LIVING BY THE GOLDEN-RULE - MULTIMARKET CONTACT IN THE UNITED-STATES AIRLINE INDUSTRY

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 signif icant and quantitatively important multimarket effects-fares are highe r in city-pair markets served by carriers with extensive interroute co ntacts. These findings are consistent with the claims of industry expe rts 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 marketi ng systems development for Northwest Airlines) cited an example in whi ch Northwest lowered fares on night flights that were flying with empt y seats in a number of routes from Minneapolis and Upper Midwest citie s to various West Coast cities. He said that Continental Airlines swif tly responded by cutting prices in important Northwest markets... Mr. Elkins's memo advises Northwest pricing analysts: ''We Will Live by th e Golden Rule!'' In his testimony, he explained that, ''the Golden Rul e in that context was that I did not want my pricing analyst initiatin g actions in another carrier's market like Chicago for fear of what th at other carrier might do to retaliate'' [Wall Street Journal, October 9, 1990, p. B1].