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Capacity Investments, Exclusionary Behavior, and Welfare: A Dynamic Model of Competition in the Airline Industry

45 Pages Posted: 9 Apr 2009 Last revised: 16 Jan 2013

Jonathan W. Williams

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: December 1, 2008

Abstract

This paper uses unique data on access to airport facilities to study the strategic entry, exit, and capacity decisions of firms in the US airline industry. I estimate a dynamic equilibrium model in which forward-looking …firms invest in seating capacity and play a capacity-constrained pricing game. I …find that the intensity of competition depends directly on the characteristics and identity of the incumbent fi…rm. In particular, dominant hub carriers aggressively invest in capacity following entry by low-cost carriers, providing a commitment to price aggressively in future periods. In doing so, the hub carrier can substantially increase the likelihood of exit by the targeted …rm. The resulting reduction in the level of competition reduces consumer welfare relative to an environment in which anti-trust authorities can eliminate such exclusionary behavior.

Keywords: Predation, Market Power, Airline Industry, Barriers to Entry, Product Differentiation

JEL Classification: L13, L93

Suggested Citation

Williams, Jonathan W., Capacity Investments, Exclusionary Behavior, and Welfare: A Dynamic Model of Competition in the Airline Industry (December 1, 2008). Available at SSRN: https://ssrn.com/abstract=1375450 or http://dx.doi.org/10.2139/ssrn.1375450

Jonathan W. Williams (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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