DP13346 Market Structure and Competition in Airline Markets

Author(s): Federico Ciliberto, Charles Murry, Elie Tamer
Publication Date: November 2018
Date Revised: February 2020
Keyword(s): Entry, market power, market structure, merger, multiple equilibria, oligopoly, Self-selection
JEL(s): C35, C51, D43, L13, L41, L44
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13346

We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions while allowing for correlations between unobserved cost and demand shocks. We use our framework to account for selection in the pricing stage. We estimate the model using data from the US airline industry and find that not accounting for endogenous entry leads to biased estimation of demand elasticities. We simulate a merger between American and US Airways and find that product repositioning and post-merger outcomes depend on how we model the characteristics of the merged firm as a function of the pre-merger firms' characteristics.