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Measuring Competition in the U.S. Airline Industry Using the Rosse-Panzar Test and Cross-Sectional Regression Analyses

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    Abstract

    We employ the Rosse-Panzar test to assess market performance in selected airport-pairs originating from Atlanta. The Rosse-Panzar test stands in the tradition of the New Empirical Industrial Organization. It is based on the comparative statics of a reduced form revenue equation. Therefore, it is less powerful than structural models, but it offers the advantage of less stringent data requirements and reduces the risk of model misspecifications. The test statistic allows us in most airport-pairs to reject both conducts consistent with the Bertrand outcome, which is equivalent to perfect competition, and the collusive outcome, which is equivalent to joint profit-maximization. Rather, the test statistic suggests that behavior is consistent with a range of intermediate outcomes between the two extremes, including, but not limited to the Cournot oligopoly. In the second part of the paper, a cross-section pricing regression complements the Rosse-Panzar test. It shows that the presence of low-cost competition in an airport-pair reduces the average fare significantly.

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    Bibliographic Info

    Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

    Volume (Year): VI (2003)
    Issue (Month): (May)
    Pages: 73-93

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    Handle: RePEc:cem:jaecon:v:6:y:2003:n:1:p:73-93

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    Related research

    Keywords: airlines; oligopoly; conduct; price-cost marginas; Lerner index; Rosse-Panzar test;

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    1. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-89, March.
    2. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    3. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-56, June.
    4. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 576-94, August.
    5. Ashenfelter, Orley & Sullivan, Daniel, 1987. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 483-98, June.
    6. Peteraf, Margaret A & Reed, Randal, 1994. "Pricing and Performance in Monopoly Airline Markets," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 193-213, April.
    7. Gautam Gowrisankaran, 2002. "Competition and regulation in the airline industry," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan18.
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    Cited by:
    1. D. R. Kamerschen & J. E. Morgan, 2004. "Collusion analysis of the Alabama liquid asphalt market," Applied Economics, Taylor & Francis Journals, vol. 36(7), pages 673-693.
    2. Jacob Bikker & Sherrill Shaffer & Laura Spierdijk, 2009. "Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium," DNB Working Papers 225, Netherlands Central Bank, Research Department.
    3. Yahua Zhang & David Round, 2009. "Policy Implications of the Effects of Concentration and Multimarket Contact in China’s Airline Market," Review of Industrial Organization, Springer, vol. 34(4), pages 307-326, June.
    4. Georges Dionne & Marc Santugini, 2012. "Entry, Imperfect Competition, and Futures Market for the Input," Cahiers de recherche 1215, CIRPEE.

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