multiple equilibria and deterrence in airline markets 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 to entry and for which the incumbent must incur some investment costs we show that the profits 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 find that on average it is profitable for all firms 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 find that the data is explained better by a model where firms make deterrence investments thus we cannot reject the hypothesis that incumbents deter entrants in the airline industry

not all rivals look alike estimating an equilibrium model of the release date timing game a very serious game of strategy is at work a cross between chess and chicken which studio distribution chiefs play year round but with increasing intensity during the summer and holiday release period new york times december 6 1999 hubris hubris if you only think about your own business you think i ve got a good story department i ve got a good marketing department we re going to go out and do this and you don t think that everybody else is thinking the same way in a given weekend in a year you ll have five movies open and there s certainly not enough people to go around joe roth chairman of walt disney studios answering a question about the large number of major movies opening within days of each other los angeles times december 31 1996 i introduction the number of americans who go to the movies varies dramatically over the course of the year and sometimes more than doubles within a period of two weeks at the same time the first week accounts for almost 40 of the box office revenues of the average movie the combination of these two facts makes the timing of launching a new movie a major focus of attention for distributors of movies with virtually no subsequent price competition the movie s release date is one of the main short run vehicles by which studios compete with each other in this paper i develop and estimate a model of discrete games which allows me to analyze this release date timing game most empirical industry studies focus on price and quantity competition taking other product characteristics as given in many industries however prices play a very small role and competition is channeled through other product attributes the entertainment industry is a prime example competition among movies television programs or broadway shows is on nonmonetary product attributes such as content advertising and time therefore understanding competition in such industries requires a model that endogenizes some of these product attributes especially those that can be changed in the short run this paper provides a framework in which release decisions can be endogenized and nonprice competition can be analyzed the absence of price competition is useful because it allows the focus of the analysis to be on the timing dimension without relying on assumptions about the nature of the postrelease price competition 1 together with the frequent timing decisions associated with different movies this makes the motion picture industry quite attractive for empirical analysis of the timing game this industry however is not the only example in which timing decisions play a central role similar timing considerations are also important in the release decisions of books compact disks and other new products as well as in the scheduling decisions of major events television programs flight schedules and promotional sales 2 when taking on a new project distributors of movies typically plan for a friday release which falls within a relatively short window of time carefully chosen to match the type of the movie this makes the choice of the release date a very discrete one the exact friday within the season is generally determined by a strategic timing game played among distributors before each release season distributors scramble to release their movies on big holiday weekends when demand is high when doing so each distributor tries to release on the attractive holiday weekend and at the same time to deter competitors from doing the same the extent to which distributors are successful in doing so largely depends on the quality of the movies at their disposal and on the way they can compete with movies released by other studios thus modeling this timing game must account for the asymmetries among movies and for the variation in these asymmetries across release seasons specifically i develop and estimate a sequential move game with private information i assume that the observed release date decisions are the equilibrium outcome of such a game

distance bank heterogeneity and entry in local banking markets we examine the determinants of entry into italian local banking markets during the period 1991 2002 and build a simple model in which the probability of branching in a new market depends on the features of both the local market and the potential entrant econometric findings show that banks are more likely to expand into those markets that are closest to their pre entry locations large banks are also more able to cope with distance related entry costs than small banks finally banks have become increasingly able to open branches in distant markets due to the advent of information and communication technologies

mergers and business model assimilation evidence from low cost airline takeovers this paper examines mergers that lead to an almost immediate replacement of the target firm s business model in favour of that of the acquiring firm we examine the post merger behaviour of the two leading european dedicated low cost airlines easyjet and ryanair each acquiring another low cost airline respectively go fly and buzz we find that both takeovers had an immediate and sustained impact on both the pricing structures and the extent of inter temporal price discrimination used on the acquired routes with early booking fares noticeably reduced and only very late booking fares increased overall the analysis points to a pro competitive effect of both takeovers as a consequence of the introduction of the acquiring firms business models and associated yield management pricing systems

competition and cooperation in decentralized push and pull assembly systems in this paper we study a decentralized assembly system consisting of a single assembler who buys complementary components from independent suppliers under two contracting schemes push and pull in both schemes the component suppliers are allowed to freely form coalitions or alliances among themselves to better coordinate their pricing or production decisions we show that the sole driver of the inefficiency in a push system which is due to horizontal decentralization of suppliers is the number of alliances that were formed specifically it is shown that in a push system the assembler s profit the total profit of all suppliers and the consumers surplus are all decreasing in the number of coalitions and are thus maximized when the grand coalition is formed we further carry out a stability analysis of coalition structures to verify to what extent suppliers can reduce or eliminate the inefficiency due to their decentralization by forming alliances we show that in a push system with more than two

economies of traffic density in the deregulated airline industry this article estimates a structural model of competition among hub and spoke airlines in order to measure the strength of economies of traffic density on individual route segments we find that economies of density were strong during the sample period fourth quarter 1985 stronger than previous estimates by douglas caves laurits christensen and michael tretheway derived from traditional cost function methods we also find that the airlines competitive behavior was far from collusive in the markets under study markets requiring a connection at a hub airport our structural model also provides plausible estimates of demand elasticities we use our estimates to provide a cost based rationale for the major changes in the structure of the industry following deregulation for example the increase in airport and industry wide concentration and the increase in competition at the city pair market level and to simulate the effects of a merger of airlines that share a hub

