Two major issues have led courts and antitrust enforcers to take a highly skeptical view when assessing claims of anticompetitive predation. First, predation is an inherently dynamic and strategic phenomenon but the practical tools available to identify predatory behavior are based on a static, competitive perspective on markets. Second, there is understandable concern about the potential distortionary implications of punishing firms for competing too intensely. This paper analyzes these problems in the context of the U.S. airline industry, where there have been frequent allegations of predatory conduct. I first argue, via an explicit dynamic industry model, that certain features of the industry do make it fertile ground for predatory incentives to arise. I then estimate the model parameters and use it to quantify the welfare and behavioral implications of predation policy for a widely discussed case: U.S. vs. American Airlines (2000). To assess the first problem, I formulate static cost-based tests of antitrust liability commonly used by courts and, to evaluate their efficacy, compare the results to a precise definition of predation that arises naturally from the model. I find evidence of predatory incentives and that the static liability tests capture these incentives surprisingly well. I calculate the appropriate level damages by resolving for model equilibrium under the assumption that American was unable to violate the liability tests and then use the new equilibrium to simulate the market in the absence of the violations. Finally, I analyze the potential distortionary effect of predation policy by resolving for equilibrium and simulating many realizations of the equilibrium under anti-predation policies proposed by the Department of Transportation. I find that, while these remedies do diminish the probability of intensely competitive market states, they remain welfare improving.
Does the Libor Reflect Bank Borrowing Costs? (with Thomas Youle)
Barriers to Entry in the Airline Industry: A Multidimensional Regression Discontinuity Analysis of the Wendel H. Ford Aviation Act (with Jonathan Williams)
Partial Identification and Mergers (with Geert Ridder and Jin Hahn; Forthcoming Economics Letters)
The Fix is In: Detecting Portfolio Driven Manipulation of the LIBOR (with Thomas Youle ; Subsumes most of "Does the Libor Reflect Bank Borrowing Costs")
Work In Progress
Bank Competition, Funding Mix, and Financial Stability
Capacity Investment and Profit Cycles in the Airline Industry: Theory and Evidence