Many Fields of Battle: How Cost Structure Affects Competition Across Multiple Markets

Traditional analysis of multi-point competition suggests that firms compete less intensely with one another when they have strategic contacts across multiple markets. However, this mutual forbearance argument has not incorporated production cost differences between firms as moderating factors. Based on the US domestic air travel data, we find that the collusion-facilitating effects (as measured by airfare increases) from multi-market contact hold when multi-market contact occurs among carriers with either uniformly low costs or uniformly high costs, although, in some cases, carrier pricing is also influenced by multi-market contact between airlines with different cost structures.