Multiple Equilibria and Deterrence in Airline Markets

46 Pages Posted: 28 Jan 2014 Last revised: 19 Apr 2016

Federico Ciliberto

University of Virginia - Department of Economics; Centre for Economic Policy Research (CEPR)

Zhou Zhang

University of Virginia

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2016

Abstract

We use a longitudinal dataset from the US airline industry to estimate three different models for entry games with very general forms of heterogeneity between U.S. carriers in airline markets: A simultaneous game with complete information; and two sequential games with or without strategic entry deterrence. In a sequential game with entry deterrence, an incumbent decides whether to incur a cost to deter potential entrants. We show that the model with sequential games with strategic deterrence provides the best fit to the data. We conclude that the results reject the hypothesis of a static model and support the hypothesis of the existence of strategic entry deterrence.

Keywords: Multiple Equilibria, Entry Games, Heterogeneity, Deterrence, Airline Industry, Sequential Move Game, Simultaneous Move Game

JEL Classification: L1

Suggested Citation

Ciliberto, Federico and Zhang, Zhou, Multiple Equilibria and Deterrence in Airline Markets (April 18, 2016). Available at SSRN: https://ssrn.com/abstract=2385720 or http://dx.doi.org/10.2139/ssrn.2385720

Federico Ciliberto (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Zhou Zhang

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Paper statistics

Downloads
185
Rank
134,443
Abstract Views
929