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An assessment of Nash equilibria in the airline industry

Alexandra Belova, Philippe Gagnepain () and Stephane Gauthier
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Alexandra Belova: ECOPSY Consulting
Philippe Gagnepain: PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We study competition in the U.S. airline industry relaxing the Nash equilibrium assumption that airlines are able to predict perfectly the behavior of their competitors. We assess empirically whether an equilibrium is more likely to occur if it is the unique rationalizable outcome. We find that equilibria of short distance routes with high traffic and low concentration are the most fragile, and low-cost companies appear detrimental to their occurrence. Our analysis is applied to the measurement of welfare gains from firms' entry, and to the characterization of the relevant market when some products are unobserved.

Keywords: Rationalizability; Nash equilibrium; Cournot competition; structural model; airline industry; welfare analysis; relevant market (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-com, nep-gth, nep-tre and nep-ure
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