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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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  • Thorsten Fischer
  • David R. Kamerschen

Abstract

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.

Suggested Citation

  • Thorsten Fischer & David R. Kamerschen, 2003. "Measuring Competition in the U.S. Airline Industry Using the Rosse-Panzar Test and Cross-Sectional Regression Analyses," Journal of Applied Economics, Taylor & Francis Journals, vol. 6(1), pages 73-93, May.
    • Handle: RePEc:taf:recsxx:v:6:y:2003:i:1:p:73-93
    DOI: 10.1080/15140326.2003.12040586
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    Cited by:

    1. Chen, Ruowei & Lei, Zheng, 2017. "Airport dominance and airline pricing power: An investigation of hub premiums in the Chinese domestic market," Transportation Research Part A: Policy and Practice, Elsevier, vol. 103(C), pages 509-524.
    2. Jacob A. Bikker & Sherrill Shaffer & Laura Spierdijk, 2012. "Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1025-1044, November.
    3. Jose A. Murillo & Sara G. Castellanos, 2004. "Inflation Dynamics’ Micro Foundations: How Important is Imperfect Competition Really?," Econometric Society 2004 Latin American Meetings 78, Econometric Society.
    4. Dionne, Georges & Santugini, Marc, 2014. "Entry, imperfect competition, and futures market for the input," International Journal of Industrial Organization, Elsevier, vol. 35(C), pages 70-83.
    5. Enrico Bachis & Claudio A. Piga, 2006. "Hub Premium, Airport Dominance and Market Power in the European Airline Industry," Rivista di Politica Economica, SIPI Spa, vol. 96(5), pages 11-54, September.
    6. Khalil Assala & Suela Bylykbashi & Gilles Roehrich, 2021. "How To Measure Competitive Intensity?," Post-Print hal-03381232, HAL.
    7. Eberhard-Ruiz, Andreas & Calabrese, Linda, 2018. "Trade facilitation, transport costs and the price of trucking services in East Africa," MPRA Paper 87150, University Library of Munich, Germany.
    8. Lieshout, Rogier & Malighetti, Paolo & Redondi, Renato & Burghouwt, Guillaume, 2016. "The competitive landscape of air transport in Europe," Journal of Transport Geography, Elsevier, vol. 50(C), pages 68-82.
    9. 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.
    10. Kwieciński Dariusz, 2017. "Measures of Competitive Intensity – Analysis Based on Literature Review," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 25(1), pages 53-77, March.
    11. Zhang, Rui & Johnson, Daniel & Zhao, Weiming & Nash, Chris, 2019. "Competition of airline and high-speed rail in terms of price and frequency: Empirical study from China," Transport Policy, Elsevier, vol. 78(C), pages 8-18.
    12. Ma, Wenliang & Wang, Qiang & Yang, Hangjun & Zhang, Anming & Zhang, Yahua, 2019. "Effects of Beijing-Shanghai high-speed rail on air travel: Passenger types, airline groups and tacit collusion," Research in Transportation Economics, Elsevier, vol. 74(C), pages 64-76.
    13. Yilmazkuday, Hakan, 2021. "Profit margins in U.S. domestic airline routes," Transport Policy, Elsevier, vol. 114(C), pages 245-251.
    14. Yahua Zhang & David Round, 2009. "Policy Implications of the Effects of Concentration and Multimarket Contact in China’s Airline Market," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(4), pages 307-326, June.

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