Rapid Price Communication and Coordination: The Airline Tariff Publishing Case

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Rapid Price Communication and CoordinationThe
Airline Tariff Publishing Case
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Agenda

• Background
• Antitrust Issues
• Analysis
• Latest Development

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Background

• 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!

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Background

• 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?

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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!

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Background

• 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.

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Background

• ATPCO (Contd)
• Information transmitted
• Fare Basis Code
• Origin and Destination Airports
• Price
• First and Last Ticket Dates
• First and Last Travel Dates
• Other Restrictions

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Background

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

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Background

• Pricing Marketing
• Frequent Flyer Programs for Travellers
• Travel Agent Commission Override Programs (TACOs)
  Frequent Booker Programs for travel agents
• 1st Gulf War
• Over Investment ? Some entered Cap 11 Bankruptcy
  Proceedings.

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Antitrust Issues DoJs Case

• DOJs Antitrust Charge (1992-12-21)
• 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.

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DoJs Case

• 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.

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DoJs Case

• Other Facts
• DoJ had collected documents from each airlines
  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

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DoJs 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.

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DoJs Case
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Antitrust Issues 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
  wasnt making them rich.
• No pre-announcement of price decreases as
  evidence for antitrust problem.

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The Airlines Defense

• Responds to DoJs Charges
• All firms price in response to the actions of
  their competitors. They were acting in their own
  best interest when it raised price.
• DoJs alligation were indistinguishable from
  competitive behavior!
• This is just part of the price discovery process!

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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.

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Antitrust Issue - DoJs Response

• DoJs 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.

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DoJs Response

• Profit levels were not relevant to the
  investigation.

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Antitrust Issue Negotiating a Settlement

• 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.

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DOJs Proposed Remedy

• Cannot use footnote designators and fare basis
  codes to convey anything but the most basic
  information
• 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.

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Responds of Airlines

• 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.
• 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.

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Overt Bargaining or Tacit Agreement?

• Are the following scenarios counted as collusive
  bargaining?
• Be Your Own Judge!

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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 As 5 fare
increases, and both Airlines thereafter offer
those fares for sale.

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

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Gertners Analysis
Airline industry as an immediate-response market

• 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).

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More Complicated Scenario
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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.
• Conclusion even if airlines differ in cost and
  other attributes, the ability to monitor one
  anothers prices closely and respond quickly
  could still result in prices will above
  competitive level.

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Back to Reality

• Since the consent decree..
• 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

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Efficacy of the Settlement