Living by the "Golden Rule": Multimarket Contact in the U. S. Airline Industry

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Abstract
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 significant and quantitatively important multimarket effects—fares are higher in city-pair markets served by carriers with extensive interroute contacts. These findings are consistent with the claims of industry experts 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.

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