Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing

Agnès Bénassy-Quéré (), Lionel Fontagné () and Horst Raff ()

Kiel Working Papers from Kiel Institute for the World Economy

Abstract: We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry

Keywords: exchange rates; pass-through; oligopoly (search for similar items in EconPapers)
JEL-codes: F31 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mic
Date: 2009-02
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Persistent link: http://EconPapers.repec.org/RePEc:kie:kieliw:1488

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