Living by the "Golden Rule": Multimarket Contact in the U. S. Airline Industry

Abstract

This paper examines empirically the effects of multimarket contact on pricing in the U. S. airline industry. The analysis of the time-series and cross-sectional variability of airline fares in the 1000 largest domestic city-pair routes reveals the presence of statistically significant and quantitatively important multimarket effects—fares are higher in city-pair markets served by carriers with extensive interroute contacts. These findings are consistent with the claims of industry experts that airlines live by the “golden rule”; i.e., that they refrain from initiating aggressive pricing actions in a given route for fear of what their competitors might do in other jointly contested routes. During his testimony, Mr. Steven B. Elkins (Senior Director of marketing systems development for Northwest Airlines) cited an example in which Northwest lowered fares on night flights that were flying with empty seats in a number of routes from Minneapolis and Upper Midwest cities to various West Coast cities. He said that Continental Airlines swiftly responded by cutting prices in important Northwest markets … Mr. Elkins's memo advises Northwest pricing analysts: “We Will Live by the Golden Rule!” In his testimony, he explained that, “the Golden Rule in that context was that I did not want my pricing analyst initiating actions in another carrier's market like Chicago for fear of what that other carrier might do to retaliate” [Wall Street Journal, October 9,1990, p. B1].