Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing
University of Paris - Paris School of Economics; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Banque de France; CEPII
Paris School of Economics (University Paris 1)
Christian-Albrechts-Universitaet zu Kiel; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Kiel Institute for the World Economy
February 9, 2009
We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry.
Number of Pages in PDF File: 24
Keywords: Exchange-rate pass-through, duopoly, aircraft industry
JEL Classification: F31, D43, L11, L62working papers series
Date posted: March 9, 2012
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