A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments

48 Pages Posted: 2 Oct 2008 Last revised: 30 Oct 2016

See all articles by Victor Aguirregabiria

Victor Aguirregabiria

University of Toronto - Department of Economics

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics

Date Written: May 1, 2012

Abstract

This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As methodological contributions of the paper, we propose and apply a method to reduce the dimension of the state space in dynamic games, and a procedure to deal with the problem of multiple equilibria when implementing counterfactual experiments. Our empirical results show that the most important factor to explain the adoption of hub-and-spoke networks is that the sunk cost of entry in a route declines importantly with the number of cities that the airline connects from the origin and destination airports of the route. For some carriers, the entry deterrence motive is the second most important factor to explain hub-and-spoke networks.

Keywords: Airline industry, Hub-and-spoke networks, Entry costs, Industry dynamics, Estimation of dynamic games, Counterfactual experiments in models with multiple equilibria

JEL Classification: C10, C35, C63, C73, L10, L13, L93

Suggested Citation

Aguirregabiria, Victor and Ho, Chun-Yu, A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments (May 1, 2012). Journal of Econometrics, Vol. 168, No. 1, 2012, Available at SSRN: https://ssrn.com/abstract=1276006 or http://dx.doi.org/10.2139/ssrn.1276006

Victor Aguirregabiria (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
4169784358 (Phone)

HOME PAGE: http://individual.utoronto.ca/vaguirre/

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics ( email )

1400 Washington Ave
Albany, NY 12222
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
344
Abstract Views
1,834
rank
96,595
PlumX Metrics