Abstract:
We investigate whether the top management of all legacy U.S. airlines used their quarterly earnings calls as a mode of communication with other airlines to coordinate output reduction (fewer passenger seats) on competitive routes. We build an original and novel dataset on the public communication content from the earnings calls, and use Natural Language Processing techniques from computational linguistics to parse and code the text from earnings calls by airline executives to measure communication. Then we determine if mentioning terms associated with “capacity discipline” is a way to sustain collusion on capacity. The estimates show that when all legacy carriers in a market communicate “capacity discipline,” it leads to a substantial reduction in the number of seats offered in the market. We find that the effect is driven entirely by legacy carriers, and also that the reduction is larger in smaller markets. Finally, we leverage our high-dimensional text data to develop novel approaches to implement falsification tests and check conditional exogeneity, and confirm that our finding - legacy airlines use public communication regarding capacity discipline to collude - is not spurious.
Host: Manudeep Bhuller