Munich Personal RePEc Archive

Firms’ Markup, Cost, and Price Changes when Policymakers Permit Collusion: Does Antitrust Immunity Matter?

Gayle, Philip and Xie, Xin

Kansas State University, East Tennessee State University

9 November 2018

Online at https://mpra.ub.uni-muenchen.de/89914/ MPRA Paper No. 89914, posted 15 Nov 2018 11:49 UTC Firms’ Markup, Cost, and Price Changes when Policymakers Permit Collusion: Does Antitrust Immunity Matter?

Philip G. Gayle* and Xin Xie**

This Draft: November 9, 2018 First Draft: July 1, 2013

Forthcoming in Journal of Economic Behavior & Organization

Abstract wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity (ATI). Whether consumers, on net, benefit from a grant of ATI to partner airlines has caused much public debate. This paper investigates the impact of granting ATI to oneworld alliance members on their price, markup, and various measures of cost. The evidence suggests that implementation of the oneworld alliance without ATI did not have a statistically significant impact on the markup of products offered by the members, and there is no evidence that the subsequent grant of ATI to various members resulted in higher markups on their products. We find evidence suggesting that the grant of ATI facilitated a decrease in partner carriers’ marginal and fixed costs. Furthermore, member carriers’ price did not increase (decreased) in markets where their services do (do not) overlap, implying that consumers, on net, benefit from the grant of ATI in terms of price changes.

Keywords: Competition; Strategic Alliances; Antitrust Immunity

JEL Classification codes: L13; L40; L93

Acknowledgements: For very helpful comments and suggestions we thank editors, Thomas Gresik and Sudipta Sarangi, two anonymous referees, Dennis Weisman, Tian Xia, and Dong Li. We also thank Adeel Faheem for excellent research assistance. Any remaining errors are our own.

*Kansas State University, Department of Economics, 322 Waters Hall, Manhattan, KS 66506; Voice: (785) 532-4581; Fax: (785) 532-6919; email: [email protected]; Corresponding author.

**East Tennessee State University, Department of Economics and Finance, 227 Sam Wilson Hall, Johnson City, TN 37614; Voice: (423) 439-5365; Fax: (423) 439-8583; email: [email protected].

1. Introduction 1

The expansion of international airline alliances since the 1990s has drawn considerable attention of researchers and policymakers. The three major global airline alliances are: Star, SkyTeam, and oneworld. By joining a global alliance, an airline can leverage its partner carriers’ route networks to extend its service to destinations in foreign countries that the airline could not otherwise serve using its own planes. Even though such interline service may be available to passengers without an alliance between the carriers, partner carriers in an alliance typically coordinate in an effort to make interline transfers seamless for passengers. In addition, partner carriers typically make their frequent-flyer programs reciprocal, thus allowing passengers with membership in any partner carrier’s frequent-flyer program to accumulate and redeem frequent-flyer points across any carrier of the alliance. Alliance partners often want to extend cooperation to revenue sharing, which effectively implies joint pricing of products. This type of cooperation in markets where the partners each offer substitute service is believed to harm competition and therefore violates antitrust laws. As such, alliance partners can only explicitly collude on price if the relevant authorities in each country exempt the partner carriers from prosecution under the country’s antitrust laws – a grant of antitrust immunity. To explicitly collude on price, airlines must first formally apply to the relevant authorities fo