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

a dynamic game of airline network competition hub and spoke networks and entry deterrence article in a hub and spoke network the profit function of an airline is supermodular with respect to the airline s own entry decisions for different city pairs this source of complementarity implies that a hub and spoke network can be an effective strategy for deterring the entry of competitors this paper presents an empirical dynamic game of airline network competition that incorporates this entry deterrence motive for using hub and spoke networks we summarize the results of the estimation of the model with special attention to empirical evidence regarding the entry deterrence motive

can private airport competition improve runway pricing the case of san francisco bay area airports abstract travelers and airlines are frustrated by long and costly travel delays at public airports that are attributable to runway charges that do not account for aircraft congestion because the inefficient charges are likely to persist we explore whether private airport competition could lead to more efficient charges that improve travelers welfare increase airlines profits and enable the airports to be profitable we use the san francisco bay area for our assessment and identify important conditions to achieve those outcomes including competition among separately owned airports bargaining between airports and airlines and the ability of airports to differentiate prices and service

strategic interactions and airline network morphology under demand uncertainty abstract in this paper we examine how strategic interactions affect airline network under demand uncertainty we develop a three stage duopoly game at stage 1 airlines determine their network structure linear versus hub and spoke at stage 2 they decide on their capacities at stage 3 firms compete in quantities the main feature of the model is that firms have to decide on network structure and capacities while facing demand uncertainty we show that while hubbing is efficient airlines may choose a linear network for strategic reasons furthermore we show that this structure softens competition by preventing contagion of competition across markets

entry exit and performance in airline markets abstract data from the airline industry indicate that 1 entry generally is not induced by price levels substantially above the norm 2 entry reduces fares and increases output and exit increases fares and reduces output and 3 incumbents cut price and maintain output in response to entry and survivors increase both price and output in response to exit these findings cast doubt on the ability of entry to prevent or reverse price increases from anticompetitive mergers

assessing firm behavior in carve out markets evidence on the impact of carve out policy abstract airlines wanting to cooperatively set prices for their international air travel service must apply to the relevant authorities for antitrust immunity ati while cooperation may yield benefits it can also have anti competitive effects in markets where partners competed prior to receiving ati a carve out policy forbids ati partners from cooperating in markets policymakers believe will be most harmed by anti competitive effects we examine carve out policy applications to three ati partner pairings and find evidence more consistent with cooperative pricing in carve out markets in spite of the policy calling into question the effectiveness of the policy in achieving intended market outcomes

competition in airline networks the case of constant elasticity demands abstract this paper is concerned with the effect of competition in airline hub and spoke networks using constant elasticity demand functions we demonstrate that competition in a single market may generate positive or negative network externalities depending on price elasticities of demand

airport presence as product differentiation there is now widespread recognition that an airline s operation at a given airport greatly affects its competitive position on routes flown out of that airport see m levine 1987 s borenstein 1989 s morrison and c winston 1989 and myself 1989 among many others airlines typically defend any competitive advantage as stemming from the lower costs and better service that are said to be generated by hub and spoke route systems airline critics typically respond that airlines gain market power by dominating individual airports both views are at least plausible huband spoke transportation networks reduce the number of round trips necessary to carry a given number of passengers on a given set of itineraries while increasing the number of passenger miles flown if there are sufficient economies of scale in plane size then the advantages of hubbing can overcome the disadvantage in passenger miles resulting in lower total costs by pooling passengers with different ultimate destinations a hubbed system can also offer more frequent flights than would be economically feasible under a nonstop system it also appears however that airlines gain other advantages from a large presence at an airport incumbent airlines are the major source of financing for many airports and therefore gain a large degree of bureaucratic control over airport operations this control may enable them to block the entry or expansion of rivals airlines with a large presence in a given city also gain advantages from frequent flyer plans and nonlinear travel agent commission schedules see again levine and others if the bureaucratic and marketing advantages of airport presence are sufficient to prevent most attempts at entry then incumbents may gain the ability to exercise traditional market power by restricting output and driving up prices this paper argues that both simple costreducing and naive market power stories are inappropriate for the airline industry i present a model in which consumers are willing to pay a premium for the services of the dominant airline this premium may be related to a number of factors including flight frequency frequent flier miles and travel agent commission overrides this model has the advantage of treating oligopoly product differentiation in an explicit way of treating price as an endogenous variable and of allowing for airport presence to affect both costs and demand

a dynamic model of entry deterrence it has been recognized in a number of recent studies on oligopoly and potential competition that a firm may deter entry by engaging in different types of irreversible investments this paper reports on an investigation of this issue in a dynamic setting the established firm is assumed to build up a stock of knowledge and goodwill by investing in r d and sales promotion and these stocks are assumed to erode over time the established firm then has to decide whether or not to deter entry and eventually when to permit a potential competitor to enter the market

the economics of international codesharing an analysis of airline alliances abstract international airline alliances allow airlines to coordinate their operations in providing international service this paper analyzes the effect of such alliances on traffic levels fares and welfare in the model the benefits of alliances arise because cooperative pricing of trips by the partners puts downward pressure on fares in the interline city pair markets these are markets where travel on both carriers is necessary the loss of competition in the interhub market which connects the hub cites of the partners generates a countervailing effect tending to raise the fare in that market while the presence of economies of traffic density complicates these impacts by generating cost links across markets simulation analysis shows that the above tendencies typically prevail welfare analysis shows that both consumer and total surplus typically rise following formation of an alliance despite the harm to interhub passengers suggesting that the positive effects of alliances may outweigh any negative impacts

quantity discount dependent consumer preferences and competitive nonlinear pricing abstract producers of consumer packaged goods often offer several package sizes of the same product and charge a lower unit price for a larger size in this article the authors investigate the quantity discount effect or the phenomenon that consumers derive transaction utility from the unit price difference between a small and a large package size of the same product the authors propose a modeling framework composed of a demand side model and a supply side model the empirical results suggest that quantity discount induced gains or losses have a significant impact on consumer buying behavior the authors also find a substantial amount of structural heterogeneity that is some consumers perceive quantity discounts as gains whereas others perceive quantity discounts as losses conversely the supply side analysis suggests that manufacturers in the empirical application do not consider quantity discount effects when setting prices through a series of policy experiments the authors show that by accou

the economics of hubs the case of monopoly in this paper we study the optimization problem of an unregulated air carrier which is given the exclusive right to satisfy demand for air travel between any pair of cities it chooses a network of connections and a set of prices to maximize profits thus both network design and prices are endogenous we characterize the solution to this optimization problem when demands and costs are symmetric our main result is that if there are economies of density in the number of individuals travelling between two directly connected cities the optimal network is either a hub of size n 1 or one in which every pair of cities is connected directly

