nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒11‒25
28 papers chosen by
Russell Pittman
US Department of Justice

  1. Uncertainty quality, product variety and price competition By GABSZEWICZ, Jean J.; RESENDE, Joana
  2. Dynamic Location Games By Simon Loertscher; Gerd Muehlheusser
  3. Cournot Duopoly when the Competitors Operate Multiple Production Plants By Fabio Tramontana; Laura Gardini; Tönu Puu
  4. To acquire, or to compete? An entry dilemna By GABSZEWICZ, Jean; LAUSSEL, Didier; TAROLA, Ornella
  5. Efficiency gains and mergers By DE FEO, Giuseppe
  6. Asymmetric Network Effects By Estelle Cantillon; Pai-Ling Yin;
  7. The effect of competition between two spatially separated markets- An investigation of two interlinked Bak-Sneppen models. By Damgaard, M.
  8. Does the absence of competition in the market foster competition for the market? A dynamic approach to aftermarkets By LAUSSEL, Didier; RESENDE, Joana
  9. Upstream Competition and Downstream Labelling By Bonroy, Olivier; Lemarie, Stephane
  10. Compatibility choice in vertically differentiated technologies By GARCIA, Filomena; VERGARI, Cecilia
  11. Successive oligopolies and decreasing returns By GABSZEWICZ, Jean J.; ZANAJ, Skerdilajda
  12. Managing Strategic Buyers By Johannes Horner; Larry Samuelson
  13. Why Powerful Buyers finance Suppliers’ R&D By Werner Bönte; Lars Wiethaus
  14. Optimal Sharing Strategies in Dynamic Games of Research and Development By Nisvan Erkal; Deborah Minehart
  15. Trade and mergers in the presence of firm heterogeneity By Noriaki Matsushima; Yasuhiro Sato; Kazuhiro Yamamoto
  16. Economic Aspects of the Microsoft Case: Networks, Interoperability and Competition By Maria J. Gil-Moltó
  17. Market Structure and Competition in Food Retail: Some Evidences from Brazil By Monterio, G.F.A.; Farina, E.M.M.Q.; Nunes, R.
  18. Environmental regulation and horizontal mergers in the eco-industry By Canton, Joan; David, Maia; Sinclair-Desgagne, Bernard
  19. Demand for differentiated milk products: Implications for price competition By Elena López; Rigoberto A. López
  20. Farm Tourism and Spatial Competition By Andersson, H.; Hoffmann, R.
  21. Imperfect competition in the fresh tomato industry By Vincent, Requillart; Michel, Simioni; Xose Luis, Verela Irimia
  22. Collective Reputation, Entry and Minimum Safety Standard By Rouviere, Elodie; Soubeyran, Raphael
  23. E-Procurement Savings and Competition Effect: Analysis of Cultural Differences Through a Unified Model By Bedri Kamil Onur Tas; Ahu Genis-Gruber
  24. Search cost and price dispersion in vertically related markets: the case of bank loans and deposits By Alfredo Martín-Oliver; Vicente Salas-Fumás; Jesús Saurina
  25. Is There Market Power in the French Comte Cheese Market? By Merel, P.R.
  26. Searching for innovations ? the technological determinants of acquisitions in the pharmaceutical industry. By Gautier Duflos; Etienne Pfister
  27. Tracing the Woes: An Empirical Analysis of the Airline Industry By Steven Berry; Panle Jia
  28. Asymmetric Price Adjustments Under Ever-Increasing Costs. Evidence from the Retail Gasoline Market in Colombia By Marc Hofstetter; Jorge Tovar

  1. By: GABSZEWICZ, Jean J. (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); RESENDE, Joana
    Abstract: This paper analyses price competition under product differentiation when goods are defined in a two dimensional characteristic space, and consumers do not know which firm sells which quality. Equilibrium prices consist of two additive terms, which balance consumers' relative valuation of goods' expected quality and consumers' preferences for variety. However the relative importance of these terms differ under vertical and horizontal dominance.
