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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

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

Suggested Citation

  • Thorsten Fischer & David R. Kamerschen, 2003. "Price-Cost Margins in the US Airline Industry using a Conjectural Variation Approach," Journal of Transport Economics and Policy, University of Bath, vol. 37(2), pages 227-259, May.
  • Handle: RePEc:tpe:jtecpo:v:37:y:2003:i:2:p:227-259
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    Cited by:

    1. Hideki Murakami, 2007. "An Empirical Analysis of Inter-firm Rivalry between Japanese Full-Service and Low-Cost Carriers," Discussion Papers 2007-45, Kobe University, Graduate School of Business Administration.
    2. Hideki Murakami, 2009. "Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in US Large Air Markets," Discussion Papers 2009-25, Kobe University, Graduate School of Business Administration.
    3. Xavier Fageda, 2006. "Measuring Conduct and Cost Parameters in the Spanish Airline Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 28(4), pages 379-399, June.
    4. Fageda, Xavier, 2014. "What hurts the dominant airlines at hub airports?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 177-189.
    5. 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.
    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. Murakami, Hideki & Amano, Yoshihisa & Asahi, Ryota, 2015. "Dynamic effect of inter-firm rivalry on airfares: Case of Japan's full-service and new air carriers," Journal of Air Transport Management, Elsevier, vol. 44, pages 25-33.
    8. 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.
    9. Dunkerley Fay & Andre de Palma & Proost Stef, 2005. "Asymmetric Duopoly in Space - what policies work?," Energy, Transport and Environment Working Papers Series ete0509, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
    10. Hideki Murakami & Akiko Yanagida, 2014. "Impacts Of East-Japan' S Disaster On Production Of A Small-Medium Cardboard Manufacturer In Fukushima," Discussion Papers 2014-15, Kobe University, Graduate School of Business Administration.
    11. 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.
    12. 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.
    13. Anming Zhang & Yimin Zhang & Joseph A. Clougherty, 2011. "Competition and Regulation in Air Transport," Chapters,in: A Handbook of Transport Economics, chapter 35 Edward Elgar Publishing.
    14. 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.
    15. McMullen, B. Starr & Du, Yan, 2007. "The Economic Impact of the ATA/Southwest Airlines Code Share Alliance," 48th Annual Transportation Research Forum, Boston, Massachusetts, March 15-17, 2007 207914, Transportation Research Forum.
    16. Christiaan Behrens & Mark Leijsen, 2015. "Measuring Competition Intensity; An Application to Air/HSR Transport Markets," Tinbergen Institute Discussion Papers 15-075/VIII, Tinbergen Institute.
    17. Lijesen, Mark & Behrens, Christiaan, 2017. "The spatial scope of airline competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 99(C), pages 1-13.
    18. Hideki Murakami, 2010. "Time Effect of Low-Cost Carrier Entry and Social Welfare in US Large Air Markets," Discussion Papers 2010-31, Kobe University, Graduate School of Business Administration.
    19. repec:eee:touman:v:61:y:2017:i:c:p:465-471 is not listed on IDEAS
    20. Fageda, Xavier & Jiménez, Juan Luis & Valido, Jorge, 2016. "Does an increase in subsidies lead to changes in air fares? Empirical evidence from Spain," Transportation Research Part A: Policy and Practice, Elsevier, vol. 94(C), pages 235-242.
    21. Hideki Murakami, 2008. "Low-Cost Entry, Inter-Firm Rivalry, and Welfare Implications in Large U.S. Air Markets," Discussion Papers 2008-36, Kobe University, Graduate School of Business Administration.
    22. 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.
    23. Joan Calzada & Xavier Fageda, 2012. "Discounts and Public Service Obligations in the Airline Market: Lessons from Spain," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(4), pages 291-312, June.
    24. 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.
    25. Hideki Murakami & Yoshihisa Amano, 2013. "Dynamic effect of inter-airline rivalry on airfares and consumers' welfare: Japan' s full-service vs. new air carriers," Discussion Papers 2013-31, Kobe University, Graduate School of Business Administration.

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