A tale of two duopolies: collusion and exit in a local airline industry
Applied Economics Letters, 2015, vol. 22, issue 8, 664-667
This article investigates two episodes of market adjustments in Hawaii's interisland civil aviation market. One is collusion in which duopolists of similar size agreed to reduce their supply to the market. The other is unilateral exit by an individual company, which resulted in the asymmetric duopoly with respect to firm size. The analysis demonstrates that even a dominant duopolist cannot maintain sufficient market power to manipulate prices as long as competitive forces are present, while cooperative adjustment in the capacity dimension is likely to lead to higher prices on a sustainable basis. The results confirm the importance of competitive forces for mitigating price hikes in the process of adjustment.
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