Market Structure and Competition in Airline Markets

68 Pages Posted: 11 May 2016 Last revised: 25 Nov 2018

See all articles by Federico Ciliberto

Federico Ciliberto

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

Charles Murry

Boston College - Department of Economics

Elie T. Tamer

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2018

Abstract

We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions in oligopolistic markets while allowing for correlations between unobserved fixed costs, marginal costs, and demand shocks. Firms' decisions to enter a market are based on whether they will realize positive profits from entry. We use our framework to quantitatively account for this selection problem in the pricing stage. We estimate this model using cross-sectional data from the US airline industry. We find that not accounting for endogenous entry leads to overestimation of demand elasticities. This, in turn, leads to biased markups, which has implications for the policy evaluation of market power. Our methodology allows us to study how firms optimally decide entry/exit decision in response to a change in policy. We simulate a merger between American and US Airways and we find that the post-merger market structure and prices depend crucially on how we model the characteristics of the post-merger firm as a function of the pre-merger firms' characteristics. Overall, the merged firm has a strong incentive to enter new markets; the merged firm faces a stronger threat of entry from rival legacy carriers, as opposed to low cost carriers; and, post-merger entry mitigates the adverse effects of increased concentration.

Keywords: Multiple Equilibria, Market Power, Self-Selection, Entry, Oligopoly, Market Structure, Merger

JEL Classification: C35, C51, D43, L13, L41, L44

Suggested Citation

Ciliberto, Federico and Murry, Charles and Tamer, Elie T., Market Structure and Competition in Airline Markets (October 10, 2018). Available at SSRN: https://ssrn.com/abstract=2777820 or http://dx.doi.org/10.2139/ssrn.2777820

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 )

London
United Kingdom

Charles Murry

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Elie T. Tamer

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
806
rank
28,663
Abstract Views
2,659
PlumX Metrics