Tacit Collusion and Price Dispersion in the Presence of Southwest Airlines

Forthcoming: Southern Economic Journal

Posted: 4 Dec 2019 Last revised: 15 Mar 2021

See all articles by Donggeun Kim

Donggeun Kim

Industrial Bank of Korea

Myongjin Kim

University of Oklahoma

Kerry M. Tan

Loyola University Maryland

Date Written: March 11, 2021

Abstract

We study the impact of tacit collusion on price dispersion in the U.S. airline industry. We find that tacit collusion driven by multimarket contact has a positive effect on prices, but a negative effect on price dispersion. Our empirical results suggest that airfares throughout the price distribution increases, yet the price distribution becomes more compressed since 10th percentile airfares increase by a larger amount than 90th percentile airfares. Moreover, we also find that this pricing phenomenon does not exist if Southwest Airlines is present on the route. Thus, route-level price competition is softened when the same airlines directly compete more frequently, except when Southwest Airlines services that route. As such, our empirical analysis provides evidence that the presence of Southwest Airlines exhibits an anti-collusive effect.

Keywords: Tacit Collusion, Price Dispersion, Multimarket Contact, Outsourcing

JEL Classification: L13, L24, L93

Suggested Citation

Kim, Donggeun and Kim, Myongjin and Tan, Kerry M., Tacit Collusion and Price Dispersion in the Presence of Southwest Airlines (March 11, 2021). Forthcoming: Southern Economic Journal, Available at SSRN: https://ssrn.com/abstract=3489385 or http://dx.doi.org/10.2139/ssrn.3489385

Donggeun Kim

Industrial Bank of Korea ( email )

79, Eulji-ro, Jung-go
Seoul, 04541
Korea, Republic of (South Korea)
821054250792 (Phone)

Myongjin Kim

University of Oklahoma ( email )

307 W Brooks
Norman, OK 73019
United States

Kerry M. Tan (Contact Author)

Loyola University Maryland ( email )

4501 N. Charles Street
Sellinger Hall 321
Baltimore, MD 21210
United States
(410)617-2460 (Phone)

HOME PAGE: http://kerrymtan.github.io/econ/

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