Kiel Working Papers, Kiel Institute for World Economics
No 1488:
Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing
Agnès Bénassy-Quéré, Lionel Fontagné and Horst Raff
Abstract: We examine the effect of exchange-rate misalignments on
competition in the market for large commercial aircraft. This market is a
duopoly where players compete in dollar-denominated prices while one of
them, Airbus, incurs costs mostly in euros. We construct and calibrate a
simulation model to investigate how companies adjust their prices to deal
with the effects of a temporary misalignment, and how this affects profit
margins and volumes. We also explore the effects on the long-run dynamics
of competition. We conclude that due to the duopolistic nature of the
aircraft market, Airbus will pass only a small part of the exchange-rate
fluctuations on to customers through higher prices. Moreover, due to
features specific to the aircraft industry, such as customer switching
costs and learning-by-doing, even a temporary departure of the exchange
rate from its long-run equilibrium level may have permanent effects on the
industry
Keywords: exchange rates, pass-through, oligopoly; (follow links to similar papers)
JEL-Codes: F31,; L13; (follow links to similar papers)
24 pages, February 2009
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