A1 - Agnès Bénassy-Quéré
A1 - Lionel Fontagné
A1 - Horst Raff
TI - Exchange-Rate Misalignments in Duopoly: the Case of Airbus and Boeing
IS - 2009-10
T3 - Working Papers
KW - Exchange-rate pass-through
KW - duopoly
KW - aircraft industry
N2 - 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.
ER -