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Union Power and Product Market Competition: Evidence from the Airline Industry

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  • Damien J. Neven
  • Lars-Hendrik Röller
  • Zhentang Zhang

Abstract

In this paper we specify and estimate a structural model which links product market competition and union power. The model has a two-stage setting in which wages are determined through bargaining between management and unions in the first stage, with a price-setting market game to follow in the second stage. Using data for eight European airlines from 1976-1994, we provide evidence on price-cost margins and the measurement of market power in a model of rent sharing. In particular, we provide evidence on the amount of rent being shifted and its impact on prices, wages, and consumer surplus. According to our estimates, the inefficiency resulting from rent-shifting is only 1.2 cents for every dollar of rent shifting. In this sense, the static impact of unions is largely on equity and less on efficiency: the winners are the unions and the losers the consumer, while economic efficiency is relatively unaffected. ZUSAMMENFASSUNG - (Gewerkschaftsmacht und Produktmarkt-Wettbewerb: Evidenz aus der Luftfahrtindustrie) In diesem Beitrag wird ein strukturiertes Modell spezifiziert und geschätzt, das den Zusammenhang zwischen Produktmarkt-Wettbewerb und Gewerkschaftsmacht abbildet. Das Modell ist zweistufig. In der ersten Stufe werden im Rahmen von Verhandlungen zwischen Management und Gewerkschaften die Löhne bestimmt und auf der zweiten Stufe folgt ein Preissetzungsspiel. Anhand von Daten für acht europäische Fluggesellschaften für die Zeit von 1976 bis 1994 läßt sich empirisch ein Zusammenhang zwischen Preis-Kostenspanne und der Messung der Marktmacht in einem Modell des "rent sharing" feststellen. Dabei wird speziell das Maß an Verlagerungen ökonomischer Renten untersucht und deren Einfluß auf Preise, Löhne und Konsumentenrente. Den Berechnungen folgend, beträgt die Ineffizienz, die aus dem "rent-shifting" resultiert, nur 1,2 Cent je Dollar. Somit betrifft die statische Wirkung der Gewerkschaften eher die Gleichheit als die Effizienz: die Gewinner sind die Gewerkschaften und die Verlierer die Konsumenten, während die Effizienz relativ unberührt bleibt.

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Bibliographic Info

Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 99-05.

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Length: 39 pages
Date of creation: Mar 1999
Date of revision:
Handle: RePEc:wzb:wzebiv:fsiv99-05

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References

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  1. Michael D. Whinston & Scott C. Collins, 1992. "Entry and Competitive Structure in Deregulated Airline Markets: An Event Study Analysis of People Express," RAND Journal of Economics, The RAND Corporation, vol. 23(4), pages 445-462, Winter.
  2. Ng, Charles K & Seabright, Paul, 2001. "Competition, Privatisation and Productive Efficiency: Evidence from the Airline Industry," Economic Journal, Royal Economic Society, vol. 111(473), pages 591-619, July.
  3. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, vol. 80(2), pages 400-404, May.
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  5. Evans, William N & Kessides, Ioannis N, 1994. "Living by the "Golden Rule": Multimarket Contact in the U.S. Airline Industry," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 341-66, May.
  6. David Good & M. Nadiri & Lars-Hendrik Röller & Robin Sickles, 1993. "Efficiency and productivity growth comparisons of European and U.S. Air carriers: A first look at the data," Journal of Productivity Analysis, Springer, vol. 4(1), pages 115-125, June.
  7. Neven, Damien & Roller, Lars-Hendrik, 1999. "An aggregate structural model of competition in the European banking industry," International Journal of Industrial Organization, Elsevier, vol. 17(7), pages 1059-1074, October.
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  12. 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.
  13. James A. Brander & Anming Zhang, 1990. "Market Conduct in the Airline Industry: An Empirical Investigation," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 567-583, Winter.
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  16. Borenstein, Severin & Rose, Nancy L, 1994. "Competition and Price Dispersion in the U.S. Airline Industry," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 653-83, August.
  17. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
  18. Good, David H & Roller, Lars-Hendrik & Sickles, Robin C, 1993. "U.S. Airline Deregulation: Implications for European Transport," Economic Journal, Royal Economic Society, vol. 103(419), pages 1028-41, July.
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  20. 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).
  21. Jan K. Brueckner & Nichola J. Dyer & Pablo T. Spiller, 1992. "Fare Determination in Airline Hub-and-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 309-333, Autumn.
  22. Neven, Damien J. & Roller, Lars-Hendrik, 1996. "Rent sharing in the European airline industry," European Economic Review, Elsevier, vol. 40(3-5), pages 933-940, April.
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Cited by:
  1. Heikki Kauppi & Erkki Koskela & Rune Stenbacka, 2004. "Equilibrium Unemployment and Capital Intensity Under Product and Labor Market Imperfections," CESifo Working Paper Series 1343, CESifo Group Munich.
  2. Kauppi, Heikki & Koskela, Erkki & Stenbacka, Rune, 2004. "Equilibrium Unemployment and Investment Under Product and Labour Market Imperfections," IZA Discussion Papers 1058, Institute for the Study of Labor (IZA).

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