Collusion and Dynamic Pricing - enablers and origins of airlines' cartels

In an unprecedented era, consumers' focus has sharpened on the rising prices of everyday commodities. The cost of living has surged across even the southernmost regions of Italy, impacting both families and individuals. The substantial hikes in expenses, such as fuel for vehicles and travel, cannot be ignored, leading to widespread discontent. These price escalations are not driven only by spikes in critical raw material costs. Economic sectors, including the airline industry, are dealing with a prolonged period of unprofitability, if not serious losses, brought on by the two years of pandemic. These price increases far exceed recently accumulated variable costs, prompting numerous complaints from consumer protection organizations and regulators. Furthermore, the economic setbacks endured during the COVID-19 years have left indelible marks, constituting one of the most severe crises in recent memory for certain sectors. Recovering from these losses necessitates a gradual approach, with incremental price adjustments until losses are remarginated, allowing a return to competitive pricing instead of exorbitant increases that burden consumers. The core objective of this thesis is to scrutinize the incongruity between rising market demand and simultaneous product price hikes, delving into the reasons behind these escalations. The aviation sector, in particular, has always been under scrutiny due to concerns of collusion, both due to its profound societal impact and sector-specific characteristics. As a result, laws and regulations are in place to support market competitiveness controlling and monitoring firms within the market. However, a not supportive regulation exacerbated losses in this sector. The suspension of the 'use it or lose it' law, mandating airlines to utilize airport slots at least 80% of the time, a valuable but limited resource, has lasted insufficiently. This suspension was initially introduced during the restriction period but later relaxed to require a utilization ratio of 50% (2021) and later 70% (2022). This relief proved inadequate, especially as Italy remained divided into red, orange, and yellow zones, with restricted foreign travel too. Airlines found themselves in dire straits, unable to avoid fixed prices while accommodating passengers affected by Covid-19 or moving goods. Consequently, losses were caused not only from no-sales but were exacerbated by the burden of unnecessary fixed costs. Given these circumstances, current collaborations between airlines appear plausible, almost justifiable, but punishable anyway. This thesis also explores additional factors that have historically facilitated collusion in the airline market, despite algorithm-managed pricing. The first chapter underscores the cultural, social, and economic significance of the aviation sector, emphasizing its interconnectedness with society's broader fabric. Subsequently, the pricing strategies employed by airlines are defined, supported by real-world cases, including insights from my internship at the tour operator Alpitour. In the next chapter, the concept of collusion, its definition, and its enablers are detailed, drawing a clear connection between this theme and the previous one. While airline ticket prices exhibit high volatility managed by algorithms, these algorithms have evolved beyond optimizing revenue solely based on internal data. Instead, they engage in a form of the Prisoner's Dilemma, maintaining price similarity with competitors regardless of the time remaining before departure.