Research

This chapter is an investigation into the possibility that multimarket con- tacts result in collusion in the setting of capacity in the US domestic airline market. I first provide reduced-form evidence on the effect of multimarket con- tacts on the possibilities of firms colluding in setting capacity by demonstrating that levels of multimarket contract have significant negative correlations with the quantity of seats that airlines release. Specifically, the effect of multimarket contact is primarily led by the four largest airlines (Southwest, United, Delta, and American); this has a greater effect in smaller markets in comparison to medium-sized and larger ones. Lead by the evidence, I estimate structural model of demand and supply system with conduct parameter which capture the degree of collusion in setting capacity. The conduct parameter is speci- fied as a function of multi market contact; it will be demonstrated that the conduct parameter shows that there is a significant and positive correlation be- tween multimarket contact and collusion, suggesting that the greater the level of multimarket contact, the lower the quantity of seats that will be offered in comparison to non-collusive oligopoly equilibrium.

In this study, I deliberate on the counterfactual merger simulations that have been carried out to establish the value of requiring slot divestiture at slot-controlled airports. I focus on two cases: the United Airlines–Continental Airlines merger and the American Airlines–US Airways merger. Slot divest- ment is done according to the requirements of antitrust enforcement agencies. The simulation results from three selected airports, Newark Liberty Interna- tional Airport, Ronald Reagan Washington National Airport, and LaGuardia Airport, indicate that the average airfare reduced for all post-merger air travel products. As a result, the airlines attracted more passenger, creating consumer surplus at the airports. Nonetheless, the airlines are still struggling to alleviate anticompetitive risks resulting from overlapping non-stop routes. These prob- lems occur when slot purchaser fail to enter the market for those routes. To address the structural limitations linked to slot divestiture, I tested other be- havioral alternatives besides slot divestment: forcing the surrender of slots oper- ating monopolistic routes, requiring code sharing between merged airlines and low-cost carriers, and opening frequent flyer programs to competitors and/or new entrants. Simulation results from these cases revealed that after merging the operations, the alternative solutions would reduce the average airfare and the number of problematic routes. Therefore, the impact of price was domi- nant compared to only when slot divestment was needed. Also, requiring slot divestiture, combined with forcing slot purchasers to enter the market for over- lapping nonstop routes and promoting code sharing would have lowered the average airfare for all products and the overlapping non-stop routes. However, requiring slot divesture combined with opening of the merged airlines’ frequent flyer programs would not have addressed the problem of anti-competition on overlapping nonstop routes.