Capacity and product market competition: measuring market power in a 'puppy-dog' industry
AbstractIn this paper we specify and estimate a structural model which accounts for competition in two variables: capacity and prices. The model has a two-stage setup. In the first stage firms make capacity decisions followed by a product-differentiated, price setting game in the second stage. Since costs are endogenized through the first stage, this has important implications for the measurement of market power in the product market. In particular, simpler one-stage specifications would result in a bias in the measurement of market power, which can be linked to the taxonomy for two-stage games given in Fudenberg and Tirole (1984). We then estimate this model - demand, cost (short and long run), and conduct - for the European Airline Industry using data for the period of 1976-1990. We perform a number of specification tests and reject a simple one-stage specification in favor of our two-stage set-up. In particular, we find that some degree of market power in the product market exists. However, market power in the two-stage set-up is significantly lower than in the more widely employed one-stage specification, which is consistent with the direction of bias in puppy-dog games. This illustrates that firms market power in the product market is significantly overestimated whenever capacity competition is not accounted for. ZUSAMMENFASSUNG - (KapazitÃ¤ts- und Produktmarktwettbewerb: Die Messung von Marktmacht in einer "Puppy-Dog"-Industrie) In diesem Beitrag wird ein strukturelles Modell entwickelt und Ã¶konometrisch geschÃ¤tzt, das zwei Variablen des Wettbewerbs berÃ¼cksichtigt: KapazitÃ¤t und Preise. Das Modell ist zweistufig. Auf der ersten Stufe entscheiden die Unternehmen Ã¼ber die KapazitÃ¤t, gefolgt von einem Produktdifferenzierungs- und Preissetzungsspiel auf der zweiten Stufe. Die Endogenisierung der Kosten auf der ersten Stufe hat wichtige Implikationen fÃ¼r die Messung der Marktmacht im Produktmarkt. Dabei ist zu berÃ¼cksichtigen, daÃ eine einfachere eins
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 18 (2000)
Issue (Month): 6 (August)
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Web page: http://www.elsevier.com/locate/inca/505551
Other versions of this item:
- 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).
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- Brander, James A. & Zhang, Anming, 1993. "Dynamic oligopoly behaviour in the airline industry," International Journal of Industrial Organization, Elsevier, vol. 11(3), pages 407-435, September.
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- Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
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