Multiple Equilibria and Deterrence in Airline Markets

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