Journal Article

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

C. Lanier Benkard

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 71, issue 3, pages 581-611
Published in print July 2004 | ISSN: 0034-6527
Published online July 2004 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2004.00297.x
A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft

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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.

Keywords: L62

Journal Article.  14947 words.  Illustrated.

Subjects: Manufacturing

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