Intensity of Competition: Evidence from an Airline Merger

Abstract

This paper examines the relationship between multimarket contact (MMC) and the intensity of competition. We take advantage of a recent merger, which altered the extent of MMC throughout the US airline industry, to understand the nature of MMC’s impact on the airlines’ frequency of service. Evidence that non-price effects of MMC are a part of the longer-term industry equilibrium is not robust. However, we observe that following the merger the market players started taking the degree of MMC into account in making their frequency decisions in line with the ‘mutual forbearance’ hypothesis; however, the effect showed signs of diminishing over time. Our results have implications for merger evaluation in industries where consolidation may lead to a higher extent of multimarket contact.