Exchanges of Cost Information in the Airline Industry
Posted: 28 Oct 2002
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: Suggested Citation