Has the 'golden rule' lost its aura? Revisiting multimarket contact in the U.S. domestic airline industry

Abstract

A seminal work in the mid-nineties finds that airlines charge higher fares in markets where they engage in extensive multimarket contact, thus empirically attesting to industry expert claims that airlines live by the 'golden rule' (i.e., avoid undercutting in jointly contested routes). Our research revisits this hypothesis by including two hitherto ignored airlines Southwest Airlines and JetBlue Airways who are practitioners of the everyday low price (EDLP) strategy. We find that this golden rule is violated when airlines engage in multimarket contact with these two airlines, and identify firm-specific differences in the overall pricing strategy as the source of this anomaly.