testing models with multiple equilibria by quantile methods this paper proposes a method for testing complementarities between explanatory and dependent variables in a large class of economic models the proposed test is based on the monotone comparative statics mcs property of equilibria our main result is that mcs produces testable implications on the small and large quantiles of the dependent variable despite the presence of multiple equilibria the key features of our approach are that i we work with a nonparametric structural model of a continuous dependent variable in which the unobservable is allowed to be correlated with the explanatory variable in a reasonably general way ii we do not require the structural function to be known or estimable iii we remain fairly agnostic on how an equilibrium is selected we illustrate the usefulness of our result for policy evaluation within berry levinsohn and pakes s 1999 model

additional information for comments on alternative models of demand for automobiles by charlotte wojcik abstract in a recent paper in this journal econ lett 68 2000 113 wojcik argues that the nested logit is likely to be superior to demand specifications we and others have used in recent empirical work we review the relevant models and their uses consider her application and find that her conclusions are incorrect

do nonprofit and government nursing homes enter unprofitable markets i introduction nursing home care is provided in the united states by for profit private nonprofit and government organizations 1 these three organizational forms may compete directly in the same markets with either differentiated or nondifferentiated output or serve entirely separate markets an understanding of which organizational forms will provide the most effective care in a given set of circumstances requires knowledge of in what ways and to what extent the nature of health care provision varies across organizational forms in the context of a market economy in which profit maximizing firms are the default producers the natural question from a welfare perspective is whether consumer surplus would decline if government and nonprofit providers were replaced with for profit providers this study examines whether nonprofit and government nursing facilities expand access to nursing home care through an examination of patterns of nursing home entry in the rural united states i employ methods due to bresnahan and reiss 1990 to identify markets that are unlikely to be profitable for for profits to enter and then ask whether nonprofits and government nursing homes as a consequence of policies that lower their costs relative to for profits locate in these unprofitable markets equivalently if government and nonprofit nursing homes were to exit isolated markets could one reasonably expect that for profits would enter to replace them any evidence suggesting that they would not supports the argument that government and nonprofit nursing home care providers contribute positively to social welfare by expanding access to care in assessing potential differences in care provided by the different organizational forms the literature has focused largely on access and quality differentials two questions of interest naturally arise when studying access to care first is any care available in the market that is is there a nursing home second if care is available to some in the market is it available to all that is are nursing homes full or do they discriminate at the point of admission on the basis of wealth health status or other observable measures the second question has received more attention in the literature most studies of access to nursing home care for example reschovsky 1996 ettner 1993 and gertler 1992 presume the presence of a facility and ask to what extent prospective residents have access to the facility often focusing on individuals covered by medicaid relatively fewer focus on issues of access in isolated markets yu and bradford 1995 is an exception while this study limits its focus to the first question by analyzing isolated rural markets in the united states the methods used here in principle can be extended to focus on the second question as well in focusing on the question of access this analysis abstracts from potential differences in quality across organizational forms deferring to existing studies on the subject including grabowski and hirth 2003 hirth 1999 chou 2002 holtmann and ullmann 1991 and weisbrod 1988 the question of whether nonprofits enter unprofitable geographic markets has not been previously addressed in the nursing home industry or elsewhere the study closest in spirit to the present one is the analysis of nonprofit and for profit hospital location by norton and staiger 1994 in which the authors conclude that for profits tend to locate in better insured areas that is areas that are more likely to be more profitable than nonprofits do this study differs from norton and staiger in that it explicitly calculates market profitability for markets that for profits have entered and projects it for markets that for profits have not entered this analysis also complements the work of kapur and weisbrod 2000 by assessing whether government nursing homes serve unprofitable markets while their paper addressed the question of whether government nursing homes serve unprofitable patients

an empirical analysis of the competitive effects of the delta continental northwest code share alliance abstract the u s department of transportation dot expressed serious reservations before ultimately approving the delta continental northwest code share alliance the dot s main fear was that the alliance could facilitate collusion explicit or tacit on prices and or service levels in the partners overlapping markets however since implementation of the alliance there has not been a formal empirical analysis of its effects on price and traffic number of passengers levels the main objective of this paper is to conduct such an analysis with a particular focus on testing whether the data are consistent with collusive behavior by the three airlines the evidence does not suggest that the alliance facilitated collusion on the partners overlapping routes

entry into regulated monopoly markets the development of a competitive fringe in the local telephone industry abstract incumbent firms operating in today s local telephone industry are beginning to face competition from new entrants using the dominant firm competitive fringe framework and a recently constructed panel data set of local telephone markets this paper provides an empirical analysis of the competitive transition underway in the u s local telephone industry of particular interest is the differential impact of economic regulation on the development of fringe competition in flocal telephone markets empirical results reveal that local telephone markets with price cap regulation have witnessed less net fringe entry and subsequently contain smaller competitive fringes during the time period studied these findings imply that the widespread adoption of price cap regulation by state public utility commissions has contributed to the slow development of local telephone competition to reconcile this surprising conclusion a political economy explanation that details how state regulators have benefited from

efficient patent pools the paper builds a tractable model of patent pools agreements among patent owners to license sets of their patents it provides a necessary and sufficient condition for patent pools to enhance welfare and shows that requiring pool members to be able to independently license patents matters if and only if the pool is otherwise welfare reducing the paper allows patents to differ in importance asymmetric blocking patterns and licensors to also be licensees we undertake some initial exploration of the impact of pools on innovation the analysis has broader applicability than pools being relevant to a number of co marketing arrangements

set identification in models with multiple equilibria we propose a computationally feasible way of deriving the identified features of models with multiple equilibria in pure or mixed strategies it is shown that in the case of shapley regular normal form games the identified set is characterized by the inclusion of the true data distribution within the core of a choquet capacity which is interpreted as the generalized likelihood of the model in turn this inclusion is characterized by a finite set of inequalities and efficient and easily implementable combinatorial methods are described to check them in all normal form games the identified set is characterized in terms of the value of a submodular or convex optimization program efficient algorithms are then given and compared to check inclusion of a parameter in this identified set the latter are illustrated with family bargaining games and oligopoly entry games copyright 2011 oxford university press

growth entry and exit of firms a dynamic model of industry equilibrium is presented which shows how growth entry and exit of firms are interrelated by taking into account the fact that a firm s profitability is to some degree subject to random shocks the simultaneous occurrence of entry and exit can be explained formally in addition by also taking internal growth costs into account it is shown that excess profits can persist in long run equilibrium even in perfect competition and with constant returns to scale the model is consistent with the facts that industry growth comes mainly from existing firms and that most firms grow at rates which do not systematically depend on their scale of operations i introduction

