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

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