Collusive Duopoly: The Economic Effects of Aloha and Hawaiian Airlines� Agreement to Reduce Capacity

Rodger Blair (), James Mak () and Carl Bonham
Additional contact information
Rodger Blair: Warrington College of Business Administration, University of Florida
James Mak: UHERO, University of Hawai`i�Manoa

No 2007-1, Working Papers from University of Hawaii Economic Research Organization, University of Hawaii at Manoa

Abstract: In the aftermath of the terrorist attacks on September 11, 2001 (9/11), Congress passed the Aviation and Transportation Security Act (ATSA). Section 116, Air Transportation Arrangements in Certain States, provided a foundation for Aloha Airlines and Hawaiian Airlines to obtain temporary antitrust immunity for their agreement to coordinate a reduction in passenger seat capacity on routes between Hawaii�s five major interisland airports. While the provision did not apply only to Hawaii, it applied only to intrastate flights, and only Hawaiian and Aloha Airlines, among U.S. airlines, took advantage of this statute to jointly reduce passenger capacity in the wake of sharply declining demand for air travel after 9/11. The limited antitrust exemption provides a rare opportunity to examine the economic effects of collusively reducing capacity in a duopolistic market. We present an economic analysis of the agreement, and advance the testable hypothesis that capacity reduction will result in fare increases. We also demonstrate empirically that reductions in passenger capacity under the agreement did contribute to sharply rising airfares in Hawaii�s interisland air travel market. Our analysis suggests that explicit agreement is more effective in reducing competition than tacit collusion in a tight oligopoly. Moreover, our empirical findings indicate that, following the expiration of the agreement, tacit collusion may have been sufficient to enable the parties to continue their supra-competitive pricing. We also document the entry of a third interisland carrier following the increase in interisland fares, and the price war that followed. Finally, our empirical results provide an economic foundation for the policy implications that we advance in our concluding section.

Keywords: Collusive Duopoly; Aloha Airlines; Hawaiian Airlines (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-03
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://uhero.hawaii.edu/wp-content/uploads/2019/08/WP_2007-1.pdf First version, 2007 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hae:wpaper:2007-1

Access Statistics for this paper

More papers in Working Papers from University of Hawaii Economic Research Organization, University of Hawaii at Manoa Contact information at EDIRC.
Bibliographic data for series maintained by UHERO ().