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Multimarket Contact and Market Power Implications in the US Airline Industry

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Abstract

We investigate the impact of multimarket contact on market power. We analyze this question in the U.S. airline industry where concomitant cross-market interactions among competing carriers abound. Collecting data from the U.S. Bureau of Transportation Statistics and exploiting a methodology that allows us to compute the Lerner index (proxy for market power), we find that multimarket contact between carriers has a U-shaped effect on market power. This suggests that there exists a threshold level of multimarket contact for carriers that compete across multiple markets to recognize their interdependences and begin to mutually forbear.

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Data Availability

The datasets generated during and/or analyzed during the current study are available in the Airline Origin and Destination Survey (DB1B) repository, https://www.transtats.bts.gov/DatabaseInfo.asp?QO_VQ=EFI&Yv0x=D.

Notes

  1. The ten mainline passenger carriers include Alaska Airlines, Allegiant Air, American Airlines, Delta Air.

    Lines, Frontier Airlines, Hawaiian Airlines, JetBlue, Southwest Airlines, Spirit Airlines, and United Airlines. See the U.S. Government Accountability Office (GAO) report (https://www.gao.gov/assets/670/664060.pdf) on the declining number of competitors in the airline industry.

  2. Our results are not sensitive to airport groupings.

  3. In our sample, online products represent 95 percent of total airline products and 98.7 percent of passengers transported.

  4. Code-sharing constitutes an accord among carriers where a carrier, called the ticketing carrier, is able to market and sell seats on its partner’s plane for flight legs of a route operated by its partner, the operating carrier. The inclusion of codeshare products do not affect our findings, mainly due to their underrepresentation in the U.S. airline industry. See Tables 6 through 10 for results that control for codeshare products and Section 4.2 for results discussion.

  5. For empirical evidence, see Brueckner et al. (2011), Brueckner and Proost (2010), Ito and Lee (2007), Brueckner and Whalen (2000), Brueckner (2001, 2003), and Bamberger et al. (2004).

  6. The nested logit model has the following well-known predicted product share function: \({s}_{j}=\frac{exp\left(\frac{{\delta }_{j}}{1-\sigma }\right)}{{D}_{g}}\times \frac{{D}_{g}^{1-\sigma }}{\left[1+{\sum }_{g=1}^{G}{D}_{g}^{1-\sigma }\right]}\), where \({D}_{g}=\sum_{j\in {G}_{g}}exp\left(\frac{{\delta }_{j}}{1-\sigma }\right)\) and \({G}_{g}\) is the set of products belonging to group \(g\).

  7. The Lerner index is zero under perfect competition, and it approaches one for positive nonzero marginal.

    cost in monopoly case.

  8. The slot-controlled airports are New York Kennedy (JFK), New York LaGuardia (LGA), and Washington National (DCA). For information regarding slot administration, visit the Federal Aviation Administration’s (FAA) website: https://www.faa.gov/about/office_org/headquarters_offices/ato/service_units/systemops/perf_analysis/slot_administration/

  9. See Brueckner et al. (2011), Brueckner and Proost (2010), Ito and Lee (2007), Brueckner and Whalen (2000), Brueckner (2001, 2003), and Bamberger et al. (2004).

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  1. School of Business, Embry-Riddle Aeronautical University, 3700 Willow Creek Road, Prescott, AZ, 86301, USA

    Jules Yimga

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Correspondence to Jules Yimga.

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Appendix

Appendix

Table 6 Correlation Matrix
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Table 7 Estimation of Nested Logit Demand Equations
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Table 8 GMM Estimation Results
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Table 9 Two-Stage Least Squares Estimation Results of Baseline Model – Weighted MMC
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Table 10 Market Power Effects of MMC among full service carriers (fsc)
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Table 11 Market Power Effects of MMC among Low-cost Carriers (lcc)
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Table 12 Market Power Effects of MMC among Carriers with Nonstop Service
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Table 13 Market Power Effects of MMC among Carriers with Connecting Service
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Table 14 Estimation of Price Equations
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Yimga, J. Multimarket Contact and Market Power Implications in the US Airline Industry. Netw Spat Econ 23, 985–1024 (2023). https://doi.org/10.1007/s11067-023-09601-3

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