Market Structure and Multiple Equilibria in Airline Markets

Authors

  • Federico Ciliberto,

    1. Dept. of Economics, University of Virginia, Monroe Hall, Charlottesville, VA 22903, U.S.A.; ciliberto@virginia.edu
    Search for more papers by this author
  • Elie Tamer

    1. Dept. of Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, U.S.A.; tamer@northwestern.edu
    Search for more papers by this author
    • We thank a co-editor and three referees for comments that greatly improved the paper. We also thank T. Bresnahan, A. Cohen, B. Honoré, C. Manski, M. Mazzeo, A. Pakes, J. Panzar, A. Paula, R. Porter, W. Thurman, and seminar participants at many institutions and meetings for comments. We especially thank K. Hendricks for insightful suggestions. We also thank S. Sakata for help with a version of his genetic algorithm, Ed Hall for computing help, and T. Whalen at the Department of Justice for useful insights on airlines' entry decisions. B. Karali provided excellent research assistance. The usual disclaimer applies. Tamer gratefully acknowledges research support from the National Science Foundation and the A. P. Sloan Foundation.


Abstract

We provide a practical method to estimate the payoff functions of players in complete information, static, discrete games. With respect to the empirical literature on entry games originated by Bresnahan and Reiss (1990) and Berry (1992), the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions. We allow the effects that the entry of each individual airline has on the profits of its competitors, its “competitive effects,” to differ across airlines. The identified features of the model are sets of parameters (partial identification) such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data.

We apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the U.S. airline industry. We find evidence of heterogeneity across airlines in their profit functions. The competitive effects of large airlines (American, Delta, United) are different from those of low cost carriers and Southwest. Also, the competitive effect of an airline is increasing in its airport presence, which is an important measure of observable heterogeneity in the airline industry. Then we develop a policy experiment to estimate the effect of repealing the Wright Amendment on competition in markets out of the Dallas airports. We find that repealing the Wright Amendment would increase the number of markets served out of Dallas Love.

Ancillary