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 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 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.

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. Copyright 1992 by The Econometric Society.

This note revisits the identification theorems of Brown (1983) and Roehrig (1988). We describe an error in the proofs of the main identification theorems in these papers, and provide an important counterexample to the theorems on the identification of the reduced form. Specifically, the reduced form of a nonseparable simultaneous equations model is not identified even under the assumptions of these papers. We provide conditions under which the reduced form is identified and is recoverable using the distribution of the endogenous variables conditional on the exogenous variables. However, these conditions place substantial limitations on the structural model. We conclude the note with a conjecture that it may be possible to use classical exclusion restrictions to recover some of the key implications of the theorems in more general settings.

We examine identification of differentiated products demand when one has “micro data” linking the characteristics and choices of individual consumers. Our model nests standard specifications featuring rich observed and unobserved consumer heterogeneity as well as product/market‐level unobservables that introduce the problem of econometric endogeneity. Previous work establishes identification of such models using market‐level data and instruments for all prices and quantities. Micro data provides a panel structure that facilitates richer demand specifications and reduces requirements on both the number and types of instrumental variables. We address identification of demand in the standard case in which nonprice product characteristics are assumed exogenous, but also cover identification of demand elasticities and other key features when these product characteristics are endogenous and not instrumented. We discuss implications of these results for applied work.

We present new identification results for a class of nonseparable nonparametric simultaneous equations models introduced by Matzkin (2008). These models combine traditional exclusion restrictions with a requirement that each structural error enter through a “residual index.†Our identification results are constructive and encompass a range of special cases with varying demands on the exogenous variation provided by instruments and the shape of the joint density of the structural errors. The most important results demonstrate identification when instruments have only limited variation. Even when instruments vary only over a small open ball, relatively mild conditions on the joint density suffice. We also show that the primary sufficient conditions for identification are verifiable and that the maintained hypotheses of the model are falsifiable.

We present new identification results for nonparametric models of differentiated products markets, using only market level observables. We specify a nonparametric random utility discrete choice model of demand allowing rich preference heterogeneity, product/market unobservables, and endogenous prices. Our supply model posits nonparametric cost functions, allows latent cost shocks, and nests a range of standard oligopoly models. We consider identification of demand, identification of changes in aggregate consumer welfare, identification of marginal costs, identification of firms' marginal cost functions, and discrimination between alternative models of firm conduct. We explore two complementary approaches. The first demonstrates identification under the same nonparametric instrumental variables conditions required for identification of regression models. The second treats demand and supply in a system of nonparametric simultaneous equations, leading to constructive proofs exploiting exogenous variation in demand shifters and cost shifters. We also derive testable restrictions that provide the first general formalization of Bresnahan's (1982) intuition for empirically distinguishing between alternative models of oligopoly competition. From a practical perspective, our results clarify the types of instrumental variables needed with market level data, including tradeoffs between functional form and exclusion restrictions.