Common-Subcontracting and Multimarket Contact in the Airline Industry

Abstract

We estimate the effect of major airlines' use of the same regional airlines (as common-subcontractors) across different markets, on ticket prices. We consider the hypothesis that there is a complementarity between the anti-competitive role of multimarket contact and the role of having common vertical relationships, henceforth, common-subcontracting. To this end, we construct a measure of common-subcontracting, and find that, on average, common-subcontracting, when acting as a “multiplier” of multi-market contact, is associated with a 6.17% increase in prices. This positive effect on prices is in addition to the 2.66% increase in prices that is due only to the standard multimarket contact among major airlines.

Keywords: Airlines, Subcontracting, Multimarket Contact

JEL Classification: D22, L12, L41, L68