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Exchanges of Cost Information in the Airline Industry.

Source: www.sunysb.edu
Topic: Airline Industry

Sort Desciption: oligopoly model for the airline industry with entry and incomplete informa- ...... ulated Airline Industry.” Journal of Law and Economics, Vol. ...

Content Inside: Exchanges of Cost Information in the Airline Industry. Olivier Armantier ¤ and Oliver Richard y October 2000 )>IJH=?J We empirically analyze exchanges of cost information in a multi-market oligopoly model for the airline industry with entry and incomplete informa- tion on marginal costs. We develop an algorithm to solve the Nash Equi- librium numerically. We estimate the structural model of supply decisions using data on the American Airlines and United Airlines duopoly at Chicago O’Hare airport. Our results provide probabilities of entry, expected quanti- ties, prices, and pro…ts on each market. Given the estimated parameters, we simulate competition under a hypothetical agreement to exchange cost infor- mation. We …nd that such exchanges would bene…t airlines without hurting consumers. Keywords: Structural Estimation, Incomplete Information, Airline Indus- try, Exchanges of Cost Information, Entry, Network. JEL Classi…cations : L11, D82, C15, C51, L93, R41 ¤ Dept of Economics, SUNY Stony Brook NY, 11794. E-mail: olivier.armantier@sunysb.edu. y Simon School of Business, University of Rochester, NY 14627; E-mail: richard@ssb.rochester.edu. We thank Jean-Pierre Florens, John Hause, Philip Lederer, Glenn MacDonald, Soiliou Namoro, Jean- Francois Richard, and Greg Sha¤er for very helpful discussions and suggestions. We also bene…ted from comments received during seminars in Rochester, Toulouse and Stony Brook and from participants at the Econometric Society World Congress (2000) and the International Conference on Game Theory (2000) Oliver Richard thanks The Olin Foundation for …nancial assistance. 1. Introduction In the past ten years, the airline industry has witnessed a proliferation of marketing alliances. Within alliances, airlines are able to market and sell tickets on their partner’s ‡ights and share revenues on joint ‡ights. These practices, known as code sharing, re- quire exchanges of information on production ...

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