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

Transcription

1 Many Felds of Battle: ow Cost Stuctue Affects Competton Acoss Multple Makets Annual Foum 2004 Tanspotaton Reseach Foum Matn Desne Robet Wndle L Zou Robet. Smth School of Busness Unvesty of Mayland

2 Multmaket contact competton compettve stuaton when the same fms compete aganst each othe n multple makets. The dstnctve natue of Multmaket contact compettve nteacton between fms acoss makets. It s dffeent fom sngle pont competton and affects the compettve behavo of fms. Edwads (1955): When two fms meet n multple poduct o geogaphc makets, they may hestate to contest a gven maket vgoously fo fea of etalatoy attacks n othe makets that eodes the pospectve gans n that maket. The mutual fobeaance vew the foundaton of multmaket competton theoy, suggestng an nvese elatonshp between multmaket contact and the ntensty of ntefm valy. Mutual Deteence Tact Coopeaton Mutual Fobeaance Lowe Intensty of Competton

3 A Contngency Model: Re-examnaton of the Mutual Fobeaance ypothess Tact Coopeaton Mutual Deteence Mutual Fobeaance Lowe Intensty Competton Fm s Cost Stuctue Cost s an Impotant Modeatng Facto The mutualty of theat may not hold when two fms dffe substantally n poducton cost and the costs ae not pvate nfomaton. Compaed to a low-cost fm, t s aganst a hgh-cost fm s nteest to cut pces, snce f t dd cut pce, t would lkely lose money n the maket. Theefoe, the theats of hgh cost fms ae not cedble and cannot dete low-cost fms fom pcng aggessvely acoss multple makets. When a fm has a cost advantage acoss makets, multmaket contact seves to enlage ths cost advantage. Theefoe, multmaket contact fostes the effcent fm to devate n all makets. Ant-compettve effect of Multmaket contact s contngent upon ntefm cost stuctue acoss makets.

4 Lteatue Revew An extensve empcal study of multmaket contact n the alne ndusty Multmaket contact s a well obseved phenomenon n the alne ndusty. The alne ndusty s an deal canddate to lnk multmaket contact wth fms collusve behavo. Evans and Kessdes (1994): Empcal study of the effects of multmaket contact on pcng n the U.S. alne ndusty. They found that the alne ndusty followed the Golden ule,.e., faes wee hghe n cty-pa makets seved by caes wth extensve nteoute contacts. Also they found a substantal non-lneaty pce effect fom multmaket contact. The alne ndusty s an deal canddate to test the modeatng effect of cost. Cae s cost stuctue s not pvate nfomaton. Cost dffeences ae typcally fm elated, athe than maket elated. Maket o oute specfc factos (e.g., apot landng fees) do not vay acoss caes. Othe man nput factos (e.g., fuel expenses and labo costs) do not vay on a pe unt bass acoss outes.

5 A Model of Betand Pce Competton n the settng of Multmaket Contact To analyze the potental effects of multmaket contact on collusve behavo, we compae the condtons fo fms to sustan colluson wth and wthout multmaket contact. Two fms 1 & 2, Two makets A&B, Demand functon n both makets P = a -bq Fm 1 has magnal costs n maket A and B of [ 1A, 1B ] Fm 2 has magnal costs n maket A and B of [, 2 A 2B ] Thee ae no fxed costs. Two-peod game stuaton. D C D C Collude o Devate n sngle maket π 1 A < π 1 A, π 1 B < π 1 B U & V Multmaket contacts pooled the ncentves of all the makets D D C Collude o Devate n both makets π + π < π + D W 1A 1B 1A π 1B C1 A < C2 A C1 B < C2B C1 A < C1B W > V Fm 1 s moe lkely to devate n both makets when makets A and B ae consdeed togethe. Poposton: If fms ae not dentcal n two makets,.e., each fm has dffeent costs acoss makets, multmaket contact has an effect on the collusve behavo. Specfcally, multmaket contact facltates the low-cost fm to devate n both makets.

