The Effect of Short-term Liquidity and Capacity Constraints on Tacit Collusion
Smeal College of Business
U.S. Securities and Exchange Commission
University of Rochester - William E. Simon Graduate School of Business Administration
We provide empirical evidence on the peculiar dynamics by which firms in the airline industry perform aggregate price adjustments and argue why these fare hikes represent tacit collusion. After using weather instruments to account for endogeneity in our capacity measures, we find that negative changes (and low levels of) both short-term liquidity and idle capacity lead to increases in the probability of collusive actions. In addition, we find that these effects are complementary such that liquidity constraints cause firms to hike only when idle capacity is low, but have the opposite effect when idle capacity is high.
Number of Pages in PDF File: 40
Keywords: Short-Term Liquidity, Financial Distress, Tacit Collusion, Capacity Constraints, Airfare Price Hikesworking papers series
Date posted: May 13, 2011 ; Last revised: December 4, 2012
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