MULTIPLE EQUILIBRIA AND DETERRENCE IN AIRLINE MARKETS

Federico Ciliberto, Zhou Zhang
2016 Economic Inquiry  
We use data from the US airline industry to estimate a model of entry deterrence. We model the interaction among airlines as a repeated static game, where we allow for a very general form of heterogeneity. We consider a menu of three alternative games that describe the strategic interaction among airlines: simultaneous and sequential move games, and a sequential move game with deterrence investments. Following Bernheim [1984], deterrence investments include all investment that raises barriers
more » ... entry, and for which the incumbent must incur some investment costs. We show that the pro...ts that incumbents can make in the sequential game, both with and without deterrence investments, are larger than those that they can make if the game is played simultaneously. Thus, we ...nd that on average it is pro...table for all ...rms to deter new entrants, with the exception of United Airlines. Remarkably, United Airlines was under bankruptcy protection during the period of analysis, suggesting that its deterrence investments were not credible. Overall, we ...nd that the data is explained better by a model where ...rms make deterrence investments. Thus, we cannot reject the hypothesis that incumbents deter entrants in the airline industry. We would like to thank Victor Aguirregabiria, Michael Mazzeo, Steven Stern, Andrew Sweeting, Elie Tamer, and Jonathan Williams for valuable comments. We thank Ed Hall and the University of Virginia Alliance for Computational Science and Engineering, who have given us essential advice and guidance in solving many computational issues. All remaining errors are our own.
doi:10.1111/ecin.12381 fatcat:rska55iecngn3g2iz3cytjvyoa