Time Series Analysis of Strategic Pricing Behavior in the US Airline Industry

A positive relationship betweencompetitive pressure and technical efficiency has been demonstratedby several studies; other studies hold forth that airline marketsbehave strategically. We bring these two literatures togetherby presenting a time series methodology to examine strategicpricing behavior and discussing the implications for airlineefficiency. We find evidence of dynamic, route-level, parallel( i.e. strategic) pricing despite highly variable price structures.A stable price relationship is consistent with successful coordinationof dynamic oligopolists and may highlight those routes wheresignificant market power exists. In light of previous research,this indicates that the airlines on these routes may not be attainingmaximum technical efficiency. For policy makers, this methodologyis useful for analyzing other markets which behave strategically.