Price wars and price collusion in China's airline markets

Abstract In the absence of an effective antitrust law, both fare wars and price collusion have been pervasive in China's airline markets, causing concern for both airlines and consumers. A study of monthly airfare data from 2002 to 2004 confirms that fare wars occur periodically, as well as price collusion. Both tend to be short-lived. The fact that collusion is more likely to occur in January and April when demand is high, as revealed by China Eastern's and China Southern's price-war and collusion models, has been confirmed by interview information obtained from the airlines' sales managers. However, there is also evidence in these models suggesting that collusion can be more easily formed when demand is low. High airport concentration measured by the HHI may facilitate collusion in certain circumstances, but it may also lead to more price wars under other conditions. Concentration in both airports and routes does not appear to systematically affect the occurrence of fare wars and collusion in all the models estimated. We also reject the possibility that mutual forbearance due to multimarket contact plays any important anti-competitive role in China's airline markets.

[1]  S. Feuerstein.  Collusion in Industrial Economics—A Survey , 2005 .

[2]  L. Ross.  WHEN WILL AN AIRLINE STAND ITS GROUND? AN ANALYSIS OF FARE WARS , 1997 .

[3]  Joel A. C. Baum,et al.  Competitive Dynamics Of Interfirm Rivalry , 1996 .

[4]  J. Tirole.  The Theory of Industrial Organization , 1988 .

[5]  David K. Round,et al.  The effects of China's airline mergers on prices , 2009 .

[6]  Annalisa Ferrando,et al.  The Italian Banking Structure in the 1990s: Testing the Multimarket Contact Hypothesis , 2000 .

[7]  Vijay Singal.  AIRLINE MERGERS AND MULTIMARKET CONTACT , 1996 .

[8]  R. Porter.  A Study of Cartel Stability: The Joint Executive Committee, 1880-1886 , 1983 .

[9]  M. Whinston,et al.  Multimarket Contact and Collusive Behavior , 1990 .

[10]  Jeffrey M. Wooldridge,et al.  Introductory Econometrics: A Modern Approach , 1999 .

[11]  David I. Rosenbaum,et al.  Multimarket contact and pricing: Evidence from the U.S. cement industry , 1997 .

[12]  Steven A. Morrison,et al.  CAUSES AND CONSEQUENCES OF AIRLINE FARE WARS , 1996 .

[13]  J. Haltiwanger,et al.  The Impact of Cyclical Demand Movements on Collusive Behavior , 1991 .

[14]  Garth Saloner,et al.  A Supergame-Theoretic Model of Price Wars during Booms , 1986 .

[15]  Multi-Market Interdependence and Local Market Competition in Banking , 1978 .

[16]  Paul Klemperer,et al.  Price Wars Caused by Switching Costs , 1989 .

[17]  Margaret C. Levenstein,et al.  What Determines Cartel Success? , 2002 .

[18]  E. Stacchetti,et al.  Optimal cartel equilibria with imperfect monitoring , 1986 .

[19]  Kristiaan Helsen,et al.  Toward an understanding of price wars: Their nature and how they erupt , 2001 .

[20]  D. Round,et al.  Policy Implications of the Effects of Concentration and Multimarket Contact in China’s Airline Market , 2009 .

[21]  Paul Klemperer,et al.  Welfare Effects of Entry Into Markets with Switching Costs , 1988 .

[22]  G. Stigler.  A Theory of Oligopoly , 1964, Journal of Political Economy.

[23]  Michael W. Tretheway,et al.  The effect of market structure on airline prices : a review of empirical results , 2005 .

[24]  Jan K. Brueckner,et al.  Airport Congestion When Carriers Have Market Power , 2002 .

[25]  Measuring the Effect of Multimarket Contact on Competition: Evidence from Mergers Following Radio Broadcast Ownership Deregulation , 2006 .

[26]  R. Porter,et al.  NONCOOPERATIVE COLLUSION UNDER IMPERFECT PRICE INFORMATION , 1984 .

[27]  W. Evans,et al.  Living by the “Golden Rule”: Multimarket Contact in the U. S. Airline Industry , 1994 .

[28]  R. Sandler.  Market Share Instability in Commercial Airline Markets and the Impact of Deregulation , 1988 .

[29]  Margaret E. Slade,et al.  Vancouver's Gasoline-Price Wars: An Empirical Exercise in Uncovering Supergame Strategies , 1992 .

[30]  M. Slade.  Price Wars in Price-Setting Supergames , 1989 .

[31]  V. Suslow.  Cartel Contract Duration: Empirical Evidence from Inter-War International Cartels , 2005 .

[32]  J. Perloff,et al.  Modern Industrial Organization , 1990 .

[33]  A. Zhang,et al.  Dynamic oligopoly behaviour in the airline industry , 1993 .

[34]  Frank A. Wolak,et al.  Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty , 1992 .

[35]  Glenn Ellison,et al.  Theories of Cartel Stability and the Joint Executive Committee , 1994 .

[36]  Meghan R. Busse.  Firm Financial Condition and Airline Price Wars , 2000 .

[37]  Michael E. Levine,et al.  AIRLINE COMPETITION IN DEREGULATED MARKETS: THEORY, FIRM STRATEGY, AND PUBLIC POLICY , 1987 .

[38]  C. D. Edwards,et al.  Conglomerate Bigness as a Source of Power , 1955 .

[39]  John T. Scott.  Purposive Diversification and Economic Performance , 1993 .

[40]  David K. Round,et al.  China's airline deregulation since 1997 and the driving forces behind the 2002 airline consolidations , 2008 .