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Market structure and multiple equilibria in airline markets

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  • Ciliberto, Federico
  • Tamer, Elie

Abstract

We provide a practical method to estimate the payoff functions of players in complete information, static, discrete games. With respect to the empirical literature on entry games originated by Bresnahan and Reiss (1990) and Berry (1992), the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions. We allow the effects that the entry of each individual airline has on the profits of its competitors, its “competitive effects,” to differ across airlines. The identified features of the model are sets of parameters (partial identification) such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data. We apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the U.S. airline industry. We find evidence of heterogeneity across airlines in their profit functions. The competitive effects of large airlines (American, Delta, United) are different from those of low cost carriers and Southwest. Also, the competitive effect of an airline is increasing in its airport presence, which is an important measure of observable heterogeneity in the airline industry. Then we develop a policy experiment to estimate the effect of repealing the Wright Amendment on competition in markets out of the Dallas airports. We find that repealing theWright Amendment would increase the number of markets served out of Dallas Love.

Suggested Citation

  • Ciliberto, Federico & Tamer, Elie, 2009. "Market structure and multiple equilibria in airline markets," MPRA Paper 38635, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:38635
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    References listed on IDEAS

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    More about this item

    Keywords

    Entry models; inference in discrete games; multiple equilibria; partial identification; airline industry; firm heterogeneity;
    All these keywords.

    JEL classification:

    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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