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Abstract

A Dynamic Model of Airline Competition

The Review of Network Economics

Vol. 6, Issue 3 - September 2007, pp 355 - 371


Authors
  Ying Fang
Department of Economics, Rice University
E-mail: [email protected]

Robin C. Sickles
Department of Economics, Rice University

Abstract
  We develop a dynamic model of collusion in airport-pair routes for selected US airlines and specify the first order conditions using a state-space representation that is estimated by Kalman-filtering techniques using the Databank 1A (DB1A) Department of Transportation (DOT) data during the period 1979I-1988IV. We consider two airlines, American (AA) and United (UA) and four city-pairs. Our measure of market power is based on the shadow value of long-run profits in a two-person strategic dynamic game and we find evidence of relative market power of AA in three of the four city pairs we analyze.

Keywords: Market Power, Airlines, Dynamic, Kalman Filter
JEL Codes: C5, L9

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