taxation and real cost of capital the effects of inflation via taxes on the firm s cost of capital are analyzed the taxes are the corporate income tax and household taxes on dividends and capital gains the costs of equity and debt are taken at their nominal values as observed by the firm on the capital market the net real cost of capital where market rates of return are adjusted for inflation are analyzed the net effects of inflation on capital cost can thus be determined while recognizing several counteracting tendencies which operate through the tax system it turns out that for most reasonable assumptions real capital cost will fall as a result of inflation when both profit tax and taxes on dividends and capital gains are taken into account different ways of indexing the system of taxation to insulate it from inflationary distortions are also presented i the problem this study deals with profit taxation of the business sector and income taxation of the household sector the central concept is the cost of capital and our intention is to analyze in detail the effects of taxation on capital cost in times of inflation when there is inflation the tax system produces distortions because not all real costs are deductible for taxation and not all real income is included in taxable profits costs of debt and equity also become distorted under the tax regimes which exist in most countries four different distorting factors operate in times of inflation two of them are due to the way the system of corporate profit taxation is constructed points 1 and 2 below and two to income taxation of households points 3 and 4 below 1 when depreciation allowances are based on historical costs under corporate tax laws inflation undermines their real significance as a result part of capital consumption may be included in the tax base or accelerated

climate change health care access and regional influence on components of u s agricultural productivity this article examines factors driving three components of total factor productivity change tfpc in u s agriculture technical change tc technical efficiency change tec and scale and mix e

crop insurance in a political economy an alternative perspective on agricultural policy lawmakers often subsidize farmers in times of financial distress this article models this political impulse as a constraint on government farm policy describing how ex ante government farm insurance can deter ex post disaster relief and improve production incentives by countering the moral hazard that otherwise prevails absent ex ante government policy ex post relief takes the form of revenue insurance which prompts excessive entry into farm production and under production by operating farmers ex ante government policy can raise economic and political welfare by buying out low productivity farmers and offering profitable farmers a combination of revenue insurance price supports and a program participation fee copyright 2003 oxford university press

impacts of code share alliances on airline cost structure a truncated third order translog estimation abstract the airline industry has undergone significant changes following deregulation more than a decade ago a prominent development in recent years has been the proliferation of airline alliances an important question arises are alliances cost savings or competition reducing this paper addresses the first part of the question however the answer has bearing on the second part as well since results in industrial economics suggest that unless a merger or alliance can substantially reduce costs consumers are unlikely to enjoy lower prices e g farrell j and c shapiro 1990 horizontal mergers an equilibrium analysis american economic review 80 1 107 26 this paper estimates a truncated third order translog cost function using quarterly firm level data of 10 airlines for the period 1994qi to 2001qi using the estimated function we assess whether alliances have any impacts on costs and if so the extent to which the cost structure of airlines are affected it is found that the truncated third order translog is an appropriate specification and alliances do appear to lower costs however while the impacts are statistically significant in economic terms the magnitude appears to be immaterial

evaluating the performance of merger simulation evidence from the u s airline industry abstract this paper uses merger simulations to predict postmerger prices for five airline mergers from the 1980s and compares these predictions with observed postmerger prices i find that standard simulation methods which measure the effect of the change in ownership on unilateral pricing incentives do not generally provide an accurate forecast by incorporating postmerger information into the model i measure the relative importance of other factors that also contributed to the observed price changes the results indicate that the unexplained component of the price change is largely accounted for by supply side effects i conclude that deviations from the assumed model of firm conduct play an important role in accounting for the differences between the predicted and observed price changes this conclusion suggests that the predictive performance of merger simulation would benefit if more flexible models of firm conduct were incorporated into the methodology

the impact of deregulation on the employment and wages of airline mechanics this paper describes the effects of deregulation on negotiated wage rates and employment levels of aircraft mechanics in the scheduled airline industry between 1978 and 1984 a firm by firm analysi

agricultural disaster payments in the southeastern us do weather and climate variability matter governments around the world are forced to react to disasters caused by weather the agricultural sector is particularly susceptible to weather extremes and adverse climate conditions in the us agricultural disaster payments account for a significant part of total agricultural subsidies the payments and their distribution are more important in the areas most affected by disastrous weather events usually coinciding with areas of pronounced impact of the el nino southern oscillation enso in this article the impact of weather and climate as well as some economic variables on disaster payments is analysed using county level data from four states in the southeastern united states the results suggest that weather and climate variables explain most of the crop disaster payments at the county level while socioeconomic variables do not suggesting that advancements in weather and climate forecasts could be helpful in planning for disaster compensation

adjustment costs uncertainty and the behavior of the firm this paper examines the effects of demand and cost uncertainty on a firm s investment output and pricing decisions but unlike most earlier studies in which demand and cost are simply not known at the time an output or pricing decision is made here i consider uncertainties over future demand and costs it will be seen that the effects of such uncertainties depend critically on the characteristics of the firm s adjustment costs i treat demand uncertainty in a dynamic context by letting the market demand function shift randomly but continuously through time according to a stochastic process this means that today s demand is known exactly but future demand may be larger or smaller and has a variance that increases with the time horizon likewise uncertainty over factor costs is characterized by treating those variables as stochastic processes i combine this characterization of uncertainty with a dynamic model of the firm in which some factor inputs can be adjusted freely in response to stochastic demand changes but other factors are quasi fixed in that adjustment costs are incurred when they are changed in this model the firm s price and output are random processes but we can examine the firm s behavior in expected value terms of interest is whether the presence of uncertainty should cause competitive or monopolistic firms to invest and produce more or less than they would otherwise how the effects of uncertainty are influenced by the presence of risk aversion and how the use of inventories can alter the impact of uncertainty on capacity and sales of course these questions have been addressed by others in the past among the earliest studies of demand uncertainty are those of edwin mills 1959 1962 and samuel karlin and charles carr 1962 mills examined a single period monopolistic firm that sets both output and price and showed that additive demand uncertainty i e the demand function is of the form q q p u where u is a random variable leads to a lower price if marginal cost is constant so that the firm reduces the expected loss from discarding unsold production karlin and carr confirmed for both the static case and the multiperiod case with inventory carryover that additive uncertainty tends to reduce the price and increase the output of a risk neutral firm while multiplicative uncertainty does the opposite other papers have been concerned with the way in which the error term enters the demand function additively multiplicatively or nonlinearly the implications of choosing price ex ante instead of output the implications of risk aversion and the use of inventories for example agnar sandmo 1971 and david baron 1970 showed that a risk averse competitive firm will produce less when the price is a random variable or subject to an additive error term but a riskneutral firm will not alter its production hayne leland 1972 extended these results to a monopolistic firm whose demand can depend in a general way on a random error term for example q q p u and showed that uncertainty reduces the production of a

