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Welfare Analysis of Tacit Coordination in the U.S. Airline Industry

Author

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  • Xiaolan Zhou

    (Faculty of Economics and Management, East China Normal University, Shanghai 200062, China)

Abstract

This paper studies airlines¡¯ competitive behavior in the U.S. airline industry, focusing on 2014 data. I use a structural model to estimate demand and test several supply models, including noncooperative competition, perfect collusion, and tacit coordination. There are three different types of tacit coordination, formed by multimarket contact, common ownership, and codeshare agreement, respectively. I find that the model that fits the data best is a tacit coordination model with coalitions between airlines with at least 30% of their markets overlapped and using price rather than quantity as the strategic variable. I further analyze the consumer welfare loss, each carrier¡¯s profit gains, and changes in market variables due to the tacit coordination.

Suggested Citation

  • Xiaolan Zhou, 2017. "Welfare Analysis of Tacit Coordination in the U.S. Airline Industry," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 12(1), pages 66-93, March.
    • Handle: RePEc:fec:journl:v:12:y:2017:i:1:p:66-93
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    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-006-017-0004-0
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    More about this item

    Keywords

    multimarket contact; common ownership; codeshare; discrete choice model; nonnested test; welfare analysis;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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