    Keywords: product differentiation, variety, quality, uncertainty
    JEL: D43 D80 L15
    Date: 2008–06
  2. By: Simon Loertscher; Gerd Muehlheusser
    Abstract: We study a location game where consumers are distributed according to some density f and where market entry is costly and occurs sequentially. This permits an endogenous determination of the number of active ¯rms, their locations and the sequence in which these locations are occupied. While in general the analysis of such games is complicated by the fact that equilibrium locations and the sequence of settlement must be determined simul-taneously, we show that they can be independently derived for certain classes of densities including monotone and, under some additional restrictions, hump-shaped and U-shaped ones. For these classes we characterize the subgame perfect equilibrium outcome. More-over, when f is monotone and concave the equilibrium locations in areas where the density is larger tend to be more pro¯table. When f is uniform the number of ¯rms entering in equilibrium is minimal.
    Keywords: Spatial competition product differentiation dynamic games entry deterrence
    JEL: D43 L13 D21
    Date: 2008
  3. By: Fabio Tramontana (Università Politecnica delle Marche & Dipartimento di Economia e Metodi Quantitativi, Università di Urbino); Laura Gardini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy)); Tönu Puu (CERUM, Umeå University, SE-90187 Umeå, Sweden)
    Abstract: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each fi…rm is assumed to operate multiple plants, which can be run alone or in combination. Each …firm has two plants with different capacity limits, so each has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal costs functions come in three disjoint pieces, so the reaction functions, derived on basis of global pro…fit maximization, may also consist of disjoint pieces. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin boundaries, related to the discontinuities. It is shown that stable cycles may coexist, and the non-existence of unstable cycles constitutes a new property. We also compare the coexistent short periodic solutions in terms of the resulting real pro…fits.
    Keywords: Cournot duopoly, isoelastic demand function, cost functions with built-in capacity limits, bifurcation structure.
    JEL: C15 C62 D24 D43
    Date: 2008
  4. By: GABSZEWICZ, Jean (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LAUSSEL, Didier; TAROLA, Ornella
    Abstract: In this paper we address the following question: is it more profitable, for an entrant in a differentiated market, to acquire an existing firm than to compete? We illustrate the answer by considering competition in the banking sector.
    Keywords: Vertical differentiation, entry, banking competition
    JEL: G34 L13 L22
    Date: 2008–05
  5. By: DE FEO, Giuseppe (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrell and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson's results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrell and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more "consumers-oriented". In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger: in a two firm merger, efficiency gains must be larger than the pre-merger average markup.
    Keywords: mergers, efficiency gains, Cournot oligopoly.
    JEL: D43 L11 L22
    Date: 2008–01
  6. By: Estelle Cantillon (ECARES, Université Libre de Bruxelles); Pai-Ling Yin (MIT Sloan School of Management);
    Abstract: When platforms compete for consumers, two types of consumer heterogeneity will matter: consumers value the presence of other consumers on a platform differently, and consumers contribute to the value of the platform differently. The optimal discriminatory pricing policy for platforms will depend on whether those two dimensions of consumer heterogeneity are positively or negatively correlated, which is an empirical question. In a companion paper (Cantillon & Yin, 2008), we study membership decisions of trading firms for two competing exchanges: LIFFE and DTB. Our analysis shows that different traders care about liquidity differently. In this paper, we estimate the heterogeneous contribution to liquidity by different types. We combine the estimates from both papers of heterogeneous preferences and contributions to liquidity. We find that valuations of liquidity tend to be correlated with contributions to liquidity in this setting.
    Keywords: derivatives exchange, network effects, heterogeneity, entry strategy, adoption, liquidity, platform competition
    JEL: L1 G15
    Date: 2008–11
  7. By: Damgaard, M.
    Abstract: This paper investigates the effect of competition in a market consisting of interlinked economic agents. In particular, the effect of increased competition from the surrounding markets is demonstrated. The presented work is an extension of the Bak-Sneppen model (Bak and Sneppen 1993). Here are two Bak-Sneppen models interlinked such that if the lowest fitness value of one market exceeds the fitness values of the other market minus transportation cost, all cells lower than this band will receive a new random value. The model shows that interdependency between markets has a strong effect on the competitiveness of the least competitive market. The external competition is able to make the least competitive market perform better as well as worse than on its own.