entry deterrence and strategic alliances researchers have written extensively on the impact that strategic alliances between airlines have on airfare but little is known of the market entry deterrent impact of strategic alliances using a structural econometric model this paper examines the market entry deterrent impact of codesharing a form of strategic alliance between incumbent carriers in domestic air travel markets we find evidence of market entry deterrence but deterrence impact depends on the specific type of codesharing between market incumbents as well as the identity of the potential entrant we quantify the extent to which market incumbents codesharing influences potential entrants market entry cost and probability of market entry

entry and patenting in the software industry to what extent are firms kept out of a market by patents covering related technologies do patents held by potential entrants make it easier to enter markets we estimate the empirical relationship between market entry and patents for 27 narrowly defined categories of software products during the period 1990 2004 controlling for demand market structure average patent quality and other factors we find that a 10 increase in the number of patents relevant to market reduces the rate of entry by 3 8 and this relationship intensified following expansions in the patentability of software in the mid 1990s however potential entrants with patent applications relevant to a market are more likely to enter it finally patents appear to substitute for complementary assets in the entry process because patents have both greater entry deterring and entry promoting effects for firms without prior experience in other markets this paper was accepted by bruno cassiman business strategy

open skies over the middle east the dynamism of air traffic markets in the middle east obscures the persistence of restrictions on international competition but how important are such restrictions for passenger traffic this paper uses detailed data on worldwide passenger aviation to estimate the effect of air transport policy on international air traffic the policy variable is a quantitative measure of the commitments under international agreements the paper analyzes for the first time not only bilateral agreements but also plurilateral agreements such as the one between arab states the analysis finds that more liberal policy is associated with greater passenger traffic between countries higher traffic levels appear to be driven primarily by larger numbers of city pairs being served rather than by more passengers traveling along given routes to demonstrate the quantitative implication of the estimates two liberalization scenarios in the middle east are evaluated deepening the plurilateral agreement among arab states would lead to a 30 percent increase in intraregional passenger traffic widening the agreement to include turkey would generate significantly larger gains because current policy vis a vis turkey is much more restrictive

export orientation and domestic merger policy theory and some empirical evidence abstract recent open economy industrial organization literature finds export orientation enhances the weight of post merger international competitive gains favouring lenient domestic merger policy however mergers seldom generate the significant synergies supportive of international competitive gains since a joint economies of production effect suggests domestic mergers tend to generate international competitive losses not gains export orientation favours strict not lenient domestic merger policy we show how non synergistic domestic mergers in the presence of international sales might reduce national welfare and incur stringent merger reviews a panel data set of u s merger policy by manufacturing sector 1990 2001 empirically supports export orientation leading to strict merger policy jel classification l40 f10

to rebate or not to rebate fuel economy standards versus feebates we compare the welfare effects in equilibrium of two environmental regulations that aim at increasing the new cars fleet s average fuel efficiency the fuel economy standards and the feebate policies maintaining the same environmental benefit and tax revenue we simulate the implementation of each policy in france and the united states standard type policies have larger negative welfare effects up to 3 2 times those from the feebate effects on manufacturers are heterogeneous some are better of under the standard regulation the addition of a market to trade levels of fuel efficiency dominates the simple standard regulation but not always the feebate we also consider the attribute based standard technological improvements and the equivalence with fuel taxes as extensions

airline network rivalry in this paper the effects of the strategic interaction between deregulated airlines on their network choice are analyzed the authors examine whether switching from a linear to a hub spoke network confers a strategic advantage because it saves costs and improves service quality they find that if hubbing lowers total cost which includes both airline and passenger inconvenience costs the pursuit of strategic advantages usually intensifies the extent of hubbing even if hubbing raises total cost it might be pursued by the airline either because hubbing is a dominant strategy in an oligopolistic setting or because hubbing will be useful in deterring entry

the dynamic spillovers of entry an application to the generic drug industry this paper examines whether experience from entry in one market can potentially enhance profitability at a future market opportunity for a related product we formulate and estimate a dynamic game of entry in which forward looking firms make decisions not just based on present benefits of past entry but also anticipating potential future benefits of current entry dynamic spillovers of entry are incorporated through a firm specific unobservable to the researcher cost that depends on past entry decisions the unobserved costs may also be serially persistent thus the model allows for firm specific unobserved heterogeneity that evolves based on firm actions the challenge of estimating a dynamic game with serially correlated unobserved state variables subject to endogenous feedback is overcome by embedding a particle filter based technique in a nested fixed point algorithm using an application to a stylized model of entry in the generic pharmaceutical industry we underscore the motivation for the model specification and the methodology developed our estimates imply positive spillover effects of entry moreover these spillovers suggest heterogeneity not just across firms but also within firms over time based on their history of entry decisions our results illustrate that entry may potentially provide firms with additional strategic advantage in later markets and that entry spillovers may be an important factor to consider in the equilibrium evolution of the generic drug industry the web appendix is available at https doi org 10 1287 mnsc 2016 2648 this paper was accepted by j miguel villas boas marketing

equilibria in networks we study a model in which two carriers choose networks to connect cities and compete for customers we show that if carriers compete aggressively e g bertrand like behavior one carrier operating a single hub spoke network is an equilibrium outcome competing hub spoke networks are not an equilibrium outcome although duopoly equilibria in nonhub networks can exist if carriers do not compete aggressively an equilibrium with competing hub spoke networks exists as long as the number of cities is not too small we provide conditions under which all equilibria consist of hub spoke networks

