Two Screening Tests for Tacit Collusion: Evidence from the Airline Industry
23 Pages Posted: 3 Aug 2017
Date Written: July 29, 2017
We formulate two screening tests for tacit collusion in the US airline industry. The first test, based on Werden and Froeb , studies the relationship between pair-wise differences in prices across competitors within a market and the extent of their multimarket contact. The second test, based on Athey, Bagwell, and Sanchirico , investigates whether the variance of prices across pairs of firms over time within a market is associated with multimarket contact. Together, the theories predict that pair-wise differences in fares within a market should be smaller and less variable if firms tacitly collude. Our empirical results confirm both predictions, and suggest that the two screening tests can be valuable tools to identify tacit collusion.
Keywords: Tacit Collusion, MultiMarket Contact, Airline Industry, Screening Tests, Price Discrepancy, Price Variation
JEL Classification: L13
Suggested Citation: Suggested Citation