Disadvantageous Semi-Collusion: Price Competition in the Norwegian Airline Industry
The paper titled "Disadvantageous Semi-Collusion: Price Competition in the Norwegian Airline Industry" by Frode Steen and Lars Sørgard has been published in Journal of Competition Law & Economics.
Abstract
Motivated by observations in the Norwegian airline industry in the late 90s, we develop a semi-collusive model with collusion on gross prices and competition on contracts for large customers (corporate contracts). The theoretical predictions are tested on detailed data on gross prices, large-customer prices, and quantities in the Norwegian airline industry in the period 1998–2001. We control for cost and demand factors as well as route-specific heterogeneity, and find results in line with what our theory model predicts. An increase in the share of large customers and their rebates are positively correlated with business- and leisure prices for passengers not traveling on these contracts, leading to a perverse price structure with an excessive high price for those consumers that are expected to be the most price-sensitive ones. The correlation is most pronounced in the business class. The correlation is found to differ according to the quality (number of flights) the airline companies can offer.