    Keywords: Bak-Sneppen model, interdependency, competition, Marketing,
    Date: 2008
  8. By: LAUSSEL, Didier; RESENDE, Joana (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: In this paper, we investigate dynamic price competition when firms strategically interact in two distinct but interrelated markets: a primary market and an aftermarket, where indirect network effects arise. We set up a differential game of two-dimensional price competition and we conclude that the absence of price competition in the aftermarket (competition in the market) fosters dynamic price competition in the primary market (competition for the market). We also investigate the impact of network sizes on firms' prices in the primary market concluding that, in equilibrium, larger firms have incentives to compete more fiercely for new "uncolonized" consumers.
    Keywords: dynamic competition, differential games, Linear Markov Perfect Equilibrium, aftermarkets, network effects.
    JEL: C61 L11 L13
    Date: 2008–05
  9. By: Bonroy, Olivier; Lemarie, Stephane
    Abstract: This paper analyses the impact of labelling in a context where the products come from a rather long supply chain. We consider a case where there is an information problem about the product quality in the downstream part of the chain, but not in the upstream part. We show that the implementation of a label to solve this information problem affects the competition in the upstream part of the chain. In particular, competition may be soften up to a point where both the high and the low quality upstream suppliers both benefit from labelling while all the intermediary producers or final consumers loose from labelling. This result is established on the basis of a simple model with two vertically related markets (a competitive downstream market which is supplied by an upstream duopoly) and where the quality of the output downstream is determined by the quality of the input upstream. This analysis is informative to understand the impact of labelling in different cases concerning the agricultural sector (poultry meat, GMOs).
    Keywords: Label, Imperfect information, Vertical product differentiation, Vertical relations, Regulation, Industrial Organization,
    Date: 2008
  10. By: GARCIA, Filomena (ISEG, Technical University of Lisbon); VERGARI, Cecilia (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: We analyse firms' incentives to provide two-way compatibility between two network goods with different intrinsic qualities. We study how the relative importance of vertical differentiation with respect to the network effect influences the price competition as well as the compatibility choice. The final degree of compatibility allows firms to manipulate the overall differentiation. Under weak network effect, full compatibility may arise: the low quality firm has higher incentives to offer it in order to prevent the rival from dominating the market. Under strong network effect we observe multiple equilibria for consumers' demands. However, in any equilibrium of the full game, coordination takes place on the high quality good which, we assume, always maintains its overall quality dominance.
    Keywords: compatibility, vertical differentiation, network effect.
    JEL: L13 L15
    Date: 2008–03
  11. By: GABSZEWICZ, Jean J. (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); ZANAJ, Skerdilajda
    Abstract: In this paper, we propose an example of successive oligopolies where the downstream firms share the same decreasing returns technology of the Cobb-Douglas type. We stress the differences between the conclusions obtained under this assumption and those resulting from the traditional example considered in the literature, namely, a constant returns technology.
    Keywords: successive oligopolies, vertical integration, technology.
    JEL: D43 L1 L22 L42
    Date: 2008–08
  12. By: Johannes Horner (Cowles Foundation, Yale University); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: We consider the problem of a monopolist with an object to sell before some deadline, facing n buyers with independent private values. The monopolist posts prices but has no commitment power. We show that the monopolist can always secure at least the larger of the static monopoly profit and the revenue from a Dutch auction with a zero reserve price. When there are only a few buyers, her profits are higher than this bound, and she essentially posts unacceptable prices up to the very end, at which point prices collapse to a "reservation price" that exceeds marginal cost. When there are many buyers, the seller abandons this reservation price in order to more effectively screen buyers. Her optimal policy then replicates a Dutch auction, with prices decreasing continuously over time. With more units to sell, prices jump up after each sale.
