The elephant in the room of mutual forbearance: How a multi-market firm develops the motivation for forbearance

Abstract

Purpose: The purpose of this paper is to explain how a multi-market firm develops the motivation to forbear from competition. Design/methodology/approach: A two-way fixed effects model with Driscoll and Kraay standard errors investigates the research question with panel data collected from the US scheduled passenger airline industry. Findings: The results demonstrate that although the interaction of multi-market contact with strategic similarity impairs a firm’s forbearance from competition, the same interaction promotes it as firm performance deteriorates, supporting the hypotheses. Research limitations/implications: Performance explains not only how forbearance emerges out of coincidental multi-market contact but also reconciles the mixed evidence for the impact of the two-way interaction between multi-market contact and strategic similarity on forbearance. Practical implications: Antitrust authorities should pay more attention to low performing firms than to high performing firms in their investigations. Also, managers of multi-market firms should identify multi-market rivals with low performance as targets for the initiation of forbearance. Originality/value: This study revises the mutual forbearance theory to align it with the accumulating empirical evidence that otherwise refutes its assumption and thereby improves theory’s descriptive and predictive power.