Working Paper: CEPR ID: DP13346
Authors: Federico Ciliberto; Charles Murry; Elie Tamer
Abstract: We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions while allowing for correlations between unobserved cost and demand shocks. We use our framework to account for selection in the pricing stage. We estimate the model using data from the US airline industry and find that not accounting for endogenous entry leads to biased estimation of demand elasticities. We simulate a merger between American and US Airways and find that product repositioning and post-merger outcomes depend on how we model the characteristics of the merged firm as a function of the pre-merger firms' characteristics.
Keywords: multiple equilibria; market power; self-selection; entry; oligopoly; market structure; merger
JEL Codes: C35; C51; D43; L13; L41; L44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| merger efficiencies (D61) | consumer welfare (D69) |
| endogenous entry (F12) | biased estimation of demand elasticities (C51) |
| not accounting for endogenous entry (D43) | biased estimation of demand elasticities (C51) |
| entry inequalities (D63) | demand and marginal cost estimates (C13) |
| endogenous entry (F12) | price coefficient in demand function (D11) |
| exogenous entry (O36) | markups (D43) |