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

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 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

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

The Review of Economic Studies , Volume 71 (3) – Jul 1, 2004

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References (26)

Publisher
Oxford University Press
Copyright
© Published by Oxford University Press.
Subject
Original Articles
ISSN
0034-6527
eISSN
1467-937X
DOI
10.1111/j.1467-937X.2004.00297.x
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

The Review of Economic StudiesOxford University Press

Published: Jul 1, 2004

Keywords: JEL classification L62

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