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

Alessandro V. M. Oliveira

Aeronautics Institute of Technology

June 27, 2013

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.

Number of Pages in PDF File: 28

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

JEL Classification: L0, L4, L93, C1

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Date posted: December 17, 2011 ; Last revised: June 27, 2013

Suggested Citation

Oliveira, Alessandro V. M., Estimating Market Power with a Generalized Supply Relation: Application to an Airline Antitrust Case (June 27, 2013). Available at SSRN: https://ssrn.com/abstract=1973166 or http://dx.doi.org/10.2139/ssrn.1973166

Contact Information

Alessandro Vinícius Marques de Oliveira (Contact Author)
Aeronautics Institute of Technology ( email )
Praça Marechal Eduardo Gomes, 50
São José dos Campos, 12.228-900
HOME PAGE: http://www.ita.br
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