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Price Competition and Endogenous Product Choice in Networks: Evidence From the US Airline Industry

Author

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  • Christian Bontemps

  • Cristina Gualdani

  • Kevin Remmy

Abstract

We develop a two-stage game in which competing airlines first choose the networks of markets to serve in the first stage before competing in price in the second stage. Spillovers in entry decisions across markets are allowed, which accrue on the demand, marginal cost, and fixed cost sides. We show that the second-stage parameters are point identified, and we design a tractable procedure to set identify the first-stage parameters and to conduct inference. Further, we estimate the model using data from the domestic US airline market and find significant spillovers in entry. In a counterfactual exercise, we evaluate the 2013 merger between American Airlines and US Airways. Our results highlight that spillovers in entry and post-merger network readjustments play an important role in shaping post-merger outcomes.

Suggested Citation

  • Christian Bontemps & Cristina Gualdani & Kevin Remmy, 2023. "Price Competition and Endogenous Product Choice in Networks: Evidence From the US Airline Industry," CRC TR 224 Discussion Paper Series crctr224_2023_400, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2023_400
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    Cited by:

    1. Gaurab Aryal & Anirban Chattopadhyaya & Federico Ciliberto, 2025. "Bridging Quasi-Experimental and Structural Approaches for Robust Evaluation of US Airline Mergers," Papers 2503.15785, arXiv.org, revised Oct 2025.
    2. Harold D. Chiang & Jack Collison & Lorenzo Magnolfi & Christopher Sullivan, 2025. "Enhancing the Merger Simulation Toolkit with ML/AI," Papers 2506.05225, arXiv.org.

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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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