    Keywords: Revenue management, Intertemporal price discrimination, Coase conjecture, Perishable goods, Reserve price, Dutch auction
    JEL: C72 D42 D82
    Date: 2008–11
  13. By: Werner Bönte (Schumpeter School of Business and Economics, University of Wuppertal); Lars Wiethaus (ESMT Competition Analysis)
    Abstract: It is a common concern that pricing pressure by powerful buyers discourages suppliers' R&D investments. Employing a simple monopsonist - competitive upstream industry - framework, this paper qualifies this view in two respects. First, the monopsonist has an incentive to subsidize upstream R&D which yields more upstream R&D and higher profits in both industries than the monopsonist's commitment to higher prices. Secondly, in the presence of intra-industry R&D spillovers between upstream firms, the monopsonist has an even stronger incentive to finance upstream R&D. If the monopsonist finances more than fifty percent of suppliers R&D efforts, R&D investments in upstream industry will be higher than in the case of buyer competition.
    Keywords: Vertical Relationships, Monopsony, Buyer Power, R&D, Knowledge Spillovers
    JEL: O31 O32 L13 L20
    Date: 2008–10
  14. By: Nisvan Erkal; Deborah Minehart
    Abstract: This paper builds a theoretical foundation for the dynamics of knowledge sharing in private industry. In practice, research and development projects can take years or even decades to complete. We model an uncertain research process, where research projects consist of multiple sequential steps. We ask how the incentives to license intermediate steps to rivals change over time as the research project approaches maturity and the uncertainty that the firms face decreases. Such a dynamic approach allows us to analyze the interaction between how close the firms are to product market competition and how intense that competition is. If product market competition is relatively moderate, the lagging firm is expected never to drop out and the incentives to share intermediate research outcomes decreases monotonically with progress. However, if product market competition is relatively intense, the incentives to share may increase with progress. These results illustrate under what circumstances it is necessary to have policies aimed at encouraging cooperation in R&D and when such policies should be directed towards early vs. later stage research
    Keywords: Multi-stage R&D; innovation; knowledge sharing; licensing; dynamic games
    JEL: L24 O30 D81
    Date: 2008
  15. By: Noriaki Matsushima (Kobe University); Yasuhiro Sato (Osaka University); Kazuhiro Yamamoto (Osaka University)
    Abstract: We investigate the role of firm heterogeneity in considering profitability and desirability of mergers in the international economy. Analysis shows that higher trade costs make only crossborder mergers profitable whereas larger firm heterogeneity is likely to increase both domestic and cross-border mergers. Furthermore, it is shown that whether or not a merger leads to merger waves depends on the types of firms involved in it. It is also demonstrated that larger firm heterogeneity can reduce the discrepancy between profitability and desirability of mergers when the trade cost is sufficiently low.
    Keywords: M&As, trade, firm heterogeneity, Cournot competition
    JEL: F12 G34 L13
    Date: 2008–11
  16. By: Maria J. Gil-Moltó
    Abstract: In this paper, we discuss the main economic aspects of the European Microsoft case; in particular, Microsoft’s refusal to supply the necessary information to make the competitors’ work group server systems interoperable with Windows Operating System. The case can be seen as an example of competition between networks. We review the relevant economics literature with the objective of understanding the motivations behind Microsoft’s strategies.
    Keywords: Networks; Complementarities; Foreclosure; Interoperability; Antitrust
    JEL: L4 O3 L1
    Date: 2008–11
  17. By: Monterio, G.F.A.; Farina, E.M.M.Q.; Nunes, R.
    Abstract: The paper analyzes competition among supermarkets in Brazil. In contrast to part of the economic literature which suggests that the fast growth of big supermarket chains would destroy independent, medium and small supermarkets, the paper argues that big supermarket chains can coexist with different formats of independent food retailing. As a result, competition in food retail is complex and cannot be described as a simple Darwinian process of market concentration. The analysis is divided in two parts. In the first part, the competition between hypermarkets and supermarkets is examined. Evidences for the district of Sao Paulo, Brazil, suggest that these retailers form separate markets. The second part is focused on neighborhood supermarkets. The results differ from the general belief that independent supermarkets establish higher prices in comparison to big chain supermarkets. The analysis brings to light the heterogeneity of the competitive fringe in the oligopoly model of Brazilian retailing.
