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Two Screening Tests for Tacit Collusion: Evidence from the Airline Industry

23 Pages Posted: 3 Aug 2017  

Federico Ciliberto

University of Virginia - Department of Economics; Centre for Economic Policy Research (CEPR)

Eddie Watkins

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Jonathan W. Williams

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: July 29, 2017

Abstract

We formulate two screening tests for tacit collusion in the US airline industry. The first test, based on Werden and Froeb [1994], 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 [2004], 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

Ciliberto, Federico and Watkins, Eddie and Williams, Jonathan W., Two Screening Tests for Tacit Collusion: Evidence from the Airline Industry (July 29, 2017). Available at SSRN: https://ssrn.com/abstract=3012580

Federico Ciliberto

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Edwin Watkins

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

102 Ridge Road
Chapel Hill, NC 27514
United States

Jonathan Williams (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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