Rapid Price Communication and Coordination: The Airline Tariff Publishing Case

Agenda Background Background Antitrust Issues Antitrust Issues Analysis Analysis Latest Development Latest Development

Background Basic Antitrust Issues: Basic Antitrust Issues: –Is it price fixing? –Firm A announces a price increase and shortly thereafter, its competitor Firm B also announces its own increase to the same level. –NO!

Background How about? How about? –What if the announcements are made and changed rapidly? –What if each firm makes many announcements before they settle down at identical prices? –What if the prices being announced are take effect at some future date so that no sales actually taken place at these prices while the announcements are made?

Background –The main issue of this case is, with the help of IT, it is easy to make rapid announcements and responses. This has blurred the meaning of “agreement” and has made it difficult to distinguish public announcements from conversations amongst competitors!

Background Airline Tariff Publishing Company (ATPCO) Airline Tariff Publishing Company (ATPCO) –Owners: 18 major airlines and Federal Express –Customers: Data Providers (Airlines) and Data Subscribers (Computer Reservation Systems) –Function: Act as Central Cleaning House for distribution of fare change information which prices are updated daily.

Background ATPCO (Cont’d) ATPCO (Cont’d) –Information transmitted: Fare Basis Code Fare Basis Code Origin and Destination Airports Origin and Destination Airports Price Price First and Last Ticket Dates First and Last Ticket Dates First and Last Travel Dates First and Last Travel Dates Other Restrictions Other Restrictions

Background Airline Industry in early 90s Airline Industry in early 90s –HHI: From 854 (1985) to 1074 (1990) –Two important Developments: Hub-and-spoke networks Hub-and-spoke networks –Northwest: Detroit and Los Angeles –American: Chicago –Continental: Denver –United: Denver or Chicago –Delta: Salt Lake City

Background Pricing & Marketing: Pricing & Marketing: –Frequent Flyer Programs for Travellers –Travel Agent Commission Override Programs (TACOs) – “Frequent Booker” Programs for travel agents –1 st Gulf War –Over Investment  Some entered Cap 11 Bankruptcy Proceedings.

Antitrust Issues – DoJ’s Case DOJ’s Antitrust Charge ( ): DOJ’s Antitrust Charge ( ): –Defendants: ATPCO and 8 major airlines –Charges: Airlines, through ATPCO, had colluded to raise price and restrict competition in the airline industry. –How? The airlines had carried on detailed conversations and negotiations over prices through ATPCO.

DoJ’s Case Example: Example: –Airline A: Announced a fare increase to take effect a number of weeks in future –Airline B: Announced a different fare increase on the same route at a similar time frame. –Airlines iterated back and forth until they reached a point where they have the same fare increase to take effect on the same date.

DoJ’s Case Other Facts: Other Facts: –DoJ had collected documents from each airline’s daily internal fare change reports, which included phrases of the nature: “we are waiting to see if [airline A] is going to go along with our proposed increase” “we are abandoning the increase on [city 1]- [city 2] because [airline B] has not matched”

DoJ’s Case –the announcement of fares that are to take effect at a later date allowed the airlines to negotiate over prices without ever offering those prices to the public. –the carriers were using fare basis codes and footnote designators to communicate to others between fare on different routes.

DoJ’s Case Firm 1’s Hub Firm 2’s Hub A D B C

Antitrust Issues – The Airlines’ Defense The Airlines’ Defense: The Airlines’ Defense: –No face-to-face meetings –The communication was observables by the public (travel agents and anyone who could access to CRS) –Airlines were experiencing largest losses in their history. If there was price fixing, it wasn’t making them rich. –No pre-announcement of price decreases as evidence for antitrust problem.

The Airlines’ Defense Responds to DoJ’s Charges: Responds to DoJ’s Charges: –All firms price in response to the actions of their competitors. They were acting in their own best interest when it raised price. –DoJ’s alligation were indistinguishable from competitive behavior! –This is just part of the price discovery process!

The Airlines’ Defense –Pre-announcements of price increases were for maintaining goodwill with consumers, not signaling to competitors. –They had never used fare basis codes or footnote designators to signal connections between fares or to communicate information to the others. –Price fixing was untenable because: (i) not all prices were public; and (ii) competitors did not know the exact mix of passengers and fares.

Antitrust Issue - DoJ’s Response DoJ’s Response: DoJ’s Response: –Recognized that some consumers may have benefited – but very small. –Due to the rapid change of price, might be the consumers were worse-off. –Although agreed that there were no pre- announced price decrease, the pre- announcing price increase could be used to facilitate collusion.

