Rapid Price Communication Rapid Price Communication and Coordination:and Coordination:The Airline Tariff Publishing The Airline Tariff Publishing CaseCase

AgendaAgenda• BackgroundBackground• Antitrust IssuesAntitrust Issues• AnalysisAnalysis• Latest DevelopmentLatest Development

BackgroundBackground• Basic Antitrust Issues:Basic Antitrust Issues:

– Is it price fixing?Is it price fixing?– Firm A announces a price increase and Firm A announces a price increase and

shortly thereafter, its competitor Firm B shortly thereafter, its competitor Firm B also announces its own increase to the also announces its own increase to the same level.same level.

– NO!NO!

BackgroundBackground• How about?How about?

– What if the announcements are What if the announcements are made made and changed rapidlyand changed rapidly??

– What if each firm makes many What if each firm makes many announcements before they announcements before they settle settle down atdown at identical prices?identical prices?

– What if the prices being announced are What if the prices being announced are take effect at some take effect at some future datefuture date so that so that no sales no sales actually taken place at these actually taken place at these prices while the announcements are prices while the announcements are made?made?

BackgroundBackground– The main issue of this case is, with The main issue of this case is, with

the help of IT, it is easy to make the help of IT, it is easy to make rapid announcements and rapid announcements and responses. This has blurred the responses. This has blurred the meaning of “agreement” and has meaning of “agreement” and has made it difficult to distinguish made it difficult to distinguish public announcements from public announcements from conversations amongst conversations amongst competitors!competitors!

BackgroundBackground• Airline Tariff Publishing Company Airline Tariff Publishing Company

(ATPCO)(ATPCO)– Owners: 18 major airlines and Federal Owners: 18 major airlines and Federal

ExpressExpress– Customers: Data Providers (Airlines) and Customers: Data Providers (Airlines) and

Data Subscribers (Computer Reservation Data Subscribers (Computer Reservation Systems)Systems)

– Function: Act as Central Cleaning House Function: Act as Central Cleaning House for distribution of fare change information for distribution of fare change information which prices are updated daily.which prices are updated daily.

BackgroundBackground• ATPCO (Cont’d)ATPCO (Cont’d)

– Information transmitted:Information transmitted:•Fare Basis CodeFare Basis Code•Origin and Destination AirportsOrigin and Destination Airports•PricePrice•First and Last Ticket DatesFirst and Last Ticket Dates•First and Last Travel DatesFirst and Last Travel Dates•Other RestrictionsOther Restrictions

BackgroundBackground• Airline Industry in early 90sAirline Industry in early 90s

– HHI: From 854 (1985) to 1074 (1990) HHI: From 854 (1985) to 1074 (1990) – Two important Developments:Two important Developments:

•Hub-and-spoke networksHub-and-spoke networks– Northwest: Detroit and Los AngelesNorthwest: Detroit and Los Angeles– American: ChicagoAmerican: Chicago– Continental: DenverContinental: Denver– United: Denver or ChicagoUnited: Denver or Chicago– Delta: Salt Lake CityDelta: Salt Lake City

BackgroundBackground•Pricing & Marketing:Pricing & Marketing:

– Frequent Flyer Programs for TravellersFrequent Flyer Programs for Travellers– Travel Agent Commission Override Travel Agent Commission Override

Programs (TACOs) – “Frequent Booker” Programs (TACOs) – “Frequent Booker” Programs for travel agentsPrograms for travel agents

– 11stst Gulf War Gulf War– Over Investment Over Investment Some entered Cap Some entered Cap

11 Bankruptcy Proceedings.11 Bankruptcy Proceedings.

Antitrust Issues – DoJ’s CaseAntitrust Issues – DoJ’s Case• DOJ’s Antitrust Charge (1992-12-21):DOJ’s Antitrust Charge (1992-12-21):

– Defendants: ATPCO and 8 major airlinesDefendants: ATPCO and 8 major airlines– Charges: Airlines, through ATPCO, had Charges: Airlines, through ATPCO, had

colluded to raise price and restrict colluded to raise price and restrict competition in the airline industry.competition in the airline industry.

– How? The airlines had carried on How? The airlines had carried on detailed conversations and negotiations detailed conversations and negotiations over prices through ATPCO.over prices through ATPCO.

