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A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft

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  • Benkard, C. Lanier

    (Stanford U)

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    Abstract

    This paper develops a multi-agent dynamic model of the commercial aircraft industry and then uses that model to analyze industry pricing, performance, and optimal industry policy. In the model, firms are differentiated in their products and cost structure, and entry, exit, prices, and quantity sold are endogenously determined in dynamic equilibrium. Reflecting the focus on the paper, demand and supply are modeled structurally, while investment is modeled in reduced form. The model utilizes a cost model of commercial aircraft production developed and estimated in a previous paper (Benkard (2000)), and a discrete choice model of commercial aircraft demand to determine static profits. I find that many unusual aspects of the aircraft data, such as high concentration and pricing below the level of static marginal cost, are explained by this model. The model also replicates the stochastic evolution of the industry well. Many of these properties could not be explained with a static model. These results provide support for the structural dynamic modeling approach in general. I also find that the unconstrained Markov perfect equilibrium is quite efficient from a social perspective, providing only 9% less welfare on average than a social planner would obtain, but that the Markov perfect equilibrium shifts a substantial amount of welfare from consumers to producers. Finally, I provide simulation evidence that an anti-trust policy in the form of a concentration restriction would be welfare reducing with high probability.

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    File URL: http://gsbapps.stanford.edu/researchpapers/library/rp1636.pdf
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    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1636.

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    Date of creation: Mar 2000
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    Handle: RePEc:ecl:stabus:1636
    Contact details of provider: Postal: Stanford University, Stanford, CA 94305-5015
    Phone: (650) 723-2146
    Fax: (650)725-6750
    Web page: http://gsbapps.stanford.edu/researchpapers/Email:


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    1. Flaherty, M Therese, 1980. "Industry Structure and Cost-Reducing Investment," Econometrica, Econometric Society, vol. 48(5), pages 1187-1209, July.
    2. Mookherjee, Dilip & Ray, Debraj, 1991. "Collusive Market Structure under Learning-by-Doing and Increasing Returns," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 993-1009, October.
    3. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
    4. Linda Argote & Sara L. Beckman & Dennis Epple, 1990. "The Persistence and Transfer of Learning in Industrial Settings," Management Science, INFORMS, vol. 36(2), pages 140-154, February.
    5. Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-40, September.
    6. Norman Keith Womer, 1979. "Learning Curves, Production Rate, and Program Costs," Management Science, INFORMS, vol. 25(4), pages 312-319, April.
    7. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
    8. Gautam Gowrisankaran & Robert J. Town, 1997. "Dynamic Equilibrium in the Hospital Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 45-74, 03.
    9. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
    10. Gilbert, Richard J & Harris, Richard G, 1981. "Investment Decisions with Economies of Scale and Learning," American Economic Review, American Economic Association, vol. 71(2), pages 172-77, May.
    11. 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.
    12. Norman Keith Womer, 1984. "Estimating Learning Curves from Aggregate Monthly Data," Management Science, INFORMS, vol. 30(8), pages 982-992, August.
    13. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
    14. Ghemawat, Pankaj & Spence, A Michael, 1985. "Learning Curve Spillovers and Market Performance," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 839-52, Supp..
    15. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    16. Ariel Pakes, 1991. "Dynamic Structural Models: Problems and Prospects. Mixed Continuous Discrete Controls and Market Interactions," Cowles Foundation Discussion Papers 984, Cowles Foundation for Research in Economics, Yale University.
    17. 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.
    18. Klepper, Gernot, 1990. "Entry into the market for large transport aircraft," European Economic Review, Elsevier, vol. 34(4), pages 775-798, June.
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    Cited by:

    1. repec:dgr:uvatin:2013045 is not listed on IDEAS
    2. Hinloopen, J. & Smrkolj, G. & Wagener, F.O.O., 2013. "In Defense of Trusts: R&D Cooperation in Global Perspective," CeNDEF Working Papers 13-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    3. Irwin, Douglas & Pavcnik, Nina, 2003. "Airbus versus Boeing Revisited: International Competition in the Aircraft Market," CEPR Discussion Papers 3876, C.E.P.R. Discussion Papers.
    4. Park, Sangin, 2003. "Semiparametric instrumental variables estimation," Journal of Econometrics, Elsevier, vol. 112(2), pages 381-399, February.
    5. Hinloopen, J. & Smrkolj, G. & Wagener, F.O.O., 2011. "From Mind to Market: A Global, Dynamic Analysis of R&D," CeNDEF Working Papers 11-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    6. Patrick Bajari & C. Lanier Benkard, 2001. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Working Papers 01010, Stanford University, Department of Economics.
    7. repec:dgr:uvatin:2011139 is not listed on IDEAS
    8. Patrick Bajari & C. Lanier Benkard, 2001. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," NBER Technical Working Papers 0272, National Bureau of Economic Research, Inc.
    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.

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