Estimation of market power in the presence of firm level inefficiencies
Abstract“The quiet life hypothesis” (QLH) by Hicks (1935) argues that, due to management’s subjective cost of reaching optimal profits, firms use their market power to allow inefficient allocation of resources. Increasing competitive pressure is therefore likely to force management to work harder to reach optimal profits. Another hypothesis, which also relates market power to efficiency is “the efficient structure hypothesis” (ESH) by Demsetz (1973). ESH argues that firms with superior efficiencies or technologies have lower costs and therefore higher profits. These firms are assumed to gain larger market shares which lead to higher concentration. Ignoring the efficiency levels of the firms in a market power model might cause both estimation and interpretation problems. Unfortunately, the literature on market power measurement largely ignores this relationship. In the context of a dynamic setting, we estimate the market power of US airlines in two city-pairs by both allowing inefficiencies of the firms and not allowing inefficiencies of the firms. Using industry level cost data, we estimate the cost function parameters and time-varying efficiencies. An instrumental variables version of the square root Kalman filter is used to estimate time-varying conduct parameters.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Econometrics.
Volume (Year): 168 (2012)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconom
Market power; Panel data; Dynamic games; Kalman filter; Airline competition; Suboptimal allocations;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lars-Hendrik Röller & Robin C. Sickles, 1997.
"Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry,"
CIG Working Papers
FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Roller, Lars-Hendrik & Sickles, Robin C., 2000. "Capacity and product market competition: measuring market power in a 'puppy-dog' industry," International Journal of Industrial Organization, Elsevier, vol. 18(6), pages 845-865, August.
- Encaoua, David & Jacquemin, Alexis, 1980. "Degree of Monopoly, Indices of Concentration and Threat of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 87-105, February.
- Comanor, William S, 1969. "Allocative Efficiency, X-Efficiency and the Measurement of Welfare Losses," Economica, London School of Economics and Political Science, vol. 36(143), pages 304-09, August.
- Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
- Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
- Koetter, Michael & Poghosyan, Tigran, 2009. "The identification of technology regimes in banking: Implications for the market power-fragility nexus," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1413-1422, August.
- Bacchetta, Philippe & Gerlach, Stefan, 1997.
"Consumption and Credit Constraints: International evidence,"
CEPR Discussion Papers
1727, C.E.P.R. Discussion Papers.
- Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
- Philippe BACCHETTA & Stefan GERLACH, 1997. "Consumption and Credit Constraints : International Evidence," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 9707, Université de Lausanne, Faculté des HEC, DEEP.
- Perloff,Jeffrey M. & Karp,Larry S. & Golan,Amos, 2007.
"Estimating Market Power and Strategies,"
Cambridge University Press, number 9780521804400, December.
- Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
- James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
- Delis, Manthos D & Tsionas, Efthymios, 2009.
"The joint estimation of bank-level market power and efficiency,"
14040, University Library of Munich, Germany.
- Delis, Manthos D. & Tsionas, Efthymios G., 2009. "The joint estimation of bank-level market power and efficiency," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1842-1850, October.
- Steven Puller, 2009. "Estimation of competitive conduct when firms are efficiently colluding: addressing the Corts critique," Applied Economics Letters, Taylor & Francis Journals, vol. 16(15), pages 1497-1500.
- Allen N. Berger & Timothy H. Hannan, 1994.
"The efficiency cost of market power in the banking industry: a test of the "quiet life" and related hypotheses,"
Finance and Economics Discussion Series
94-36, Board of Governors of the Federal Reserve System (U.S.).
- Allen N. Berger & Timothy H. Hannan, 1998. "The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 454-465, August.
- Allen Berger & Timothy Hannan, 1994. "The Efficiency Cost of Market Power in the Banking Industry: A Test of the 'Quiet Life' and Related Hypotheses," Center for Financial Institutions Working Papers 94-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Baltagi, Badi H & Griffin, James M & Rich, Daniel P, 1995. "Airline Deregulation: The Cost Pieces of the Puzzle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 245-60, February.
- Parish, Ross M & Ng, Yew-Kwang, 1972. "Monopoly, X-Efficiency and the Measurement of Welfare Loss," Economica, London School of Economics and Political Science, vol. 39(155), pages 301-08, August.
- Berg, Sigbjorn Atle & Kim, Moshe, 1998.
"Banks as Multioutput Oligopolies: An Empirical Evaluation of the Retail and Corporate Banking Markets,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 30(2), pages 135-53, May.
- Sigbjorn Atle Berg & Moshe Kim, 1996. "Banks as multioutput oligopolies: an empirical evaluation of the retail and corporate banking markets," Proceedings 503, Federal Reserve Bank of Chicago.
- Jin, Hui & Jorgenson, Dale W., 2010. "Econometric modeling of technical change," Journal of Econometrics, Elsevier, vol. 157(2), pages 205-219, August.
- Appelbaum, Elie, 1982. "The estimation of the degree of oligopoly power," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 287-299, August.
- Pindyck, Robert S, 1985.
"The Measurement of Monopoly Power in Dynamic Markets,"
Journal of Law and Economics,
University of Chicago Press, vol. 28(1), pages 193-222, April.
- Pindyck, Robert S., 1984. "The measurement of monopoly power in dynamic markets," Working papers 1540-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June.
- Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211.
- Gallet, Craig A. & Schroeter, John R., 1995. "The Effects of the Business Cycle on Oligopoly Coordination: Evidence from the U.S. Rayon Industry," Staff General Research Papers 5250, Iowa State University, Department of Economics.
- Kumbhakar, Subal C., 1997. "Modeling allocative inefficiency in a translog cost function and cost share equations: An exact relationship," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 351-356.
- Badi H. Baltagi & James M. Griffin & Sharada R. Vadali, 1998. "Excess capacity: a permanent characteristic of US airlines?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(6), pages 645-657.
- Steven L. Puller, 2007. "Pricing and Firm Conduct in California's Deregulated Electricity Market," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 75-87, February.
- Kim, Chang-Jin, 2006. "Time-varying parameter models with endogenous regressors," Economics Letters, Elsevier, vol. 91(1), pages 21-26, April.
- Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
- Battese, George E. & Corra, Greg S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December.
- Kutlu, Levent, 2010. "Battese-coelli estimator with endogenous regressors," Economics Letters, Elsevier, vol. 109(2), pages 79-81, November.
- G. Peersman & L. Pozzi, 2004. "Determinants of consumption smoothing," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/231, Ghent University, Faculty of Economics and Business Administration.
- David H. Good & Robin C. Sickles & Jesse C. Weiher, 2008. "A Hedonic Price Index For Airline Travel," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(3), pages 438-465, 09.
- George E. Battese & Greg S. Corra, 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 169-179, December.
- Kim, Chang-Jin & Nelson, Charles R., 2006. "Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1949-1966, November.
- Seung Ahn & Robin Sickles, 2000. "Estimation of long-run inefficiency levels: a dynamic frontier approach," Econometric Reviews, Taylor & Francis Journals, vol. 19(4), pages 461-492.
- Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-74, October.
- Koetter, Michael, 2013. "Market structure and competition in German banking: Modules I and IV," Working Papers 06/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
- Hovhannisyan, Vardges & Bozic, Marin, 2013. "A Benefit-Function Approach to Studying Market Power: An Application to the U.S. Yogurt Market," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(2), August.
- Anonymous & Bosch, Darrell J., 2013. "Table of contents," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 45(02), May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.