Market Structure and Multiple Equilibria in the Airline Industry

Posted: 18 Sep 2009 Last revised: 10 Nov 2009

See all articles by Federico Ciliberto

Federico Ciliberto

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

Elie T. Tamer

Harvard University

Date Written: March 1, 2009


We provide a practical method to estimate the payoff functions of players in complete information, static, discrete games. With respect to the empirical literature on entry games originated by Bresnahan and Reiss (1990) and Berry (1992), the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions. We allow the effects that the entry of each individual airline has on the profits of its competitors, its "competitive effects," to differ across airlines. The identified features of the model are sets of parameters (partial identification) such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data.

We apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the U.S. airline industry. We find evidence of heterogeneity across airlines in their profit functions. The competitive effects of large airlines (American, Delta, United) are different from those of low cost carriers and Southwest. Also, the competitive effect of an airline is increasing in its airport presence, which is an important measure of observable heterogeneity in the airline industry. Then we develop a policy experiment to estimate the effect of repealing the Wright Amendment on competition in markets out of the Dallas airports. We find that repealing theWright Amendment would increase the number of markets served out of Dallas Love.

Keywords: Entry Models, Inference in Discrete Games, Multiple Equilibria, Partial Identification, Airline Industry, Firm Heterogeneity

Suggested Citation

Ciliberto, Federico and Tamer, Elie T., Market Structure and Multiple Equilibria in the Airline Industry (March 1, 2009). Econometrica, Vol. 77, No. 6, pp. 1791-1828, November 2009, Available at SSRN:

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 )

United Kingdom

Elie T. Tamer

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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