Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing

24 Pages Posted: 9 Mar 2012

See all articles by Lionel Fontagne

Lionel Fontagne

Banque de France; CEPII; University of Paris 1 Panthéon Sorbonne; Paris School of Economics

Agnès Bénassy-Quéré

Paris School of Economics (University Paris 1)

Horst Raff

Christian-Albrechts-Universitaet zu Kiel; CESifo (Center for Economic Studies and Ifo Institute); Kiel Institute for the World Economy

Date Written: February 9, 2009

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-rate pass-through, duopoly, aircraft industry

JEL Classification: F31, D43, L11, L62

Suggested Citation

Fontagne, Lionel and Benassy-Quere, Agnes and Raff, Horst, Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing (February 9, 2009). Available at SSRN: https://ssrn.com/abstract=2018852 or http://dx.doi.org/10.2139/ssrn.2018852

Lionel Fontagne (Contact Author)

Banque de France ( email )

Paris
France

HOME PAGE: http://www.lionel-fontagne.eu/

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Paris School of Economics ( email )

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Agnes Benassy-Quere

Paris School of Economics (University Paris 1) ( email )

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Paris, F-75013
France
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HOME PAGE: http://www.parisschoolofeconomics.com/benassy-quere-agnes/agnesb.html

Horst Raff

Christian-Albrechts-Universitaet zu Kiel ( email )

Institut fur Volkswirtschaftslehre
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Kiel, 24098
Germany
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HOME PAGE: http://www.wiso.uni-kiel.de/vwlinstitute/Raff/?page=raff

CESifo (Center for Economic Studies and Ifo Institute)

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Kiel Institute for the World Economy ( email )

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