Title of article :
Estimation of market power in the presence of firm level inefficiencies
Author/Authors :
Kutlu، نويسنده , , Levent and Sickles، نويسنده , , Robin C.، نويسنده ,
Issue Information :
دوفصلنامه با شماره پیاپی سال 2012
Pages :
15
From page :
141
To page :
155
Abstract :
“The quiet life hypothesis” (QLH) by Hicks (1935) argues that, due to management’s subjective cost of reaching optimal profits, firms use their market power to allow inefficient allocation of resources. Increasing competitive pressure is therefore likely to force management to work harder to reach optimal profits. Another hypothesis, which also relates market power to efficiency is “the efficient structure hypothesis” (ESH) by Demsetz (1973). ESH argues that firms with superior efficiencies or technologies have lower costs and therefore higher profits. These firms are assumed to gain larger market shares which lead to higher concentration. Ignoring the efficiency levels of the firms in a market power model might cause both estimation and interpretation problems. Unfortunately, the literature on market power measurement largely ignores this relationship. In the context of a dynamic setting, we estimate the market power of US airlines in two city-pairs by both allowing inefficiencies of the firms and not allowing inefficiencies of the firms. Using industry level cost data, we estimate the cost function parameters and time-varying efficiencies. An instrumental variables version of the square root Kalman filter is used to estimate time-varying conduct parameters.
Keywords :
Dynamic games , Airline competition , Suboptimal allocations , Market power , Panel data , Kalman filter
Journal title :
Journal of Econometrics
Serial Year :
2012
Journal title :
Journal of Econometrics
Record number :
2129005
Link To Document :
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