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ENDOGENOUS COSTS AND PRICE-COST MARGINS: AN APPLICATION TO THE EUROPEAN AIRLINE INDUSTRY -super-

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  • DAMIEN J. NEVEN
  • LARS-HENDRIK RÖLLER
  • ZHENTANG ZHANG

Abstract

This paper allows for endogenous costs in the estimation of price cost margins. In particular, we estimate price-cost margins when firms bargain over wages. We extent the standard two-equation set-up (demand and first-order condition in the product market) to include a third equation, which is derived from bargaining over wages. In this way, price-cost margins are determined by wages and vice versa. We implement the model using data for eight European airlines from 1976-1994, and show that the treatment of endogenous costs has important implications for the measurement of price-cost margins and the assessment of market power. Our main result is that observed prices in Europe are virtually identical to monopoly prices, even though observed margins are consistent with Nash behavior. Apparently, costs had been inflated to the point that the European consumers were faced with a de facto monopoly prices. Copyright Blackwell Publishing Ltd. 2006.

Suggested Citation

  • Damien J. Neven & Lars-Hendrik Röller & Zhentang Zhang, 2006. "ENDOGENOUS COSTS AND PRICE-COST MARGINS: AN APPLICATION TO THE EUROPEAN AIRLINE INDUSTRY -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 54(3), pages 351-368, September.
  • Handle: RePEc:bla:jindec:v:54:y:2006:i:3:p:351-368
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    Cited by:

    1. Melo Filho, Cícero R. & Salgado, Lucia Helena & Sato, Renato Cesar & Oliveira, Alessandro V.M., 2014. "Modeling the effects of wage premiums on airline competition under asymmetric economies of density: A case study from Brazil," Journal of Air Transport Management, Elsevier, vol. 36(C), pages 59-68.
    2. Coccorese, Paolo, 2012. "Banks as ‘fat cats’: Branching and price decisions in a two-stage model of competition," Journal of Economics and Business, Elsevier, vol. 64(5), pages 338-363.

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