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Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing

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  • Agnès Bénassy-Quéré
  • Lionel Fontagné
  • Horst Raff

Abstract

We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1488.

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Length: 24 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:kie:kieliw:1488

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Keywords: exchange rates; pass-through; oligopoly;

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