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Exchange-rate Misalignments in Duopoly: The Case of Airbus and Boeing

  • Agnès Bénassy-Quéré


    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

  • Lionel Fontagné


    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

  • Horst Raff


    (Institut für Weltwirtschaft (Kiel Institute for the World Economy) - Institut für Volkswirtschaftslehre (Department of Economics) Christian-Albrechts-Universität)

We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs a large fraction of its costs in euro. We estimate price elasticities for big aircraft, and construct a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment and how this affects profit margins and volumes. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00603386.

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Date of creation: Apr 2011
Date of revision:
Publication status: Published in World Economy, Wiley, 2011, 34 (4), pp.623-641. <10.1111/j.1467-9701.2011.01338.x>
Handle: RePEc:hal:cesptp:hal-00603386
DOI: 10.1111/j.1467-9701.2011.01338.x
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