Kyle Hampton, University of Hawaii at Manoa

Katerina Sherstyuk, University of Hawaii at Manoa

Abstract

Anti-trust exemptions may be granted to businesses on the grounds of extenuating circumstances, with an argument that such exemptions may benefit the public through helping producers to adjust to otherwise difficult economic circumstances. This project uses the tools of economic laboratory to evaluate possible effects of anti-trust exemptions, allowing oligopolists to coordinate their capacities, on firmsí abilities to adjust to negative demand shocks. We also seek to evaluate the effects of such capacity coordination on the industry prices and consumer welfare. We use the post-September 11th Aloha and Hawaiian Airlines Antitrust Exemption Agreement as a motivating example for our study. The agreement allowed the two airlines to periodically coordinate their capacities, and also included a revenue transfer clause that served as an effective enforcement mechanism for the agreement.

We use Kreps and Scheinkman (1983) two-stage capacity and price setting duopoly game as a benchmark setting for our experiment. We institute a negative demand shock half-way through each experimental session, and then explore alternative scenarios, with and without capacity coordination between the firms, and with and without enforcement. We thus consider the effects of capacity coordination on industry prices, firmsí profits or losses, and consumer welfare. In particular, we seek to explain the historically observed phenomenon in the airlines industry when the demand decreased but the industry prices rose. We further discuss policy implications of our findings.