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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. We extend the empirical literature on entry and market structure started in \citeasnoun{bres_reiss_restud}. We allow for a more flexible model of entry, heterogeneity and player identities without making assumptions on equilibrium selection. Our estimation strategy is directed at a class of models that obey the fundamental assumption that if a firm enters a market it expects nonnegative profits. This fundamental condition provides a set of inequality restrictions on regressions that we exploit to learn about the profits of various firms. We then examine airline market structure focusing on the strategic behavior between a set of airlines where we allow for and find heterogeneity in the effects airlines have on each other, and for correlation among the unobservables. We find that there are multiple equilibria in the number and identity of firms. Finally, we also test for particular selection rules and find that a rule that picks the equilibrium with the largest total profits is consistent with the data and the model

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 52.

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Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:52
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. 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.
  2. Elie Tamer & Federico Ciliberto, 2004. "Market Structure and Multiple Equilibria in Airline Markets," 2004 Meeting Papers 52, Society for Economic Dynamics.
  3. Aradillas-Lopez, Andres, 2010. "Semiparametric estimation of a simultaneous game with incomplete information," Journal of Econometrics, Elsevier, vol. 157(2), pages 409-431, August.
  4. 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.
  5. 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.
  6. Haile,P.A. & Tamer,E.T., 2000. "Inference with an incomplete model of English auctions," Working papers 18, Wisconsin Madison - Social Systems.
  7. 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.
  8. Andrew Sweeting, 2005. "Coordination Games, Multiple Equilibria and the Timing of Radio Commercials," 2005 Meeting Papers 490, Society for Economic Dynamics.
  9. 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.
  10. Arie Beresteanu & Francesca Molinari, 2008. "Asymptotic Properties for a Class of Partially Identified Models," Econometrica, Econometric Society, vol. 76(4), pages 763-814, 07.
  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. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
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