domestic airline alliances and consumer welfare this article investigates the consumer welfare consequences of the recent code share agreement between continental airlines and northwest airlines we develop a discrete choice model based on individual flight characteristics this structural model recognizes that consumers i may have heterogeneous preferences for flight attributes and ii may face different prices for the same flight the empirical methodology also deals with the measurement error problem stemming from the absence of consumer level data on prices the estimation results suggest that whereas the code share agreement did not impact consumers significantly on average it increased the average surplus of connecting passengers but decreased the average surplus of nonstop passengers interestingly the magnitude of our welfare results may be attributed in large part to changes in product characteristics other than prices

pricing weather derivatives this article presents a general method for pricing weather derivatives specification tests find that a temperature series for fresno ca follows a mean reverting brownian motion process with discrete jumps and autoregressive conditional heteroscedastic errors based on this process we define an equilibrium pricing model for cooling degree day weather options comparing option prices estimated with three methods a traditional burn rate approach a black scholes merton approximation and an equilibrium monte carlo simulation reveals significant differences equilibrium prices are preferred on theoretical grounds so are used to demonstrate the usefulness of weather derivatives as risk management tools for california specialty crop growers

the contribution of weather variability to economic sectors every day people make economic decisions based on the weather affecting sales of companies in a wide range of economic sectors in many cases the impact of weather on sales is not constant from

dynamic oligopoly behaviour in the airline industry abstract this paper examines the dynamic interaction between united airlines and american airlines on a set of duopoly routes we estimate quarterly conduct parameters or conjectural variations and test constant behaviour bertrand cournot and collusive models we also test two regimeswitching models derived from the green porter price war model one based on reversion to bertrand behaviour during price wars the other on reversion to cournot behaviour the three constant behaviour models are all rejected the regime switching models can both describe the data but the cournot based version is preferred

tying foreclosure and exclusion in recent years the leverage theory of tied good sales has faced heavy and influential criticism in an important sense though the models used by its critics are actually incapable of addressing the leverage theory s central concerns here the author reconsiders the leverage hypothesis and argues that tying can indeed serve as a mechanism for leveraging market power the mechanism through which this leverage occurs its profitability and its welfare implications are discussed in detail copyright 1990 by american economic association

airline code share alliances and their competitive effects abstract code share alliances have become a prominent feature in the competitive landscape of the airline industry however policy makers are extremely hesitant to approve proposed code share alliances when the potential partners route networks have significant overlap the main concern is that an alliance may facilitate price collusion on partners overlapping routes this article shows how policy makers can use a structural econometric framework to quantify the competitive effects of proposed code share alliances where potential alliance partners compete on overlapping routes in the prealliance industry as an example i apply the econometric model to the delta continental northwest alliance this proposed alliance was initially greeted with skepticism by the u s department of transportation owing to the potential partners unprecedented level of route network overlap for the markets considered in my analyses it appears as though the ultimate approval of the alliance by policy makers was justified

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

poverty and witch killing many observers have noted that poverty and violence go hand in hand there is a strong negative relationship between economic growth and crime across countries as well as across districts in india and a link between low income and the occurrence of civil war 1 yet existing studies are typically unable to resolve the key econometric identification issues of omitted variable bias and endogeneity to illustrate the unobserved quality of local government institutions may affect both income growth and crime rates and poverty could lead to violence if desperate people with nothing to lose commit more crimes but violence itself may in turn affect economic productivity this paper uses local rainfall variation to identify the impact of income shocks on murder in a rural tanzanian district 2 extreme rainfall resulting in drought or floods is exogenous and is associated with poor harvests and near famine conditions in the region and a large increase in the murder of witches there are twice as many witch murders in years of extreme rainfall as in other years the victims are nearly all elderly women typically killed by relatives these econometric results across 11 years in 67 villages provide novel evidence on the role of income shocks in causing violent crime and religious violence in particular and also provide insights into witchcraft an important social phenomenon in africa rarely studied by economists the view that economic conditions are a driving force behind witch murders is bolstered by the fact that most witch killing in tanzania takes place in poor rural areas largely dependent on rain fed agriculture and that most victims in our sample are from poor households however it is difficult to definitively disentangle this income shock theory from alternative socio cultural explanations the concentration of tanzanian witch murders in a region dominated by one particular ethnic group the sukuma and the especially high number of witch murders in villages where indigenous religious beliefs are strong both point to the important role of non economic factors economic theories and cultural theories are perhaps best viewed as complements the empirical findings demonstrate the power of economics to rationalize a phenomenon that has previously been understood almost solely through a socio cultural lens 3

bid preference programs and participation in highway procurement auctions we use data from highway procurement auctions subject to california s small business preference program to study the effect of bid preferences on auction outcomes our analysis is based on an estimated model of firms bidding and participation decisions which allows us to evaluate the effects of current and alternative policy designs we show that incorporating participation responses significantly alters the assessment of preferential treatment policies

fixed costs limit pricing and investments in barriers to entry abstract the paper analyses how investments in r d and sales promotion can give rise to barriers to entry it is argued that the classification of barriers to entry suggested by j s bain is not very suitable for a theoretical analysis and an alternative classification is suggested this alternative classification is then used to treat the so called niche production concept

the economics of airport congestion pricing abstract conventional economic wisdom suggests that congestion pricing would be an appropriate response to cope with the growing congestion levels currently experienced at many airports several characteristics of aviation markets however may make naive congestion prices equal to the value of marginal travel delays a non optimal response this paper develops a model of airport pricing that captures a number of these features the model in particular reflects that 1 airlines typically have market power and are engaged in oligopolistic competition at different sub markets 2 part of external travel delays that aircraft impose are internal to an operator and hence should not be accounted for in congestion tolls and 3 different airports in an international network will typically not be regulated by the same authority we present an analytical treatment for a simple two node network and some numerical results to illustrate our findings some main conclusions are that second best optimal tolls are typically lower than what would be suggested by congestion costs alone and may even be negative and that cooperation between regulators need not be stable but that non cooperation may lead to welfare losses also when compared to a no tolling situation

