A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft

This paper uses an empirical dynamic oligopoly model of the commercial aircraft industry to analyse industry pricing, industry performance, and optimal industry policy. A novel feature of the model with respect to the previous literature is that entry, exit, prices, and quantities are endogenously d...

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Bibliographic Details
Published inThe Review of economic studies Vol. 71; no. 3; pp. 581 - 611
Main Author Benkard, C. Lanier
Format Journal Article
LanguageEnglish
Published Wiley-Blackwell 01.07.2004
Review of Economic Studies Ltd
Subjects
Aircraft
Aircraft industry
Airlines
Commerce
Commercial aircraft
Dynamic modeling
Dynamics
Economic analysis
Equilibrium theory
Industrial market
Industrial policy
Industry
L62
Learning curves
Marginal costs
Modeling
Oligopoly
Pricing
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Summary:This paper uses an empirical dynamic oligopoly model of the commercial aircraft industry to analyse industry pricing, industry performance, and optimal industry policy. A novel feature of the model with respect to the previous literature is that entry, exit, prices, and quantities are endogenously determined in Markov perfect equilibrium (MPE). We find that many unusual aspects of the aircraft data, such as high concentration and persistent pricing below static marginal cost, are explained by this model. We also find that the unconstrained MPE is quite efficient from a social perspective, providing only 10% less welfare on average than a social planner would obtain. Finally, we provide simulation evidence that an anti-trust policy in the form of a concentration restriction would be welfare reducing.
Bibliography:ark:/67375/HXZ-8SNHZTT6-N
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ISSN:0034-6527
1467-937X
DOI:10.1111/j.1467-937X.2004.00297.x