Estimating Market Power with a Generalized Supply Relation: Application to an Airline Antitrust Case

Abstract

The empirical assessment of market power using conduct parameter models has the weaknesses of lacking proper grounding in oligopoly theory and typically producing inconsistent supply-side estimates. This paper develops an alternative framework for evaluating market power with a freely estimated parameter. This model is based on a marginal profits ratio that balances the marginal profit obtained from collusion with the marginal profit from best-response behavior in a repeated game. It builds upon the concept of efficient collusion, and also allows for a set of possible penal codes for deviation punishment and profits persistence. The resulting generalized supply relation has the advantage of not imposing a particular static non-cooperative equilibrium - a strong restriction that is commonly found in the literature. The model nests important benchmarks of oligopoly theory as special cases, with convenient expressions for homogeneous or differentiated, single or multi-product, price or quantity competition settings. As the proposal is particularly suitable for antitrust investigations, it is applied to a price-fixing case from the airline industry, with the hypothesis of coordinated market power not being rejected by the data. Additionally, alleged price parallelism between carriers did not significantly shift conduct or market outcome.

Keywords: conduct parameter, supply relations, market power, airlines

JEL Classification: L0, L4, L93, C1