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Exchange-rate misalignments in duopoly : the case of Airbus and Boeing

Authors
Publisher
Kiel Institute for the World Economy (IfW) Kiel
Publication Date
Keywords
  • F31
  • L13
  • Ddc:330
  • Exchange Rates
  • Pass-Through
  • Oligopoly
  • Luftfahrtindustrie
  • Duopol
  • Exchange Rate Pass-Through
  • Internationaler Wettbewerb
  • Theorie
  • Eu-Staaten
  • Usa

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.

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