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Market structure and multiple equilibria in airline markets

  • Ciliberto, Federico
  • Tamer, Elie

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38635.

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Date of creation: 15 Nov 2009
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Publication status: Published in Econometrica 6.77(2009): pp. 1791-1828
Handle: RePEc:pra:mprapa:38635
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  1. Richard Blundell & Martin Browning & Ian Crawford, 1997. "Non-parametric Engel curves and revealed preferences," IFS Working Papers W97/14, Institute for Fiscal Studies.
  2. Elie Tamer & Federico Ciliberto, 2004. "Market Structure and Multiple Equilibria in Airline Markets," 2004 Meeting Papers 52, Society for Economic Dynamics.
  3. Arie Beresteanu & Francesca Molinari, 2006. "Asymptotic properties for a class of partially identified models," CeMMAP working papers CWP10/06, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  4. 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.
  5. 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.
  6. Philip Haile, 2000. "Inference with an Incomplete Model of English Auctions," Econometric Society World Congress 2000 Contributed Papers 1546, Econometric Society.
  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. Andrew Sweeting, 2005. "Coordination Games, Multiple Equilibria and the Timing of Radio Commercials," 2005 Meeting Papers 490, Society for Economic Dynamics.
  9. 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.
  10. Aradillas-Lopez, Andres, 2010. "Semiparametric estimation of a simultaneous game with incomplete information," Journal of Econometrics, Elsevier, vol. 157(2), pages 409-431, August.
  11. 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.
  12. Richard Blundell & Amanda Gosling & Hidehiko Ichimura & Costas Meghir, 2006. "Changes in the Distribution of Male and Female Wages Accounting for Employment Composition Using Bounds," CIRJE F-Series CIRJE-F-420, CIRJE, Faculty of Economics, University of Tokyo.
  13. 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.
  14. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  15. 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.
  16. 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.
  17. 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.
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