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. 248; p. 581
Main Author C Lanier Benkard
Format Journal Article
LanguageEnglish
Published Oxford Oxford University Press 01.07.2004
Subjects
Aircraft industry
Commercial aircraft
Costs
Dynamic programming
Economic models
Economic theory
Equilibrium
Learning curves
Oligopoly
Prices
Product differentiation
Profits
Studies
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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. [PUBLICATION ABSTRACT]
ISSN:0034-6527
1467-937X