DoJ’s Response –Profit levels were not relevant to the investigation.

Antitrust Issue – Negotiating a Settlement Two Main Issues: Two Main Issues: –The pre-announcement of price increases; and –the alleged use of fare basis codes and footnote designators to communicate linkages between prices on different routes.

DOJ’s Proposed Remedy Cannot use footnote designators and fare basis codes to convey anything but the most basic information; Cannot use footnote designators and fare basis codes to convey anything but the most basic information; Cannot link different fares to different codes; Cannot link different fares to different codes; Cannot preannounce price increases (through last-ticket dates and future first- ticket dates) except in the case of widely publicized sales. Cannot preannounce price increases (through last-ticket dates and future first- ticket dates) except in the case of widely publicized sales.

Responds of Airlines United and USAir agreed the proposal leading to the first settlement (Dec 92) United and USAir agreed the proposal leading to the first settlement (Dec 92) The rest of six airlines argued against it at the Tunney Act Hearing, which was later on approved by the court. The rest of six airlines argued against it at the Tunney Act Hearing, which was later on approved by the court. In Mar 94, the other six agreed the same restrictions in a consent decree that last for 10 years (until 2004) In Mar 94, the other six agreed the same restrictions in a consent decree that last for 10 years (until 2004) Same decree was order in the 2004 review. Same decree was order in the 2004 review.

Overt Bargaining or Tacit Agreement? Are the following scenarios counted as collusive bargaining? Be Your Own Judge!

Scenario 1 At noon on Friday Airline A transmits 10% fare increases on certain city-pairs to ATPCO. The increased fares become available for sale through CRS at 5 p.m. that same day. On Saturday, Airline B transmits 5% increases to ATPCO on the same city-pairs. Airline A withdraws its 10% fare increases on Sunday when it learns that competing airlines have not offered matching fares for sale. Airline B withdraws its 5% increased fares. The following week, on Friday, Airline A raises its fares 5% on those city-pairs where Airline B had raised its fares 5% the previous week. On Saturday, Airline B matches Airline A’s 5% fare increases, and both Airlines thereafter offer those fares for sale.

Scenario 2 Airline A offers for sale at a low fare (e.g. $101) for travel on a route that is important to Airline B. Airline B matches the $101 fare for travel on the same city-pair and also offers for sale a $101 fare for travel on a city-pair that is important to Airline A. Airline B withdraws both $101 fares after one day. Airline A then withdraws its initial $101 fare the next day.

Yet, they are considered by DOJ as NO violation of the consent decree!

Can we avoid the unavoidable? Q: Can DOJ stop Airlines collusive behavior by restrictions in the consent decree? A: Collusive pricing can result even without any sort of explicit communication among firms – Gertner (1994)

Gertner’s Analysis The simplest case: If firms are not too different, the outcome will still be close to the collusive outcome and the price will be dictated by the firm that prefers the lowest price (e.g. airlines offering the change-of-plane service). If firms are not too different, the outcome will still be close to the collusive outcome and the price will be dictated by the firm that prefers the lowest price (e.g. airlines offering the change-of-plane service). Airline industry as an immediate-response market

Firm 1’s Hub Firm 2’s Hub A D B C More Complicated Scenario

Case Without Symmetric Routing Structure Letting the low-cost firm (which offers the change-of-plane service) to fill its capacity and then selling to the remaining demand is BETTER than matching price. Letting the low-cost firm (which offers the change-of-plane service) to fill its capacity and then selling to the remaining demand is BETTER than matching price. Conclusion: even if airlines differ in cost and other attributes, the ability to monitor one another’s prices closely and respond quickly could still result in prices will above competitive level. Conclusion: even if airlines differ in cost and other attributes, the ability to monitor one another’s prices closely and respond quickly could still result in prices will above competitive level.

Back to Reality Since the consent decree….. Since the consent decree….. Airlines post price increases on a Friday afternoon, which become available in the CRSs on Saturday morning. Airlines post price increases on a Friday afternoon, which become available in the CRSs on Saturday morning. If competitors do not match the increase by Sunday afternoon, the airline withdraws the increase in Sunday night If competitors do not match the increase by Sunday afternoon, the airline withdraws the increase in Sunday night

Efficacy of the Settlement Pre Settlement Post Settlement Monopolized Routes 20% above national average Competitive Routes Around national average 10% above national average