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Airbus versus Boeing Revisited: International Competition in the Aircraft Market

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  • Irwin, Douglas
  • Pavcnik, Nina

Abstract

This Paper examines international competition in the commercial aircraft industry. We estimate a discrete choice, differentiated products demand system for wide-body aircraft and examine the Airbus-Boeing rivalry under various assumptions on firm conduct. We then use this structure to evaluate two trade disputes between the United States and European Union. Our results suggest that aircraft prices increased by about 3.7% after the 1992 US – EU agreement on trade in civil aircraft that limits subsidies. This price hike is consistent with a 5% increase in firms’ marginal costs after the subsidy cuts. We also simulate the impact of the future entry of the Airbus A-380 super-jumbo aircraft on the demand for other wide-bodied aircraft, notably the Boeing 747. We find that the A-380 could reduce the market share of the 747 by up to 14.8 percentage points in the long range wide-body market segment (depending upon the discounts offered on the A-380), but would reduce the market for Airbus’s existing wide-bodies by an even greater margin.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3876.

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Date of creation: Apr 2003
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Handle: RePEc:cpr:ceprdp:3876
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Keywords: aircraft industry; trade policy;

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Find related papers by JEL classification:
  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. Richard Baldwin & Paul Krugman, 1988. "Industrial Policy and International Competition in Wide-Bodied Jet Aircraft," NBER Chapters, in: Trade Policy Issues and Empirical Analysis, pages 45-78 National Bureau of Economic Research, Inc.
  2. Paul Krugman & Alasdair Smith, 1994. "Empirical Studies of Strategic Trade Policy," NBER Books, National Bureau of Economic Research, Inc, number krug94-1, October.
  3. 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.
  4. Gernot Klepper, 1994. "Industrial Policy in the Transport Aircraft Industry," NBER Chapters, in: Empirical Studies of Strategic Trade Policy, pages 101-130 National Bureau of Economic Research, Inc.
  5. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
  6. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  7. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  8. Benkard, C. Lanier, 2000. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Research Papers 1636, Stanford University, Graduate School of Business.
  9. C. Lanier Benkard, 2000. "Learning and Forgetting: The Dynamics of Aircraft Production," American Economic Review, American Economic Association, vol. 90(4), pages 1034-1054, September.
  10. C. Lanier Benkard, 2000. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," NBER Working Papers 7710, National Bureau of Economic Research, Inc.
  11. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  12. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  13. Nina Pavcnik, 2002. "Trade Disputes in the Commercial Aircraft Industry," The World Economy, Wiley Blackwell, vol. 25(5), pages 733-751, 05.
  14. Irwin, Douglas A & Klenow, Peter J, 1994. "Learning-by-Doing Spillovers in the Semiconductor Industry," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1200-1227, December.
  15. Klepper, Gernot, 1990. "Entry into the market for large transport aircraft," European Economic Review, Elsevier, vol. 34(4), pages 775-798, June.
  16. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-58, March.
  17. Hendel, Igal, 1999. "Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 423-46, April.
  18. Damien NEVEN & Paul SEABRIGHT, 1995. "European Industrial Policy: The Airbus Case," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9509, Université de Lausanne, Faculté des HEC, DEEP.
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Cited by:

  1. Martini, Gianmaria & Scotti, Davide, 2010. "Potere di mercato e distribuzione dei profitti nella filiera del trasporto aereo
    [Market power and profits distribution in the air transportation vertical channel]    ," MPRA Paper 24647, University Library of Munich, Germany.
  2. Anders, Christoph, 2010. "Auswirkungen des Leasings auf Transaktionskosten," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 8(2), pages 71-88.
  3. Friberg, Richard & Ganslandt, Mattias, 2006. "An empirical assessment of the welfare effects of reciprocal dumping," Journal of International Economics, Elsevier, vol. 70(1), pages 1-24, September.
  4. T.Huw Edwards, 2009. "Regulatory Protection When Firms Move First," Discussion Paper Series 2009_19, Department of Economics, Loughborough University, revised Nov 2009.
  5. Agnès Bénassy-Quéré & Lionel Fontagné & Horst Raff, 2009. "Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing," Kiel Working Papers 1488, Kiel Institute for the World Economy.
  6. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1450-1476.
  7. Wu, Xin-wang & Zhu, Quan-tao & Sun, Laixiang, 2012. "On equivalence between Cournot competition and the Kreps–Scheinkman game," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 116-125.
  8. Victor Fernandez-Blanco & Luis Orea & Juan Prieto-Rodriguez, 2013. "Endogeneity and measurement errors when estimating demand functions with average prices: an example from the movie market," Empirical Economics, Springer, vol. 44(3), pages 1477-1496, June.
  9. Stephen Martin, 2012. "Market Structure and Market Performance," Review of Industrial Organization, Springer, vol. 40(2), pages 87-108, March.
  10. Mackay, Daniel, 2011. "Estimating the impact of investment tax credits on aircraft demand," MPRA Paper 32767, University Library of Munich, Germany.
  11. Berrittella, Maria & Franca, Luigi La & Mandina, Vito & Zito, Pietro, 2007. "Modelling strategic alliances in the wide-body long-range aircraft market," Journal of Air Transport Management, Elsevier, vol. 13(3), pages 139-148.
  12. Garcia Pires, Armando José, 2006. "Losers, Winners and Prisoner's Dilemma in International Subsidy Wars," CEPR Discussion Papers 5979, C.E.P.R. Discussion Papers.
  13. Ohashi, Hiroshi, 2005. "Learning by doing, export subsidies, and industry growth: Japanese steel in the 1950s and 1960s," Journal of International Economics, Elsevier, vol. 66(2), pages 297-323, July.
  14. Tombak, Mihkel M., 2006. "Strategic asymmetry," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 339-350, November.
  15. Varshavsky, Leonid, 2010. "Methodological basis of modeling evolution of markets of products with long life cycle: a study of the civil aircrafts’ market," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 20(4), pages 53-74.

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