6 ypothess 1: The valy ntensty expeenced by an alne n a focal maket s negatvely elated to the extent of multmaket contact wth ts focal maket vals. Model 1 Ln( Yeld) RouteDs tan ce) 4 ypothess 2: Multmaket contact would have a smalle o nsgnfcant effect on yelds fo low cost caes as compaed to hgh cost caes. Model 2 ypothess 3: The negatve assocaton between multmaket contact and the ntensty of valy dmnshes as the cost dffeences between the focal and val fm ncease. Model 3 Ln( Yeld) = α RouteI) RouteDs tan ce) 4 Exp/ASM) MaketSze) 5 Low- Cost Cae Sample = α RouteI) 0 ** 1 MaketSze) 5 * Ln(MMC) + ApotI) 2 9 = 1.., N 1 + α ( SlotContol) 6 Model 1 ApotI) 2 + α ( SlotContol) 6 α ( Cae) + ε ApotMaketShae) 3 MMC) = 1.., N 1 gh-cost Cae Sample ApotMaketShae) 3 MMC) 7 α ( Cae) + ε

7 Data Souce Database poducts Inc. compled fle fo 10 pecent tcket sample. Bueau of Tanspotaton Statstcs alne fnancal data and apot actvty statstcs. Selected the top 1000 U.S. domestc O&D outes n Collected data on all alnes flyng these outes and calculated oute-specfc vaables, e.g., Route I and Apot I. Excluded caes flyng fewe than 10 outes and sevng fewe than 1% of the passenges on a oute. The fnal sample ncludes 19 caes fo 998 outes, totalng 4667 obsevatons. Thee ae 89 endpont apots.

8 The basc measuement of multmaket contact Count the numbe of outes seved by two competng caes A unque measue of cae-oute specfc MMC Numbe of contacts between cae and j acoss all outes A = R j D D j = 1 Multmaket contact between cae and j: Multmaket contact fo cae on oute : A j Whee D s the dummy vaable =1, f alne I fles on the oute, and 0 othewse. MC j MC MC j A j = whee MC s the total numbe of outes cae fles. MC + MC j N D j j= 1 = N j= 1 D MC j j MC whee N s the total numbe of caes.

9 Expenses/ASM Adjustment Annual opeatng expenses and avalable seat mle fo alne s obseved and tansfomed as (EXP/ASM). Aveage flght length fo cae n 2002 s obseved as (D). (EXP/ASM) (D) ln( Exp / ASM ) = β ln( D) + µ ˆ β = ( ItneayDs tan ce) ( StageLength) = ( AveageCoupon) ( Exp / ASM ) ** StageLength = ( Exp / ASM ) * ( D ** ( Exp / ASM ) Route Adjustment ) Cae Adjustment ( Exp / ASM ) * D = D = ( Exp / ASM ) * ( ) D * ( Exp/ ASM) 19 = ( D) Whch alnes ae Low Cost Caes???

10 Low Cost Cae Cae Adjusted (Exp/ASM) (Dolla/Seat-Mles) Numbe of Aveage Flght Rtes Seved Dstance(Mles) gh cost/low cost Mdway Alnes US Aways Mdwest Expess Alnes Nothwest Alnes Alaska Alnes Delta Alnes Unted Alnes Amecan Alnes Atan Contnental Alnes Fonte L Southwest Alnes L Vanguad L Ameca West Alnes L Spt Alnes L Amecan Tans A L Jet Blue L Natonal Alnes(new) L Sun County Alnes L

11 Vaable Yeld Route I Apot I Apot Maket Shae Dstance Maket Sze Slot Contolled Apots MMC Expenses/ASM Descpton Aveage one-way afae chaged by alne on oute. Non-stop oute dstance s used to get Yeld as pce measue.[dolla/mle] Sum of squaed maket shaes of all caes flyng on oute. Apot I s the sum of squaed maket shaes of all caes at the apot. Fo cae on oute, the maxmum I of the two endponts s the apot I fo cae on oute. The maxmum maket shae fo cae at the two endpont apots on oute. Non-stop dstance on oute. [Mles] Total numbe of passenges on oute. Dummy vaable (1- ethe one o both endpont apots ae slot contolled). In 2002, thee wee 4 slot contolled apots: ORD, JFK, LGA and DCA. Multmaket contact ndex fo cae on oute. Adjusted opeatng cost fo cae on oute. [Dollas/seat-mle] Mean and (Std. Dev.) (9.031E-02) (0.1870) (0.1470) (0.2082) (656.45) ( ) 0.15 (0.35) (0.1038) (3.1283E-02) Numbe of Obsevatons: 4667

