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Title: An empirical investigation of multimarket contact and asymmetric pricing strategies in the US domestic airline industry
Authors: Sin, Raymond G.
Chellappa, R. K.
Sambamurthy, V.
Keywords: Multimarket contact
Asymmetric pricing
Everyday low price strategy
Promotional strategy
US domestic airline industry
Issue Date: Jun-2010
Citation: Proceedings of the 6th Symposium on Statistical Challenges in Electronic Commerce Research (SCECR 2010), June 5-6, 2010 Austin TX, U.S.A.
Abstract: Multimarket contact (MMC) is a unique form of competition where the same set of firms face each other in more than one market resulting in a focal-market strategy that needs to account for competition in other markets. Extant research in this area suggests that rational firms will not undercut multimarket competitors in a given market as they will foresee a response from their competitors in other markets leading to a form of tacit collusion and higher prices. Such behavior is purportedly observed in a number of industry contexts including the US domestic airline sector. Our research presents a significant departure from this understanding of multimarket competition and suggests that extant work has ignored firm-specific differences in their basis for rationality when formulating best-response under MMC. In the airline sector there are two distinct rationales for pricing, an Everyday Low Price (EDLP) strategy and a promotional (PROMO or HILO) strategy. While the latter often varies prices to attract customers through deals and promotions, an EDLP strategy is focused on signaling consistency and average low prices. A majority of US carriers engage in promotional pricing while Southwest and JetBlue practice EDLP. In a first study using both posted and transacted airline prices, we examine the impact of asymmetric pricing strategies on the understanding of multimarket contact.
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