airlines strategic interactions and airport pricing in a dynamic bottleneck model of congestion abstract this paper analyzes efficient pricing at a congested airport dominated by a single firm unlike much of the previous literature we combine a dynamic bottleneck model of congestion and a vertical structure model that explicitly considers the role of airlines and passengers we show that a stackelberg leader interacting with a competitive fringe partially internalizes congestion and that there are various toll regimes that induce the welfare maximizing outcome widening the set of choices for regulators in particular charging the congestion toll that would apply for fully competitive carriers and that ignores any internalization to both the leader and the fringe yields the first best outcome

the price effects of international airline alliances abstract this paper provides evidence on the effect of international airline alliances on fares the main finding is that alliance partners charge interline fares that are approximately 25 percent below those charged by nonallied carriers according to our theoretical model the main source of this fare reduction is the internalization of a negative externality that arises from the uncoordinated choice of interline sub fares in the absence of an alliance the paper also looks for evidence of an anti competitive alliance effect in the gateway to gateway markets while the point estimates show that an alliance between two previously competitive carriers would raise fares by about 5 percent this effect is not statistically significant

how do incumbents respond to the threat of entry evidence from the major airlines this paper examines how incumbents respond to the threat of entry of competitors as distinguished from their response to competitors actual entry it uses a case study from the passenger airline industry specifically the evolution of southwest airlines route network to identify particular routes where the probability of future entry rises abruptly when southwest begins operating in airports on both sides of a route but not the route itself this dramatically raises the chance they will start flying that route in the near future we examine the pricing of the incumbents on threatened routes in the period surrounding such events we find that incumbents cut fares significantly when threatened by southwest s entry into their routes this is true even after controlling in several ways for airport specific operating costs the response of incumbents seems to be limited only to the threatened route itself and not to routes out of nearby competitor airports where southwest does not operate e g fares drop on routes from chicago midway but not chicago o hare the largest responses appear to be restricted to routes that were concentrated beforehand incumbents do experience short run increases in their passenger loads concurrent with these fare cuts this is consistent with theories implying incumbents will try to generate some longer term loyalty among current customers before the entry of a new competitor we examine evidence relating this demand building motive to frequent flyer programs and find suggestive evidence in favor of this notion there is only weak evidence that incumbents increase capacity on the routes

hybrid cooperation agreements in networks the case of the airline industry abstract this paper develops a unified framework to analyze a continuum of hybrid cooperation agreements along two dimensions their degree of revenue sharing scope of alliances and their degree of cost sharing scope of joint ventures the analysis focuses on the air transportation industry distinguishing between interline and interhub markets as economies of traffic density become stronger we find that the socially optimal cooperation agreement moves from full alliance to joint venture in interline markets whereas it moves from joint ventureto merger in interhub markets these results are driven by the tradeoff between a procompetitive effect of alliances in interline markets and an anticompetitive effect in interhub markets along with the efficiency gains associated with joint ventures in interhub markets we also develop an empirical application for intercontinental routes for the period 2010 2016 that identifies a positive impact of deeper degrees of airline cooperation revenue and cost sharing on traffic both in interline and interhub markets therefore the potential anticompetitive effect of deeper alliances in interhub markets is not observed in our sample

political action committee contributions and u s congressional voting on sugar legislation this study examines the simultaneous relationship between political action committee pac contributions and congressional votes on u s sugar legislation we extend the conventional analysis by specifying a three equation system in which each congressman s vote depends on contributions received from pro sugar and anti sugar coalitions while the propensity of each of these coalitions to contribute depends simultaneously on the congressman s anticipated voting decision and the contributions of the opposing coalition logrolling is also accommodated by considering the effect that contributions from other coalitions have had on voting decisions we find evidence of a three way linkage between votes and competing campaign contributions and conclude that the effectiveness of pac contributions reflects the dominance of political pressure over ideological concerns

public monopoly and economic efficiency evidence from the pennsylvania liquor control board s entry decisions we estimate a spatial model of liquor demand to analyze the impact of government controlled retailing on entry patterns in the absence of the pennsylvania liquor control board the state would have roughly 2 5 times the current number of stores higher consumer surplus and lower payments to liquor store employees with just over half the number of stores that would maximize welfare the government system is instead best rationalized as profit maximization with profit sharing government operation mitigates but does not eliminate free entry s bias against rural consumers we find only limited evidence of political influence on entry jel d42 d72 l11 l12 l43 l81

using weather variability to estimate the response of savings to transitory income in thailand this paper measures the extent to which farmers are able to use savings and dissavings to smooth consumption in response to unexpected shocks to income time series information on regional rainfall is used to construct estimates of transitory income due to rainfall shocks the relationship between these measures of transitory income and savings indicates that farm households save a significantly higher fraction of transitory income than nontransitory income jel d91 016 the incomes of farm households in developing countries are notorious for being both low and uncertain policies that increase the incomes of farmers may well be different

international airfares in the age of alliances the effects of codesharing and antitrust immunity this paper provides empirical evidence showing the effect of airline cooperation on the interline fares paid by international passengers the analysis focuses on two measures of cooperation codesharing and antitrust immunity and the results show that their partial effects are both negative the presence of codesharing on an international interline itinerary reduces the fare by 8 17 with the exact number depending on the sample used and the estimation method moreover the presence of antitrust immunity reduces the fare by 13 21 codesharing and immunity are substitutes however in the sense that their combined effect is smaller than the sum of their partial effects taking account of this difference which is captured by an interaction variable in the regressions the combined effect ranges between 17 and 30 these results provide strong evidence that airline cooperation in the fare setting process generates substantial benefits for interline passengers

vertical relationships between manufacturers and retailers inference with limited data in this paper different models of vertical relationships between manufacturers and retailers in the supermarket industry are compared demand estimates are used to compute price cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed the purpose is to identify the set of margins compatible with the margins obtained from estimates of cost and to select the model most consistent with the data among non nested competing models the models considered are 1 a simple linear pricing model 2 a vertically integrated model and 3 a variety of alternative strategic supply scenarios that allow for collusion non linear pricing and strategic behaviour with respect to private label products using data on yogurt sold in several stores in a large urban area of the u s the results imply that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain this is consistent with non linear pricing by the manufacturers or high bargaining power of the retailers

