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Measuring Competition in the U.S. Airline Industry Using the Rosse-Panzar Test and Cross-Sectional Regression Analyses

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    We employ the Rosse-Panzar test to assess market performance in selected airport-pairs originating from Atlanta. The Rosse-Panzar test stands in the tradition of the New Empirical Industrial Organization. It is based on the comparative statics of a reduced form revenue equation. Therefore, it is less powerful than structural models, but it offers the advantage of less stringent data requirements and reduces the risk of model misspecifications. The test statistic allows us in most airport-pairs to reject both conducts consistent with the Bertrand outcome, which is equivalent to perfect competition, and the collusive outcome, which is equivalent to joint profit-maximization. Rather, the test statistic suggests that behavior is consistent with a range of intermediate outcomes between the two extremes, including, but not limited to the Cournot oligopoly. In the second part of the paper, a cross-section pricing regression complements the Rosse-Panzar test. It shows that the presence of low-cost competition in an airport-pair reduces the average fare significantly.

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    File URL: http://www.cema.edu.ar/publicaciones/download/volume6/fisher.pdf
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    Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

    Volume (Year): VI (2003)
    Issue (Month): (May)
    Pages: 73-93

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    Handle: RePEc:cem:jaecon:v:6:y:2003:n:1:p:73-93
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    1. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    2. Ashenfelter, Orley & Sullivan, Daniel, 1987. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 483-98, June.
    3. Gautam Gowrisankaran, 2002. "Competition and regulation in the airline industry," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan18.
    4. Seade, Jesus K, 1980. "On the Effects of Entry," Econometrica, Econometric Society, vol. 48(2), pages 479-89, March.
    5. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 576-94, August.
    6. Peteraf, Margaret A & Reed, Randal, 1994. "Pricing and Performance in Monopoly Airline Markets," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 193-213, April.
    7. Panzar, John C & Rosse, James N, 1987. "Testing for "Monopoly" Equilibrium," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 443-56, June.
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