Live comments from the CCP Summer Conference 2014 – Session 6

Session 6: Supply-side issues that fall outside of standard antitrust law:

Frode Steen (Norwegian School of Economics (NHH), Oslo) raises the concern of semicollusion, where firms are able to coordinate parts of their strategy while they compete in others, in markets with large buyers. Large customers frequently use their buyer power to negotiate large rebates. Combined with price discrimination by sellers this can lead to groups of buyers paying non-optimal prices. For example, in the Swedish petrol market the erosion of profits by increasing rebates led to firms colluding in order to preserve profits, while maintaining competitive prices.

The Norwegian airline market provides another example which shows the harm of this type of behaviour. Airlines charged extremely high prices to individual customers, aided by very easy coordination, transparent prices and a strong recognition of mutual interdependence, but could not operate profitably because of the extremely low prices offered to large customers, for whom the airlines sharply competed. The airlines ultimately merged to monopoly to prevent the failure of both firms.

A detailed dataset of this case, including to prices offered to large customers, is used to estimate an econometric model of this behaviour. The results indicate that larger quantities of larger customers lead to higher prices for individual customers. The welfare losses of this semicollusion are worse even than the welfare losses which would be associated with full collusion. This outcome amounts to a prisoners’ dilemma on the part of the firms’ strategies, where each would prefer another equilibrium but cannot reach it.

CCP Session 6- Frode Steen

Severin Borenstein (University of California, Berkeley) estimates how critical changes following deregulation in the airline industry have resulted in price reductions. The history since the deregulation in 1958 have been conflicted. There has been lots of entry and exit, declining real fares and significant losses for airlines in the 1980s and 2000s, small profits in the 1990s but also high concentration on many routes. High-cost firms have also been able to maintain high market shares and increasing national concentration due to increase mergers. Moreover, since 1980 there has been an expansion and contraction of the business model of hub-and-spoke networks, steadily increasing load factors and the expansion of the market share of low cost carriers. The high concentration of the industry in terms of air prices 1990 was due to the very strong market power of the firms through the strong loyalty programme, directed both at individual travellers and at large business customers.

Airline prices were began rising before the most recent mergers took effect. The phenomenon of the “share gap,” where customers are disproportionately likely to use airlines which have high market shares in the originating airport persists in the modern airline market. Econometric analysis of these share gaps suggests that they play an important role in maintaining the market shares of incumbent airlines. The presence of loyalty programmes is the most compelling explanation for the persistence of the share gap effect. Loyalty programs seem to be an important part of the strategy of the major airlines in terms of raising barriers to new entrants and dividing markets, possibly softening competition.

CCP Session 6 - Severin Borenstein

About CCP
The Centre for Competition Policy (CCP) conducts interdisciplinary research into competition policy and regulation.

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