Estimation of Cost Efficiency Without Cost Data

Kutlu, Levent; Wang, Ran

doi:10.2139/ssrn.2607280

Estimation of Cost Efficiency Without Cost Data

35 Pages Posted: 22 May 2015 Last revised: 12 Oct 2017

See all articles by Levent Kutlu

Ran Wang

Georgia Institute of Technology

Date Written: October 11, 2017

Abstract

One of the advantages of conduct parameter games is that they enable estimation of market power without total cost data. In line with this, we develop a conduct parameter based model to estimate the firm specific "marginal cost efficiency" and conduct without using total cost data. The marginal cost efficiency is an alternative measure of efficiency that is based on deadweight loss. We illustrate our methodology by estimating firm-route-quarter specific conducts and marginal cost efficiencies of U.S. airlines for Chicago based routes without using route-level total cost data.

Keywords: Market power; Conduct parameter; Efficiency; Stochastic frontier analysis; Airlines

JEL Classification: C13, L13, L93

Suggested Citation: Suggested Citation

Kutlu, Levent and Wang, Ran, Estimation of Cost Efficiency Without Cost Data (October 11, 2017). Available at SSRN: https://ssrn.com/abstract=2607280 or http://dx.doi.org/10.2139/ssrn.2607280