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An EmpiricalAn Empirical Investigation of Multimarket Contact and Asymmetric Pricing Strategies in the U.S. Domestic Airline Industry

Authors Chellappa, Ramnath
Sin, Raymond
Sambamurthy, Vallabh
Issue Date 2010
Source The 6th Symposium on Statistical Challenges in Electronic Commerce Research (SCECR) , Austin, United States, June 5-6, 2010
Summary 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.
Language English
Format Conference paper
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