Exchanges of Cost Information in the Airline Industry

Posted: 28 Oct 2002

See all articles by Oliver M. Richard

Oliver M. Richard

U.S. Department of Justice - Economic Analysis Group - Antitrust Division

Olivier Armantier

Federal Reserve Bank of New York

Abstract

We empirically analyze exchanges of cost information in a multimarket oligopoly model for the airline industry with entry and incomplete information on marginal costs. We develop an algorithm to solve the Nash equilibrium numerically. We estimate the structural model of supply decisions using data on the American Airlines and United Airlines duopoly at Chicago O'Hare airport. Our results provide probabilities of entry, expected quantities, prices, and profits in each market. Given the estimated parameters, we simulate competition under a hypothetical agreement to exchange cost information. We find that such exchanges would benefit airlines while only moderately costing consumers.

Keywords: Structural Estimation, Incomplete Information, Airline Industry, Exchanges of Cost Information, Entry, Network

JEL Classification: L11, D82, C15, C51, L93, R41

Suggested Citation

Richard, Oliver M. and Armantier, Olivier, Exchanges of Cost Information in the Airline Industry. RAND Journal of Economics, Vol. 34, No. 3. Available at SSRN: https://ssrn.com/abstract=344680

Oliver M. Richard (Contact Author)

U.S. Department of Justice - Economic Analysis Group - Antitrust Division ( email )

450 Fifth Street, NW
Ninth Floor
Washington, DC 20530
United States

Olivier Armantier

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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