Advanced Search
MyIDEAS: Login to save this paper or follow this series

A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments

Contents:

Author Info

  • Victor Aguirregabiria
  • Chun-Yu Ho

Abstract

This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors which may explain the adoption of hub-and-spoke networks: (1) travelers value the services associated with the scale of operation of an airline in the hub airport (e.g., more convenient check-in and landing facilities); (2) operating costs and entry costs in a route may decline with an airline's scale operation in origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As a methodological contribution, we propose and apply a simple method to deal with the problem of multiple equilibria when using the estimated model to predict the effects of changes in structural parameters. We find that the most important factor to explain the adoption of hub-and-spoke networks is that the cost of entry in a route declines very importantly with the scale of operation of the airline in the airports of the route. For some of the larger carriers, strategic entry deterrence is the second most important factor to explain hub-and-spoke networks.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-337.pdf
File Function: Main Text
Download Restriction: no

Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-337.

as in new window
Length: 49 pages
Date of creation: 29 Sep 2008
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-337

Contact details of provider:
Postal: 150 St. George Street, Toronto, Ontario
Phone: (416) 978-5283

Related research

Keywords: Airline industry; Hub-and-spoke networks; Entry costs; Industry dynamics; Estimation of dynamic games; Counterfactuals with multiple equilibria;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Rust, J., 1994. "Using Randomization to Break the Curse of Dimensionality," Working papers, Wisconsin Madison - Social Systems 9429, Wisconsin Madison - Social Systems.
  2. Hiroyuki Kasahara & Katsumi Shimotsu, 2008. "Sequential Estimation of Structural Models with a Fixed Point Constraint," Working Papers, Queen's University, Department of Economics 1192, Queen's University, Department of Economics.
  3. Victor Aguirregabiria & Victor Aguirregabiria & Aviv Nevo & Aviv Nevo, 2010. "Recent Developments in Empirical IO: Dynamic Demand and Dynamic Games," Working Papers, University of Toronto, Department of Economics tecipa-419, University of Toronto, Department of Economics.
  4. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, Econometric Society, vol. 75(5), pages 1331-1370, 09.
  5. Ken Hendricks & Michele Piccione & Guofu Tan, 1999. "Equilibria in Networks," Econometrica, Econometric Society, Econometric Society, vol. 67(6), pages 1407-1434, November.
  6. Elie Tamer & Federico Ciliberto, 2004. "Market Structure and Multiple Equilibria in Airline Markets," Econometric Society 2004 North American Winter Meetings, Econometric Society 517, Econometric Society.
  7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 841-90, July.
  8. Ulrich Doraszelski & Mark Satterthwaite, 2010. "Computable Markov-perfect industry dynamics," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 215-243.
  9. Kenneth L. Judd, 1985. "Credible Spatial Preemption," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 153-166, Summer.
  10. Delgado, Miguel A & Mora, Juan, 1995. "Nonparametric and Semiparametric Estimation with Discrete Regressors," Econometrica, Econometric Society, Econometric Society, vol. 63(6), pages 1477-84, November.
  11. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, Econometric Society, vol. 60(4), pages 889-917, July.
  12. Alam, Ila M Semenick & Sickles, Robin C, 2000. "Time Series Analysis of Deregulatory Dynamics and Technical Efficiency: The Case of the U.S. Airline Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 203-18, February.
  13. Borenstein, S., 1991. "The Evolution of U.S. Airline Competition," Papers, California Davis - Institute of Governmental Affairs 389, California Davis - Institute of Governmental Affairs.
  14. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Victor Aguirregabiria & Pedro Mira, 2004. "Sequential Estimation Of Dynamic Discrete Games," Working Papers, CEMFI wp2004_0413, CEMFI.
  16. Ken Hendricks & Michele Piccione & Guofu Tan, 1997. "Entry and Exit in Hub-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 291-303, Summer.
  17. Doraszelski, Ulrich & Satterthwaite, Mark, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6212, C.E.P.R. Discussion Papers.
  18. Reiss, Peter C & Spiller, Pablo T, 1989. "Competition and Entry in Small Airline Markets," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 32(2), pages S179-202, October.
  19. Nevo, Aviv & Rossi, Federico, 2008. "An approach for extending dynamic models to settings with multi-product firms," Economics Letters, Elsevier, Elsevier, vol. 100(1), pages 49-52, July.
  20. Hendricks, Ken & Piccione, Michele & Tan, Guofu, 1995. "The Economics of Hubs: The Case of Monopoly," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(1), pages 83-99, January.
  21. Severin Borenstein & Nancy L. Rose, 2007. "How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry," NBER Working Papers 13452, National Bureau of Economic Research, Inc.
  22. Ariel Pakes & Michael Ostrovsky & Steven Berry, 2007. "Simple estimators for the parameters of discrete dynamic games (with entry/exit examples)," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 373-399, 06.
  23. Severin Borenstein, 1989. "Hubs and High Fares: Dominance and Market Power in the U.S. Airline Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 344-365, Autumn.
  24. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  25. Berry, Steven T, 1990. "Airport Presence as Product Differentiation," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 394-99, May.
  26. Tae Hoon Oum & Anming Zhang & Yimin Zhang, 1995. "Airline Network Rivalry," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 28(4a), pages 836-57, November.
  27. Victor Aguirregabiria & Pedro Mira, 1999. "Swapping the Nested Fixed-Point Algorithm: a Class of Estimators for Discrete Markov Decision Models," Computing in Economics and Finance 1999, Society for Computational Economics 332, Society for Computational Economics.
  28. Steven Berry & Michael Carnall & Pablo T. Spiller, 1996. "Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity," NBER Working Papers 5561, National Bureau of Economic Research, Inc.
  29. Igal Hendel & Aviv Nevo, 2005. "Measuring the Implications of Sales and Consumer Inventory Behavior," NBER Working Papers 11307, National Bureau of Economic Research, Inc.
  30. Kasahara, Hiroyuki & Shimotsu, Katsumi, 2008. "Pseudo-likelihood estimation and bootstrap inference for structural discrete Markov decision models," Journal of Econometrics, Elsevier, Elsevier, vol. 146(1), pages 92-106, September.
  31. Mara Lederman, 2008. "Are Frequent-Flyer Programs a Cause of the "Hub Premium"?," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 17(1), pages 35-66, 03.
  32. Ulrich Doraszelski & Mark Satterthwaite, 2007. "Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity," Levine's Bibliography 321307000000000912, UCLA Department of Economics.
  33. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  34. R. Färe & S. Grosskopf & R. C. Sickles, 2007. "Productivity? of US Airlines After Deregulation," Journal of Transport Economics and Policy, London School of Economics and University of Bath, London School of Economics and University of Bath, vol. 41(1), pages 93-112, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:tor:tecipa:tecipa-337. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePEc Maintainer).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.