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Market Structure and Multiple Equilibria in Airline Markets

  • Elie Tamer
  • Federico Ciliberto

We provide a framework for inference in discrete games that involve multiple decision makers and use it to study airline market structure in the US. We make inferences on a "class of models" rather that looking for point identifying assumptions that pin down a unique model. Making inferences in the presence of multiple equilibria is complicated since the underlying econometric model is incomplete: for a given set of parameters, the model does not predict a unique distribution for the outcomes. Strategies to deal with multiplicity have involved a variety of assumptions to narrow down the class of models into a unique one that point identifies the parameters of interest. We allow for a more flexible model of entry, heterogeneity and player identities without making assumptions on equilibrium selection. This estimation strategy nests within it a class of models that obey the fundamental assumption that if a firm enters a market it expects nonnegative profits. The weak assumption on the class of models comes at the cost of partial identification of the profit functions. The estimated features of the profits function can then be used to test for particular equilibria and predict market structure. We study the airline industry because of its characteristic wide dispersion in the number and identity of firms serving comparable city-pair markets. We might observe the wide dispersion because demand for airline travel is non-linear; because entry costs depend on the identities of the other entrants; because some markets are more attractive to smaller airlines than others; or because large network airlines strategically accommodate the entry of smaller carriers. We use our new econometric method to investigate the determinants of dispersion in the number and identity of firms across airline markets, allowing for both observed and unobserved heterogeneity among firms, and allowing for multiple equilibria to exist.

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 517.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:517
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  1. Charles F. Manski & Elie Tamer, 2002. "Inference on Regressions with Interval Data on a Regressor or Outcome," Econometrica, Econometric Society, vol. 70(2), pages 519-546, March.
  2. Philip Haile, 2000. "Inference with an Incomplete Model of English Auctions," Econometric Society World Congress 2000 Contributed Papers 1546, Econometric Society.
  3. Beresteanu, Arie & Molinari, Francesca, 2006. "Asymptotic Properties for a Class of Partially Identified Models," Working Papers 06-07, Cornell University, Center for Analytic Economics.
  4. Ciliberto, Federico & Tamer, Elie, 2009. "Market structure and multiple equilibria in airline markets," MPRA Paper 38635, University Library of Munich, Germany.
  5. Reiss, Peter C & Spiller, Pablo T, 1989. "Competition and Entry in Small Airline Markets," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages S179-202, October.
  6. Richard W. Blundell & Martin Browning & Ian A. Crawford, 2003. "Nonparametric Engel Curves and Revealed Preference," Econometrica, Econometric Society, vol. 71(1), pages 205-240, January.
  7. Andrew Cohen & Ron Borzekowski, 2005. "Estimating Strategic Complementarities in Credit Union’s Outsourcing Decisions," Computing in Economics and Finance 2005 410, Society for Computational Economics.
  8. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  9. Patrick Bajari & Han Hong & Stephen Ryan, 2004. "Identification and Estimation of Discrete Games of Complete Information," NBER Technical Working Papers 0301, National Bureau of Economic Research, Inc.
  10. Andrew Sweeting, 2005. "Coordination Games, Multiple Equilibria and the Timing of Radio Commercials," 2005 Meeting Papers 490, Society for Economic Dynamics.
  11. Richard Blundell & Amanda Gosling & Hidehiko Ichimura & Costas Meghir, 2007. "Changes in the Distribution of Male and Female Wages Accounting for Employment Composition Using Bounds," Econometrica, Econometric Society, vol. 75(2), pages 323-363, 03.
  12. Victor Chernozhukov & Han Hong & Elie Tamer, 2007. "Estimation and Confidence Regions for Parameter Sets in Econometric Models," Econometrica, Econometric Society, vol. 75(5), pages 1243-1284, 09.
  13. Aradillas-Lopez, Andres, 2010. "Semiparametric estimation of a simultaneous game with incomplete information," Journal of Econometrics, Elsevier, vol. 157(2), pages 409-431, August.
  14. Joseph P. Romano & Azeem M. Shaikh, 2010. "Inference for the Identified Set in Partially Identified Econometric Models," Econometrica, Econometric Society, vol. 78(1), pages 169-211, 01.
  15. Canay, Ivan A., 2010. "EL inference for partially identified models: Large deviations optimality and bootstrap validity," Journal of Econometrics, Elsevier, vol. 156(2), pages 408-425, June.
  16. Arie Beresteanu & Ilya Molchanov & Francesca Molinari, 2008. "Sharp identification regions in games," CeMMAP working papers CWP15/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  17. Evans, William N & Kessides, Ioannis N, 1993. "Localized Market Power in the U.S. Airline Industry," The Review of Economics and Statistics, MIT Press, vol. 75(1), pages 66-75, February.
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