    Keywords: Food retail, Supermarkets, Differentiation, Agribusiness, Industrial Organization,
    Date: 2008
  18. By: Canton, Joan; David, Maia; Sinclair-Desgagne, Bernard
    Abstract: This paper considers the environmental policy and welfare implications of a merger be- tween environment ¯rms (i.e., ¯rms managing environmental resources or supplying pollution abatement goods and services). The traditional analysis of mergers in Cournot oligopolies is extended in two ways. First, we show how environmental policy a®ects the incentives of environment ¯rms to merge. Second, we stress that mergers in the eco-industry impact wel- fare beyond what is observed in other sectors, due to an extra e®ect on pollution abatement e®orts; this might lead to disagreements between an anti-trust agency seeking to limit market concentration which can be detrimental to consumer surplus and a benevolent regulator who maximizes total welfare.
    Keywords: Eco-industry, environmental policy, horizontal mergers, Environmental Economics and Policy, Industrial Organization, D62, H23, L11,
    Date: 2008
  19. By: Elena López; Rigoberto A. López (Departamento de Fundamentos de Economía e H.E. , Universidad de Alcalá, and Department of Agricultural and Resource Economics, University of Conneticut.)
    Abstract: We apply the Berry, Levinsohn and Pakes (1995) model to scanner data from Boston supermarkets augmented with consumer characteristics data in order to analyze consumer choices and price competition in a differentiated fluid milk market. Milk characteristics include price, fat content, brand name and the organic and/or lactose-free nature of the product. Empirical results show that consumer valuation of fat decreases with income but increases with the number of children. Low-fat and specialty milks, such as organic and lactose-free milks, are preferred by high-income consumers with no children. Although all milks are price elastic at the individual brand level, the cross-price elasticities are quite low and negligible for specialty milks. Based on calculated Lerner indexes, private label milks have the highest percent markups despite their lower prices, while specialty milks have the lowest markups despite their higher prices, which attests to a greater degree of market power for conventional and particularly for private label milk.
    Keywords: Demand analysis, Random coefficients model, Milk, Consumer behavior, Retail pricing, Markups, Competition.
    JEL: D12 D40 L11 L81
    Date: 2008
  20. By: Andersson, H.; Hoffmann, R.
    Abstract: Changes in EU agricultural policies towards an increased focus on rural development issues raise questions regarding the economic impact of local and regional spatial competition. Farmers are typically price takers in the traditional markets for the major agricultural products. This is, however, not necessarily the case for €ܮew enterprises€ݠactive in local and regional markets. This paper examines local/regional spatial competition for farm tourism. A spatial econometrics framework is applied to a hedonic pricing model. It is shown that spatial dependence affects the pricing of both Self-catering and Bed & Breakfast. However, the results indicate that local/regional competition may have a positive effect on the former but a negative effect on the latter. The findings illustrate the potential importance of local competition for rural developments studies.
    Keywords: farm tourism, spatial competition, rural development, Community/Rural/Urban Development,
    Date: 2008
  21. By: Vincent, Requillart; Michel, Simioni; Xose Luis, Verela Irimia
    Abstract: In this paper, we analyse the market power of the retail industry in the French tomato market. Following the methods developed in the New Empirical Industrial Organization, we develop a structural model of this industry. The analysis is based on detailed data on final consumption and prices at both shipper and consumer levels for two types of tomatoes in France. The structural model is composed of a system of demand equations, supply equations and pricing equations which include terms which capture the oligopoly and oligopsony power of the retail sector. We show that i) elasticity of demand varies during the year ii) the retail sector exercise only a €حoderate€٠market power iii) the exercise of market power decreases over time iv) If markets were competitive, in the case of tomato €زonde€٠ retail price would decrease by about 1.2% to 4.5% depending on the year; v) In absence of market power, shipping price might be 6% to 24% higher than observed. We find higher distortions in the case of tomato €اrappe€ٮ We also find that the distortions tend to decrease over time. We conclude to a moderate exercise of market power of the retail sector in the French tomato market.
    Keywords: Oligopoly, Oligopsony, Fresh products, Industrial Organization,
    Date: 2008
  22. By: Rouviere, Elodie; Soubeyran, Raphael
    Abstract: This article deals with the issue of entry into an industry where firms share a collective reputation. First, we show that free entry is not socially optimal; there is a need for regulation through the imposition of a minimum quality standard. Second, we argue that a minimum quality standard can induce firms to enter the market. Contrary to conventional wisdom, a minimum quality standard should not always be considered as a barrier to entry.
