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Price-Cost Margins in the US Airline Industry using a Conjectural Variation Approach

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  • Thorsten Fischer
  • David R. Kamerschen
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    Abstract

    The New Empirical Industrial Organization (NEIO) provides techniques for the estimation of parameters of conduct that identify well-defined models of oligopoly behaviour, ranging from perfect competition, or, equivalently, Bertrand competition, the Cournot outcome and collusive cartel. The identification of different theoretical models of oligopoly based on estimation from economic, as opposed to accounting data, allows for explicit hypothesis testing. The degree of market power is inferred from the conduct parameter. This paper employs a reduced form model to calculate price-cost margins in selected airport-pair markets originating from Atlanta. The authors find that conduct in most airport-pairs is consistent with the Cournot solution with deviations from this conduct both to more and less competitive behaviour. The estimates for the Lerner index indicate that in all airportpairs under consideration, incumbent airlines exert a considerable degree of market power. Furthermore, the estimates of the price-cost margins are more stable, both across airlines and time than the conduct parameters. © The London School of Economics and the University of Bath 2003

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    Bibliographic Info

    Article provided by London School of Economics and University of Bath in its journal Journal of Transport Economics and Policy.

    Volume (Year): 37 (2003)
    Issue (Month): 2 (May)
    Pages: 227-259

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    Handle: RePEc:tpe:jtecpo:v:37:y:2003:i:2:p:227-259

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    Web page: http://www.bath.ac.uk/e-journals/jtep

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    Cited by:
    1. André De Palma & Fay Dunkerley & Stef Proost, 2005. "Asymmetric Duopoly in Space - what policies work?," ERSA conference papers ersa05p494, European Regional Science Association.
    2. Silva, Hugo E. & Verhoef, Erik T., 2013. "Optimal pricing of flights and passengers at congested airports and the efficiency of atomistic charges," Journal of Public Economics, Elsevier, vol. 106(C), pages 1-13.
    3. Kamerschen, David R. & Klein, Peter G. & Porter, David V., 2005. "Market structure in the US electricity industry: A long-term perspective," Energy Economics, Elsevier, vol. 27(5), pages 731-751, September.
    4. Hugo E. Silva & Erik T. Verhoef, 2011. "Optimal Pricing of Flights and Passengers at Congested Airports: The Efficiency of Atomistic Charges," Tinbergen Institute Discussion Papers 11-179/3, Tinbergen Institute, revised 28 Mar 2013.
    5. Xavier Fageda, 2005. "Measuring Conduct And Cost Parameters In The Spanish Airline Market," Industrial Organization 0511011, EconWPA.
    6. Fay Dunkerley & Andre de Palma & Stef Proost, 2009. "Spatial Asymmetric Duopoly With An Application To Brussels' Airports," Journal of Regional Science, Wiley Blackwell, vol. 49(3), pages 529-553.
    7. Joan Calzada & Xavier Fageda, 2012. "Discounts and Public Service Obligations in the Airline Market: Lessons from Spain," Review of Industrial Organization, Springer, vol. 40(4), pages 291-312, June.
    8. Ofelia Betancor & Juan Luis Jiménez, 2011. "When trains go faster than planes: the strategic reaction of airlines in Spain," ERSA conference papers ersa11p295, European Regional Science Association.
    9. Mizutani, Jun, 2011. "Airline merger and competition in Japan: A conduct parameter and theoretical price approach," Journal of Air Transport Management, Elsevier, vol. 17(2), pages 120-124.
    10. 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.
    11. Du, Yan & McMullen, B. Starr & Kerkvliet, Joe R., 2008. "The economic impact of the ATA/Southwest Airlines code-share agreement," Research in Transportation Economics, Elsevier, vol. 24(1), pages 51-60.
    12. Zhang, Qiong & Yang, Hangjun & Wang, Qiang & Zhang, Anming, 2014. "Market power and its determinants in the Chinese airline industry," Transportation Research Part A: Policy and Practice, Elsevier, vol. 64(C), pages 1-13.
    13. Xavier Fageda, 2014. "“What hurts the dominant airlines at hub airports?”," IREA Working Papers 201414, University of Barcelona, Research Institute of Applied Economics, revised May 2014.

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