IS THE AIRLINE INDUSTRY A NATURAL MONOPOLY 185 airports remains a key factor in the decision not to enter a route a factor, that when combined with the well-established reputation of a dominant carrier at this airport or with its predatory reputation, potential entry by a competitor, will face many risks in the assessment of prospective profitability of a route. 3.2. The Mutual Forbearance Hypothesis The theory of mutual forbearance, developed by Edwards in 195530, states that companies tend to elude fierce competition by implicitly or tacitly exercising collusion and by deterring each other. When a deterrence effect occurs, the intensity of competition tends to decrease. The mutual forbearance hypothesis is based on the premise that firms naturally seek to move from short-term survival to long-term sustainability, having no interest in a prolonged head-on rivalry. Besides the fact that competition can occur simultaneously in multiple product and geographic markets, multipoint competition theories31 state that multipoint contacts among competitors provide credible threats that should decrease rivalry. Within the airline industry, the concept of multipoint competition refers to situations in which airlines compete with the same rivals in many different routes, a favourbale multimarket contact context to their mutual understanding and to their increased ability to coordinate each other’s actions and responses, even to the extent to allow tacit coordination or even tacit collusion. In the US airline industry, the mutual forbearance thesis was supported by studies32 that found that multi-routes contacts reduced the level of rivalry. This lack of competitive pressure was reflected by increases in fares and decreases in the quality of service such as delays. Airlines should be concerned by the fact that their aggressive behaviour on a route may provoke a response from a rival on another route, a escalation of rivalry that could trigger a “lose-lose” situation. The reciprocal threat is an important factor in reducing the intensity of competition with competitors in its own strategic markets. In addition, there 30 Edwards, 1955, “Conglomerate bigness as a source of power”. Business concentration and price policy, Princeton University, Princeton, 1955. 31 Baum & Korn, 1996, “Competitive dynamics of interfirm rivalry”, Academy of Management Journal, 39, 255-291. 32 Gimeno & Woo, 1996, “Hypercompetition in a multimarket environment: The role of strategic similarity and multimarket contact in competitive de-escalation”, Organization Science, 7: 322-341. See also Gimeno, 1999, “Reciprocal threats in multimarket rivalry: staking out spheres of influence in the US airline industry”, Strategic Management Journal, n°20, 101-128. See also Miller (2010), “Did the airline tariff publishing case reduce collusion?” Journal of Law and Economics, 53, 569-601.
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