Market Power, Multimarket Contact and Pricing: Some Evidence from the US Automobile Market

Multimarket contact is perceived to be one of those factors, which can facilitate and sustain implicit collusion. This multimarket contact effect has got relatively little attention in the previous literature, although the theoretical and empirical discussion has been revived in the 1990s after Bernheim and Whinston (1990) seminal work. In this paper the authors state that the multimarket contact may lessen the degree of the competition between the rivals, as the multiple competitors are more likely to recognize their mutual dependence, and to sustain collusion across the range of markets, in which they meet. The existing empirical studies, which are mostly done for airlines and banking industry, have failed to give conclusive evidence about the existence, sign and significance of the multimarket contact effect on collusion. The present paper attempts to develop new approaches to study the interdependence of firm behaviour across markets, especially in the context of differentiated products industries. In particular, the paper looks at whether the multimarket contact facilitates collusive (cooperative) arrangements, or reduces firm competition intensity. The multimarket contact effects are studied within a structural oligopoly model for differentiated products for the US automobile market. The automobile industry is characterized by extensive multimarket contact within the geographical and product market context where different firms may have different "spheres of influence". The results of the paper lends some support to the fact that multimarket contact influences competition in the automobile markets and increases the firms’ strategic interdependence.

Leheyda, Nina (2008), Market Power, Multimarket Contact and Pricing: Some Evidence from the US Automobile Market, ZEW Discussion Paper No. 08-118, Mannheim.