12 Table 2: Regesson Results ~ Dependent Vaable: Ln(Yeld) Vaable Coeffcent Estmates t-statstcs Sgnfcance Constant Ln (Route I) Ln (Apot I) Ln (Apot Maket Shae) Ln (Dstance) Ln (Maket Sze) Slot Contolled Apots Ln (MMC) E E E E-02 Amecan Alnes (-4.386); Alaska Alnes (-6.008); Jet Blue (-6.547); Contnental Alnes (-3.805); Delta Alnes (-4.864); Fonte Alnes 1.436E- 02 (0.271); ATan (-4.934); Amecan West Alnes (-3.181); Mdway Alnes (-3.962) ; Natonal Alnes (-3.409) ; Vanguad (-1.876); Spt Alnes (-7.246); Nothwest Alnes (-4.704); Sun County Alnes (-5.074); Amecan Tans A (-3.407); Unted Alnes 0.142(-3.054); US Aways (-6.802); Southwest Alnes (-8.817). Note: Mdwest Expess Alnes as the base cae. t-statstcs ae n () fo alne dummy coeffcents. R-Squaed = Numbe of Obsevatons =

13 Table 4: Regesson Results ~ Dep. Vaable: Ln(Yeld)~ Low Cost vs. gh Cost Cae Sg. t-statstcs Low Cost Coeff. Est. Vaables gh Cost Coeff. Est. t-statstcs Sg Constant E-02 Ln(Route I) 2.910E Ln(Apot I) E-02 Ln(Apot Maket Shae) Ln(Dstance) E-02 Ln(Maket Sze) E E-02 Slot Contol Apots E-02 Ln(MMC) E-02 Jet Blue Amecan Alnes E-02 Fonte Alaska Alnes E-02 Amecan West Contnental Alnes Alnes Natonal Alnes Delta Alnes E-02 Vanguad A Tan Spt Alnes Mdway Alnes Sun County Alnes Nothwest Alnes E-02 Amecan Tans A Unted Alnes US Aways Southwest Alnes as the base cae. R^2 = Mdwest Expess Alnes as the base cae. R^2 = 0.778

14 Afae and and MMC: gh gh Cost Cost Caes (2002) 220 Afae($) 200 $ $18 $10 $9 160 $17 $ Mdwest Expess Alnes Unted Alnes Contnental Alnes MMC= 0.3+/-(1Std.) Cost: Mdwest Expess Alnes>Unted Alnes>Contnental Alnes

15 Afae and and MMC: Low Low Cost Cost Caes (2002) 180 Afae($) Southwest Alnes Spt Alnes Natonal Alnes MMC= 0.3+/-(1Std.) Cost: Southwest Alnes>Spt Alnes>Natl.Alnes

16 Table 5: Regesson Results ~ Dependent Vaable: Ln (Yeld) Vaable Coeffcent Estmates t-statstcs Sgnfcance Constant Ln (Route I) 2.675E Ln (Apot I) Ln (Apot Maket Shae) 7.583E Ln (Dstance) Ln (Maket Sze) E Slot Contolled Apots Ln (MMC) Ln (MMC) * Ln (Adjusted Expenses/ASM) Amecan Alnes (-2.616); Alaska Alnes (-7.163); Jet Blue (-8.663); Contnental Alnes (-3.072); Delta Alnes 0.2 (-4.359); Fonte Alnes (-2.147); ATan (-7.523); Amecan West Alnes (-4.510); Mdway Alnes (-3.279); Natonal Alnes (-6.418); Vanguad 0.185(-3.131); Spt Alnes (-9.256); Nothwest Alnes (-4.678); Sun County Alnes ( ); Amecan Tans A 0.253( ); Unted Alnes 5.102E-02 (-1.088); US Aways 0.194(-4.021); Southwest Alnes ( ). Note: Mdwest Expess Alnes as the base cae. t-statstcs ae n () fo alne dummy coeffcents. R^2 = Numbe of Obsevatons =

17 Afae($) Afae and and MMC: gh gh Cost Cost Cae (2002) Delta Delta Alnes Alnes US US Aways Aways MMC Nothwest Nothwest Alnes Alnes Cost: US Aways>Nothwest Alnes>Delta Alnes

18 Afae and and MMC: Low Low Cost Cost Cae (2002) Afae($) Amecan Amecan West West 180 Alnes Alnes 170 Amecan Amecan 160 Tans A Tans A Southwest 150 Southwest Alnes Alnes MMC Cost: Southwest Alnes>Amecan West Alnes>Amecan Tans A

19 ypothess 1: The valy ntensty expeenced by an alne n a focal maket s negatvely elated to the extent of multmaket contact wth ts focal maket vals. ypothess 2: Multmaket contact would have a smalle o nsgnfcant effect on yelds fo low cost caes as compaed to hgh cost caes. ypothess 3: The negatve assocaton between multmaket contact and the ntensty of valy dmnshes as the cost dffeences between the focal and val fm ncease.