DoJ’s CaseDoJ’s Case• Example:Example:

– Airline A: Announced a fare increase to take Airline A: Announced a fare increase to take effect a number of weeks in futureeffect a number of weeks in future

– Airline B: Announced a different fare increase Airline B: Announced a different fare increase on the same route at a similar time frame.on the same route at a similar time frame.

– Airlines iterated back and forth until they Airlines iterated back and forth until they reached a point where they have the same reached a point where they have the same fare increase to take effect on the same date.fare increase to take effect on the same date.

DoJ’s CaseDoJ’s Case• Other Facts:Other Facts:

– DoJ had collected documents from each DoJ had collected documents from each airline’s daily internal fare change reports, airline’s daily internal fare change reports, which included phrases of the nature:which included phrases of the nature:““we are waiting to see if [airline A] is going we are waiting to see if [airline A] is going to go along with our proposed increase”to go along with our proposed increase”

““we are abandoning the increase on [city we are abandoning the increase on [city 1]-[city 2] because [airline B] has not 1]-[city 2] because [airline B] has not matched”matched”

DoJ’s CaseDoJ’s Case– the announcement of fares that are to the announcement of fares that are to

take effect at a later date allowed the take effect at a later date allowed the airlines to negotiate over prices without airlines to negotiate over prices without ever offering those prices to the public.ever offering those prices to the public.

– the carriers were using fare basis codes the carriers were using fare basis codes and footnote designators to and footnote designators to communicate to others between fare on communicate to others between fare on different routes.different routes.

DoJ’s CaseDoJ’s Case

Firm 1’s Hub

Firm 2’s Hub

A D

BC

Antitrust Issues – The Airlines’ Antitrust Issues – The Airlines’ DefenseDefense• The Airlines’ Defense:The Airlines’ Defense:

– No face-to-face meetingsNo face-to-face meetings– The communication was observables by The communication was observables by

the public (travel agents and anyone the public (travel agents and anyone who could access to CRS)who could access to CRS)

– Airlines were experiencing largest losses Airlines were experiencing largest losses in their history. If there was price fixing, in their history. If there was price fixing, it wasn’t making them rich.it wasn’t making them rich.

– No pre-announcement of price decreases No pre-announcement of price decreases as evidence for antitrust problem.as evidence for antitrust problem.

The Airlines’ DefenseThe Airlines’ Defense• Responds to DoJ’s Charges:Responds to DoJ’s Charges:

– All firms price in response to the actions of All firms price in response to the actions of their competitors. They were acting in their competitors. They were acting in their own their own best interestbest interest when it raised when it raised price.price.

– DoJ’s alligation were DoJ’s alligation were indistinguishableindistinguishable from competitive behavior!from competitive behavior!

– This is just part of the price discovery This is just part of the price discovery process!process!

The Airlines’ DefenseThe Airlines’ Defense– Pre-announcements of price increases Pre-announcements of price increases

were for maintaining goodwill with were for maintaining goodwill with consumers, not signaling to competitors.consumers, not signaling to competitors.

– They had never used fare basis codes or They had never used fare basis codes or footnote designators to signal footnote designators to signal connections between fares or to connections between fares or to communicate information to the others.communicate information to the others.

– Price fixing was untenable because: (i) Price fixing was untenable because: (i) not all prices were public; and (ii) not all prices were public; and (ii) competitors did not know the exact mix competitors did not know the exact mix of passengers and fares.of passengers and fares.

Antitrust Issue - DoJ’s Antitrust Issue - DoJ’s ResponseResponse• DoJ’s Response:DoJ’s Response:

– Recognized that some consumers may Recognized that some consumers may have benefited – but very small.have benefited – but very small.

– Due to the rapid change of price, might Due to the rapid change of price, might be the consumers were worse-off.be the consumers were worse-off.

– Although agreed that there were no pre-Although agreed that there were no pre-announced price decrease, the pre-announced price decrease, the pre-announcing price increase could be used announcing price increase could be used to facilitate collusion.to facilitate collusion.

DoJ’s ResponseDoJ’s Response– Profit levels were not relevant to the Profit levels were not relevant to the

investigation.investigation.

