Mutual Forbearance: The Moderating Effect of Multimarket Contact on Incumbent Response to Entry in the U.S. Airline Industry

This paper examines incumbent response after market entry. Specifically, this paper investigates the moderating effect of multimarket contact on the incumbent pricing response; the so-called 'retaliatory response' as hypothesized by mutual forbearance theory. This crucial premise on which the theory rests, has yet received little attention in empirical research. Employing a fixed effect model using panel data on the U.S. airline industry, I find conclusive results in support of the mutual forbearance theory. In line with the theory's expectations, the degree of multimarket strengthens the negative effect of market entry on the incumbent's pricing strategy. This study is the first to specifically investigate this alleged retaliatory response of mutual forbearance theory, and provides additional support for the theory. Further research into the validity of these findings across industries and for different attack and response behavior is encouraged.