Welfare Analysis of Tacit Coordination in the U.S. Airline Industry

Xiaolan Zhou ()
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Xiaolan Zhou: Faculty of Economics and Management, East China Normal University, Shanghai 200062, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2017, vol. 12, issue 1, 66-93

Abstract: This paper studies airlines¡¯ competitive behavior in the U.S. airline industry, focusing on 2014 data. I use a structural model to estimate demand and test several supply models, including noncooperative competition, perfect collusion, and tacit coordination. There are three different types of tacit coordination, formed by multimarket contact, common ownership, and codeshare agreement, respectively. I find that the model that fits the data best is a tacit coordination model with coalitions between airlines with at least 30% of their markets overlapped and using price rather than quantity as the strategic variable. I further analyze the consumer welfare loss, each carrier¡¯s profit gains, and changes in market variables due to the tacit coordination.

Keywords: multimarket contact; common ownership; codeshare; discrete choice model; nonnested test; welfare analysis (search for similar items in EconPapers)
JEL-codes: L11 L13 L40 L93 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:12:y:2017:i:1:p:66-93

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