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Strategic uncertainty and market size: An illustration on the Wright amendment

Author

Listed:
  • Philippe Gagnepain

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Stéphane Gauthier

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper exploits the repeal of the Wright amendment as a natural experiment in order to contribute to the ongoing discussion on how the enlargement of the relevant market affects the ability of firms to coordinate on a Nash equilibrium. Using data on the U.S. air transportation industry, we present a Difference-inDifference procedure which sheds light on the significant loss of accuracy in airlines' predictions in markets originating in Dallas after the Love Field airport started operating long distance services in 2014. This suggests that competition authorities should be careful when they refer to the Nash equilibrium following market expansion reforms.

Suggested Citation

  • Philippe Gagnepain & Stéphane Gauthier, 2021. "Strategic uncertainty and market size: An illustration on the Wright amendment," Working Papers halshs-03359597, HAL.
    • Handle: RePEc:hal:wpaper:halshs-03359597
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03359597v1
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    References listed on IDEAS

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    1. Peter Davis & Eliana Garcés, 2009. "Quantitative Techniques for Competition and Antitrust Analysis," Economics Books, Princeton University Press, edition 1, number 9078, December.
    2. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2021. "Vertical relations, pass-through, and market definition: Evidence from grocery retailing," International Journal of Industrial Organization, Elsevier, vol. 74(C).
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    5. Federico Ciliberto & Elie Tamer, 2009. "Market Structure and Multiple Equilibria in Airline Markets," Econometrica, Econometric Society, vol. 77(6), pages 1791-1828, November.
    6. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, vol. 82(5), pages 1254-1278, December.
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