Lunch Seminar Economics (LSE) - 2021/2022
Interviene: Christian Bontemps, Toulouse School of Economics
Title: Price Competition and Endogenous Product Choice in Networks: Evidence from the US Airline Industry
Authors: C. Bontemps, Cristina Gualdani, K. Remmy
Abstract: The recent merger waives in airline markets have received attention by researchers and the general public alike. Most academic studies have analysed the problem using demand/supply or entry models. These contributions assume that airlines’ route networks are exogenous, or that airlines’ entry decisions are i.i.d. across routes. Instead, we estimate a two-stage model where airlines choose their route networks in the first stage and compete in prices in the second stage. The two-stage framework allows us to account for selection of airlines into interdependent routes. Moreover, it permits us to make counterfactual exercises which robustly predict changes not only in prices and markups, but also in how airlines adjust their route networks. We estimate the model using crosssectional data on the US airline market and use our results to evaluate a merger between American Airlines and US Airways. We find that after the merger consumer surplus rises by around 7% and that remedies imposed to the merging parties by the Department of Justice at Charlotte Airport were effective in preventing harm to consumers.