Multimarket contact and the Southwest effect: twenty-five years of evolving rivalry in the US airline industry

María Carballido Cerqueiro, Jesus Carro and Georgios Siotis

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: This paper aims to better understand competitive rivalry in the US airline industry over the last 25 years. First, it contributes to a better understanding of the procompetitive "Southwest effect" over the period 2000-2025. We show that this effect can clearly be identified during the first part of our sample period, but disappears circa 2016, when Southwest culminated a process of strategic re-orientation and appears to have started behaving like legacy carriers. Second, we find that Southwest presence on a route flattened the relationship between air fares and Multimarket Contact (MMC) until the mid-2010s; since then, the two groups of routes have converged. Third, we document that the effect of MMC on fares has diminished over time. We conjecture that this may be due to increased concentration and symmetry among major players. Fourth, our results indicate that a linear specificationto identify the relationship between MMC and fares may be adequate until2007. This is no longer the case afterwards: the data point to a non-monotonic U/V-like shape, first on routes with Southwest and, from 2016, on all routes. Fifth, the pandemic seems to have led to a temporary breakdown in tacit collusion, but only on routes where Southwest was not present; once the COVID-19 crisis ended, the long-run evolution of the MMC-fare relationship resumed.

Keywords: Southwest; effect; Multimarket; contact; Airline; industry; Demand; shock; Pandemic (search for similar items in EconPapers)
Date: 2026-10-07
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:50949

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