Estimation of cost efficiency without cost data

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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 

Notes

Acknowledgements

We would like to thank Vivek Ghosal, Giannis Karagiannis, Byung-Cheol Kim, UshaNair-Reichert, Robin Sickles, Jerry Thursby, and Mike Tsionas for their valuable comments.

Compliance with ethical standards

Conflict of interest

The authors declare that they have no conflict of interest.

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© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.School of EconomicsGeorgia Institute of TechnologyAtlantaUSA
  2. 2.SunTrust BankAtlantaUSA

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