The Prisoner’s Dilemma in Business and the Economy
This research looks into whether the top management of all legacy U.S. airlines coordinated output reduction (fewer passenger seats) on rival routes by using their quarterly earnings calls as a means of contact with other airlines. Using Natural Language Processing methods from computational linguistics, they create an original and novel dataset on the public communication material from the earnings calls and parse and code the text from airline executives’ earnings calls to assess communication. The estimations demonstrate that when all legacy carriers in an area communicate “capacity discipline,” the market’s supply of seats is significantly reduced. This indicates that legacy carriers are solely responsible for the effect and that smaller markets experience a greater decline. Finally, the research confirms the conclusion that legacy airlines collude by using public communication about capacity discipline.
As we learned in class about prisoner dilemma, the most well-known concept of game theory, even when it seems to be in their best interests to cooperate, two perfectly sensible people may not do so. However, the U.S. airlines did not fall into the typical prisoner dilemma because of two points. First, as we learned in the lecture, most business and other human contacts take place more than once in the real world. A true prisoner’s dilemma is often only performed once; with practice, people can start to predict other people’s conduct and gain knowledge from errors and unfavorable results. Many prisoner problems are changed by explicit punishment for defections toward more mutually advantageous cooperative solutions. Moreover, in the case study above, companies share their information which does not appear in the typical prisoner dilemma case where they cannot communicate with each other at all.
Besides the connection with in-class knowledge, this research also reveals that the SEC’s transparency standards conflict with antitrust laws in the aviation business, which is something that policymakers need to be aware of. Although the usefulness of quarterly earnings calls is still up for debate, investors are usually considered to benefit from the public disclosure of information provided by these calls. The competitive impacts of this enhanced transparency are, however, conceptually murky and poorly researched. This research is a great start and example of filling the gap.
Work Cited:
Aryal, Gaurab, Federico Ciliberto, and Benjamin Leyden. Public communication and collusion in the airline industry. London, UK: Centre for Economic Policy Research, 2018.
https://bfi.uchicago.edu/wp-content/uploads/WP_No.2018-11.pdf