Market Sharing Agreements: Empirical Evidence from the US Airline Industry

Research Seminars

Belleflamme and Bloch (2004) presented theoretical underpinnings for existence of market sharing agreements in the imperfectly competitive markets. Our paper offers a first empirical test of this theoretical proposition, using data from the US airline industry. We use the DB1B data for 2003-2008, aggregated at the market level. These data allow us to evaluate the degree of concentration on over 8,000 airport-pair markets, including both concentrated markets with non-stop services and more competitive markets, where only one-stop services are available. Our dataset indeed boasts substantial variability in the levels of market concentration. From this dataset, we are also able to evaluate the extent of multimarket contact (MMC) between the US carriers. It has been argued both theoretically (Bernheim and Whinston, 1990) and empirically (Evans and Kessides, 1994) that higher level of MMC facilitates tacit collusion, leading to higher prices. Bellaflamme and Bloch's result, however, implies that MMC can also serve as an entry barrier, suggesting a theoretical positive relationship between the level of multimarket contact and market concentration. Further, one of the results of Belleflamme and Bloch's paper is fiercer competition on more concentrated routes, implying stronger MMC-price relationship on routes that are less concentrated.

We take advantage of the panel nature of our dataset, and employ market fixed effects estimation technique to investigate the impact of multimarket contact on both price and market concentration. Instrumental variable approach is used to account for potential endogeneity of MMC in the MMC- concentration regressions - we devise an instrument based on the high correlation between carrier's size and the level of multimarket contact. Results of our data analysis show positive MMC-concentration relationship on the less concentrated routes only. The relationship is negative on markets that are more concentrated. This suggests that airlines appear to use more concentrated routes to increase the extent of MMC, and then use the increased level of multimarket contact to soften competition on the less concentrated markets. Estimation results of the MMC-price relationship both confirm Evans and Kessides' findings, and demonstrate stronger relationship on less concentrated routes, as predicted by Belleflamme and Bloch.

Further Author

  • Giovanni Tabacco (University of Jaume I)

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 Volodymyr  Bilotkach

Volodymyr Bilotkach // Newcastle University

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Research Associate
Kai Hüschelrath
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