"Market power and volatility in the airline industry"
Co-authors : Alexandra Belova and Stéphane Gauthier

ABSTRACT :
Market power and volatility in the airline industry1 Alexandra Belova, Philippe Gagnepain, and St´ephane Gauthier2 July 13, 2018 In a strategic game where firms compete against each other, the set of rationalizable strategies for each player entABSTRACT :
Market power and volatility in the airline industry1 Alexandra Belova, Philippe Gagnepain, and St´ephane Gauthier2 July 13, 2018 In a strategic game where firms compete against each other, the set of rationalizable strategies for each player entMarket power and volatility in the airline industry1 Alexandra Belova, Philippe Gagnepain, and St´ephane Gauthier2 July 13, 2018 In a strategic game where firms compete against each other, the set of rationalizable strategies for each player entails all the best responses to the other’s decisions. The theoretical litterature has suggested that the uniqueness of the rationalizable outcomes coincides with the Nash equilibrium of the game. This paper proposes an empirical test of the existence of the uniqueness of the Nash equilibrium in a Cournot oligopoly. We focus on the U.S. airline industry and develop a theoretical model of competition on each route. It is assumed that airlines are not always able to predict perfectly the behavior of the competitors which can result in multiplicity of rationalizable outcomes. Based on the supply and demand ingredients of our model, we construct a stability criterion which guarantees uniqueness. We conclude that more than 90% of the local markets observed in the U.S. airline industry have reached the unique possible Nash equilibrium. As a byproduct, we also identify the main determinants which prevent firms from reaching an equilibrium. We show in particular that local markets which include a higher number of competitors are the ones where the quantity produced is more volatile.