Antitrust Issue – Negotiating a Antitrust Issue – Negotiating a SettlementSettlement• Two Main Issues:Two Main Issues:

– The pre-announcement of price The pre-announcement of price increases; andincreases; and

– the alleged use of fare basis codes and the alleged use of fare basis codes and footnote designators to communicate footnote designators to communicate linkages between prices on different linkages between prices on different routes.routes.

DOJ’s Proposed RemedyDOJ’s Proposed Remedy• Cannot use footnote designators and fare Cannot use footnote designators and fare

basis codes to convey anything but the basis codes to convey anything but the most basic information;most basic information;

• Cannot link different fares to different Cannot link different fares to different codes;codes;

• Cannot preannounce price increases Cannot preannounce price increases (through last-ticket dates and future first-(through last-ticket dates and future first-ticket dates) except in the case of widely ticket dates) except in the case of widely publicized sales.publicized sales.

Responds of AirlinesResponds of Airlines• United and USAir agreed the proposal United and USAir agreed the proposal

leading to the first settlement (Dec 92)leading to the first settlement (Dec 92)

• The rest of six airlines argued against it at The rest of six airlines argued against it at the Tunney Act Hearing, which was later on the Tunney Act Hearing, which was later on approved by the court.approved by the court.

• In Mar 94, the other six agreed the same In Mar 94, the other six agreed the same restrictions in a consent decree that last for restrictions in a consent decree that last for 10 years (until 2004)10 years (until 2004)

• Same decree was order in the 2004 review.Same decree was order in the 2004 review.

Overt Bargaining or Tacit Overt Bargaining or Tacit Agreement?Agreement?

Are the following scenarios Are the following scenarios counted as collusive counted as collusive

bargaining?bargaining?

Be Your Own Judge!Be Your Own Judge!

Scenario 1Scenario 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 A’s 5% fare increases, and both Airlines thereafter offer those fares for sale.

Scenario 2Scenario 2Airline 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.

Yet, they are considered Yet, they are considered by DOJ as by DOJ as NONO violation of violation of

the consent decree!the consent decree!

Can we avoid the Can we avoid the unavoidable?unavoidable?Q: Can DOJ stop Airlines collusive Q: Can DOJ stop Airlines collusive

behavior by restrictions in the consent behavior by restrictions in the consent decree?decree?

A: Collusive pricing can result even A: Collusive pricing can result even without any sort of explicit without any sort of explicit communication among firms – Gertner communication among firms – Gertner (1994)(1994)

Gertner’s Analysis Gertner’s Analysis

The simplest case: The simplest case: • If firms are not too different, the If firms are not too different, the

outcome will still be close to the outcome will still be close to the collusive outcome and the price will collusive outcome and the price will be dictated by the firm that prefers be dictated by the firm that prefers the lowest price (e.g. airlines offering the lowest price (e.g. airlines offering the change-of-plane service).the change-of-plane service).

Airline industry as an immediate-response market

Firm 1’s Hub

Firm 2’s Hub

A D

BC

More Complicated Scenario

Case Without Symmetric Case Without Symmetric Routing StructureRouting Structure• Letting the low-cost firm (which offers the Letting the low-cost firm (which offers the

change-of-plane service) to fill its capacity change-of-plane service) to fill its capacity and then selling to the remaining demand and then selling to the remaining demand is BETTER than matching price.is BETTER than matching price.

• Conclusion: even if airlines differ in cost Conclusion: even if airlines differ in cost and other attributes, the ability to monitor and other attributes, the ability to monitor one another’s prices closely and respond one another’s prices closely and respond quickly could still result in prices will quickly could still result in prices will above competitive level.above competitive level.

Back to RealityBack to Reality• Since the consent decree…..Since the consent decree…..• Airlines post price increases on a Airlines post price increases on a

Friday afternoon, which become Friday afternoon, which become available in the CRSs on Saturday available in the CRSs on Saturday morning.morning.

• If competitors do not match the If competitors do not match the increase by Sunday afternoon, the increase by Sunday afternoon, the airline withdraws the increase in airline withdraws the increase in Sunday nightSunday night

Efficacy of the Efficacy of the SettlementSettlement

Pre SettlementPre Settlement Post SettlementPost Settlement

MonopolizeMonopolized Routesd Routes

20% above 20% above national national averageaverage

20% above 20% above national national averageaverage

CompetitivCompetitive Routese Routes

Around national Around national averageaverage

10% above 10% above national national averageaverage