A tale of two duopolies: collusion and exit in a local airline industry

Abstract

This article investigates two episodes of market adjustments in Hawaii’s interisland civil aviation market. One is collusion in which duopolists of similar size agreed to reduce their supply to the market. The other is unilateral exit by an individual company, which resulted in the asymmetric duopoly with respect to firm size. The analysis demonstrates that even a dominant duopolist cannot maintain sufficient market power to manipulate prices as long as competitive forces are present, while cooperative adjustment in the capacity dimension is likely to lead to higher prices on a sustainable basis. The results confirm the importance of competitive forces for mitigating price hikes in the process of adjustment.

Keywords:

• collusion
• exit
• airlines
• price
• adjustment

JEL Classification:

• L11
• L13
• L93

Acknowledgements

The author would like to thank Noriyuki Doi, Sumner LaCroix and James Mak for their helpful comments on an earlier version of the paper, and Akiko Sugimoto for her excellent research assistance.

Notes

¹ Forman (2005) gives a detailed history of Hawaii’s civil aviation industry, including the rivalry between the two companies and the entry/exit of other operators such as Mid Pacific Airlines (1981–1988) and Mahalo Airlines (1993–1997).

² Hawaiian Airlines and Aloha Airlines announced their intention to merge in December 2001. Merger negotiations were, however, called off in March 2002.

³ Brueckner (2003) identified an opposite effect of antitrust immunity in analysis of cooperation among international carriers in the form of codesharing and antitrust immunity. This immunity led to reduced fares for interline passengers.

⁴ The asymmetric nature of this duopoly was illustrated in a letter to shareholders from the chairman of Hawaiian Airlines’ board of directors, in which he wrote about the company’s response to the exit of Aloha: ‘[R]esponsibility fell to Hawaiian Airlines to prevent a meltdown in the State’s transportation system,… In this regard, we can all be very proud of our Company’s performance. Instead of chaos, we had order at each of our airports. Not one of Aloha’s interisland customers was left stranded.’ The letter was issued with the company’s annual report for 2008.

⁵ The four airports (and the island on which they are located) are: Honolulu (Oahu), Kahului (Maui), Kona (Hawaii) and Lihue (Kauai).

⁶ The random effects specification is selected over the fixed effects specification because the dependent variable is price change that is unlikely to shift by a constant margin across individual airports. Breusch and Pagan Lagrangian multiplier test supports this specification choice.

⁷ Wiles (2008) describes efforts by Hawaiian Airlines and the other airline to rapidly increase interisland service frequency.