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Disadvantageous semicollusion : price competition in the Norwegian airline industry

Steen, Frode; Sørgard, Lars
Working paper
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URI
http://hdl.handle.net/11250/163462
Date
2012-12
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  • Discussion papers (SAM) [579]
Abstract
Motivated by observations in the Norwegian airline industry in the late 90s, we develop a

semicollusive 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 increase business- and leisure prices for passengers

not travelling 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 effect is

most pronounced in the business class. The effect is found to differ according to the quality

(number of flights) the airline companies can offer.
Publisher
Norwegian School of Economics, Department of Economics
Series
Discussion paper;27/2012

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