A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft

56 Pages Posted: 11 Jun 2000 Last revised: 17 Oct 2010

See all articles by C. Lanier Benkard

C. Lanier Benkard

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2000

Abstract

This paper develops a multi-agent dynamic model of the commercial aircraft industry and then uses that model to analyze industry pricing, industry performance, and optimal industry policy. In the model, firms are differentiated in their products and cost structure, and entry, exit, prices, and quantity sold are endogenously determined in dynamic equilibrium. Re ecting the focus of the paper, demand and supply are modeled structurally, while investment is modeled in reduced form. The model utilizes a cost model of commercial aircraft production developed and estimated in a previous paper (Benkard (2000)), and a discrete choice model of commercial aircraft demand to determine static profits. I find that many unusual aspects of the aircraft data, such as high concentration and pricing below the level of static marginal cost, are explained by this model. The model also replicates the stochastic evolution of the industry well. Many of these properties could not be explained with a static model. These results provide support for the structural dynamic modeling approach in general. I also find that the unconstrained Markov perfect equilibrium is quite efficient from a social perspective, providing only 9% less welfare on average than a social planner would obtain, but that the Markov perfect equilibrium shifts a substantial amount of welfare from consumers to producers. Finally, I provide simulation evidence that an anti-trust policy in the form of a concentration restriction would be welfare reducing with high probability.

Suggested Citation

Benkard, C. Lanier, A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft (May 2000). NBER Working Paper No. w7710. Available at SSRN: https://ssrn.com/abstract=232096

C. Lanier Benkard (Contact Author)

Stanford Graduate School of Business ( email )

Stanford, CA 94305-5015
United States
650-723-4124 (Phone)
650-725-0468 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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