Time series analysis of strategic pricing behavior in the US airline industry

A positive relationship between competitive pressure and technical efficien cy has been demonstrated by several studies; other studies hold forth that airline markets behave strategically. We bring these two literatures togeth er by presenting a time series methodology to examine strategic pricing beh avior and discussing the implications for airline efficiency. We find evide nce of dynamic, route-level, parallel (i.e. strategic) pricing despite high ly variable price structures. A stable price relationship is consistent wit h successful coordination of dynamic oligopolists and may highlight those r outes where significant market power exists. In light of previous research, this indicates that the airlines on these routes may not be attaining maxi mum technical efficiency. For policy makers, this methodology is useful for analyzing other markets which behave strategically.