Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, November 16, 2020

Estimating Market Power Using a Composed Error Model

Estimating Market Power Using a Composed Error Model

Mustafa Karakaplan

Georgetown University - Department of Economics

Levent Kutlu

Georgia Institute of Technology


We present a maximum likelihood based composed error model to estimate market powers of firms. In our model, the stochastic part of the supply relation includes two random components: the conventional two‐sided error term and a random term, which is capturing firm‐specific conducts. Moreover, we provide a generalization of scaled Stevenson stochastic frontier model in the context of doubly truncated normal distributions. We estimate the market powers of Chicago based airlines as an empirical example that is showing the applicability of our estimation procedure.

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