    Keywords: Collective Reputation, Entry, Minimum Quality Standard, Institutional and Behavioral Economics,
    Date: 2008
  23. By: Bedri Kamil Onur Tas; Ahu Genis-Gruber
    Date: 2008–11
  24. By: Alfredo Martín-Oliver (Banco de España); Vicente Salas-Fumás (Universidad de Zaragoza); Jesús Saurina (Banco de España)
    Abstract: Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer’s search costs in retail banking, consistent with predictions from the Carlson and McAfee (1983) model of market competition with search costs.
    Keywords: Interest rate dispersion, market structure, search costs
    JEL: D83 G21
    Date: 2008–11
  25. By: Merel, P.R.
    Abstract: An NEIO approach is used to measure seller market power in the French Comté cheese market, characterised by government-approved supply control. The estimation is performed on quarterly data at the wholesale stage over the period 1985-2005. Three different elasticity shifters are included in the demand specification, and the supply equation accounts for the existence of the European dairy quota policy. The market power estimate is small and statistically insignificant. Monopoly is rejected, as well as weak forms of Cournot oligopoly. Results appear to be robust to the choice of functional form, and suggest little effect of the supply control scheme on consumer prices.
    Keywords: Supply control, NEIO, protected designation of origin, Marketing,
    Date: 2008
  26. By: Gautier Duflos (Centre d'Economie de la Sorbonne - Paris School of Economics); Etienne Pfister (BETA-Règles - Université de Nancy II)
    Abstract: This article analyzes the individual determinants of acquisition activity and target choices in the pharmaceutical industry over the period 1978-2002. The "innovation gap" hypothesis states that acquiring firms lack promising drug compounds and acquire firms with more promising drug prospects. A duration model implemented over a panel of more than 400 firms relates the probabilities of being an purchaser or a target to financial, R&D ant patent data to investigate this explanation more deeply. Results show that purchasers are firms with a lower Tobin's Q and decreasing sales, which could indicate that acquisitions are used to compensate for low internal growth prospects. Firms with a higher proportion of radical patents in their portfolio, especially in pharmaceutical and biothechnological patent classes, face a higher probability of being targeted, indicating that acquiring firms are indeed searching for innovative competencies. However, acquiring firms also present a significant absorptive capacity : their R&D investment increases in the year preceding the operation and their patent stock is larger and more diversified than for non-acquiring firms. Finally, we observe that over the last ten years of the sample period, firms have paid a greater attention to the size of the target's portfolio.
    Keywords: M&A, pharmaceutical, innovations, patent citations.
    JEL: G34 L15 L21 O3
    Date: 2008–09
  27. By: Steven Berry; Panle Jia
    Abstract: The U.S. airline industry went through tremendous turmoil in the early 2000's. There were four major bankruptcies and two major mergers, with all legacy carriers reporting a large profit reduction. This paper presents a structural model of the airline industry, and estimates the impact of demand and supply changes on profitability. We find that, compared with the late 1990s, in 2006, a) air-travel demand was 8% more price sensitive; b) passengers displayed a strong preference for direct flights, and the connection semi-elasticity was 17% higher; c) the changes of marginal cost significantly favored direct flights. These findings are present in all the specifications we estimated. Together with the expansion of low cost carriers, they explained more than 80% of the decrease in legacy carriers' variable profits.
    JEL: L0 L1 L13 L91 L93
    Date: 2008–11
  28. By: Marc Hofstetter; Jorge Tovar
    Abstract: There is abundant empirical evidence showing that asymmetric price adjustments exist in a wide variety of markets. Prices tend to grow faster when costs rise relative to the rate at which prices drop when costs fall. The objective of this paper is to empirically test whether asymmetric price adjustments exist in a scenario where costs are increasing every period. The Colombian retail gasoline market offers an excellent case study due to a specific regulation, something discussed further in this paper. Our results suggest that when costs rise above the reference price –a government suggested retail price– retail prices tend to rise less relative to when costs grow below the reference price. Thus, asymmetry does exist.
    Date: 2007–10–11

This nep-com issue is ©2008 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.