Disadvantageous semicollusion: Price competition in the Norwegian airline industry

Motivated by observations in the Norwegian airline industry in the late 90s, we develop a semicollusive model with collusion on gross prices and competition on contracts for large customers (corporate contracts). The theoretical predictions are tested on detailed data on gross prices, large customer prices and quantities in the Norwegian airline industry in the period 1998-2001. We control for cost and demand factors as well as route specific heterogeneity, and find results in line with what our theory model predicts. An increase in the share of large customers and their rebates increase businessand leisure prices for passengers not travelling on these contracts, leading to a perverse price structure with an excessive high price for those consumers that are expected to be the most price sensitive ones. The effect is most pronounced in the business class. The effect is found to differ according to the quality (number of flights) the airline companies can offer. 1 We are indebted to the Norwegian Research Council for financial support through the project ‘Improving Competition Policy’ at SNF.