monopoly competition and information acquisition abstract an incumbent monopolist is uncertain about its linear demand but can acquire public information at a cost we determine how an entry threat affects the firm s information acquisition if returns to scale are constant and the state contingent demands become more dispersed as output increases then entry reduces information acquisition if however either the incumbent or entrant has increasing returns or if the state contingent demands are nonlinear or fail increasing dispersion then entry can increase information finally entry can hurt consumers although entry always increases output it can decrease information consumers sometimes prefer a better informed monopoly to a duopoly

hubs and high fares dominance and market power in the u s airline industry this article estimates the importance of route and airport dominance in determining the degree of market power exercised by an airline the results indicate that an airline s share of passengers on a route and at the endpoint airports significantly influences its ability to mark up price above cost the high markups of a dominant airline however do not create much of an umbrella effect from which carriers with smaller operations in the same markets can benefit the article suggests a number of possible explanations for this asymmetry

patents as options some estimates of the value of holding european patent stocks in many countries holders of patents must pay an annual renewal fee in order to keep their patents in force this paper uses data on the proportion of patents renewed and the renewal fees faced by post world war ii cohorts of patents in france the united kingdom and germany in conjunction with a model of patent holders renewal decisions to estimate the returns earned from holding patents in these countries since patents are often applied for at a nearly stage in the innovation process the model allows agents to be uncertain about the sequence of returns that will be earned if the patent is kept inforce formally then the paper presents and solves a discrete choice optimal stochastic control model derives the implications of the model on aggregate behaviour and then estimates the parameters of the model from aggregate data the estimates enable a detailed description of the evolution of the distribution of returns earned from holding patents over their life spans and calculations of both the annual returns earned from holding the patents still in force or the patent stocks in the alternative countries and the distribution of the discounted value of returns earned from holding the patents in a cohort this abstract was borrowed from another version of this item

rivalry between strategic alliances abstract rivalry between strategic alliances is investigated in a model where each alliance member maximizes its own profit and some share of its partner s profit a complementary alliance confers a strategic advantage by allowing the partners to credibly commit to greater output owing to both within alliance complementarities and cross alliance substitutabilities although rivalry between different alliances can sometimes lead to a prisoners dilemma for firms it tends to improve economic welfare on the other hand an alliance that arises due purely to the threat of entry may reduce welfare

the determinants of exit in an open economy in this paper the determinants of exit are investigated for the manufacturing sector of the united states economy which has been subjected to growing international influences the analysis uses united states cross sectional data the results of the exit equation suggest that low profitability declining industry growth and displacement of incumbents by entrants foster exit international influences are also seen to have an impact on u s manufacturing exit specifically imports into an industry have a small effect on exit and protection has little influence in stemming exit

economies of scale in networks abstract a network s capacity can typically be increased in a variety of ways for example in a highway network existing roads can be made wider or new roads added this paper is concerned with the determination of the degree of local economies of scale in the cost function for the outputs of a congestible network when there are multiple margins for making adjustments to capacity the main result is that under the provision of a cost minimizing network one for which the sum of user and capacity costs for the network s outputs is at a minimum the degree of local economies of scale in the cost function for the network s outputs is the same along all margins for adjusting capacity this includes what routes to establish

product line rivalry with brand differentiation competition with product rivalry is examined in a model where products are differentiated by both quality and brand name with no commitment firms produce a full product line when firms can commit to restrict their product offerings firms specialize if the degree of brand specific differentiation is small and they produce a full product line if brand specific differentiation is large relative to intrafirm differentiation firms may crowd a product space when all competitors would be better off with specialization brand proliferation is a credible entry deterring strategy if the degree of brand specific differentiation is not too large copyright 1993 by blackwell publishing ltd

a dynamic model of entry and exit in a growing industry the potential demand in a new industry evolves over time demand is initially low but advertising by the industry s early entrants can speed up demand growth however there is intrinsic uncertainty of the demand level in each period and uncertainty of the demand evolution path which can be affected by the underlying economic environment we construct a dynamic model that features the stochastically and endogenously expanding demand of a new industry and we investigate the optimal entry and exit behavior of firms as the industry evolves we find that firms incentive to enter early depends critically on the cost that early entrants have to pay in developing the market when the cost is high and the benefit spills over to potential entrants firms have an incentive to wait and the probability of entry can increase with the number of incumbents under certain circumstances firms entry strategy is also influenced by the transition of economic states firms are more likely to enter under a state that shows the prospect of demand taking off soon we also find that in the early stage of an industry higher demand uncertainty can induce faster entry

fixed costs sunk costs entry barriers and sustainability of monopoly this paper shows that i fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices for the products of a natural monopolist prices making him invulnerable against entry ii nevertheless fixed costs do not constitute barriers to entry that is they need not have undesirable welfare consequences iii indeed in market forms that we call perfectly contestable large fixed costs are completely compatible with many desirable attributes of competitive equilibrium iv sunk costs do however constitute barriers to entry and v finally the profit and welfare consequences of entry barriers are described formally in this paper it is shown that i fixed costs of sufficient magnitude assure the existence of a vector of sustainable prices a set of product prices that make a natural monopolist invulnerable against successful entry ii nevertheless costs that are truly fixed do not constitute barriers to entry that is they do not have the welfare consequences normally attributed to barriers to entry iii indeed there are markets of a form which we call perfectly contestable markets and whose properties may be approximated in practice in which large fixed costs are completely compatible with many if not most of the desirable attributes of competitive equilibrium iv sunk costs do however constitute barriers to entry and v finally the resource allocation problems that stem from fixed costs are formally identical with those that accompany public goods both their sources and their character are the same thus the rationale for public supply of public goods may be no different from that pertaining to nationalization of natural monopolies

predatory reputation in us airline markets abstract despite its long history in antitrust policy predation remains a poorly understood phenomenon the main difficulty is in empirically identifying predatory intent i propose a method for measuring the effect of reputation whose significance would enable us to infer predatory intents maximum likelihood estimation using simulated annealing algorithm is conducted with a sample of us airline markets the results provide some support for the presence of entrants learning and reputation effect as an application i discuss how the outcomes of my empirical model could help analyze such antitrust cases as the american airlines case