Exchange-rate misalignments in Duopoly: The case of Airbus and Boeing

The authors 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 a large fraction of its costs in euro. We estimate price elasticities for big aircraft, and construct 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.

The authors 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. 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.

ESO: Background information: WTO rules that Boeing received $5.3bn in aid http://www.europeansources.info/record/wto-rules-that-boeing-received-5-3bn-in-aid/

---