Price-Cost Margins in the US Airline Industry using a Conjectural Variation Approach

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