Market heterogeneity and the relationship between competition and price dispersion : evidence from the U.S. airline market

Altres ajuts: Acord transformatiu CRUE-CSICPrevious studies agree that competition influences price dispersion, however there is disagreement on the direction of the effect. To explain this contradiction in findings we include a measure not typically considered in competitive analysis, the level of market heterogeneity. We find that the response of price dispersion to changes in competition is conditioned by differentiation. When products in a market are homogenous, increasing competition reduces price dispersion, while in a market with heterogeneous products, the same increase in competition increases price dispersion. We include an output attribute index as a control for market heterogeneity and test our method on 73,981 observations of airfare data from 2002 through 2016. The implication of our findings for policymakers is that the traditional measures of market concentration do not determine the level of competition alone. Decisions on allowing or disallowing mergers should consider market heterogeneity, not just concentration. The results of this work contribute toward extending knowledge on the effect of competition on price dispersion and introduce a method of measuring market differentiation

Evaluating the regulator : winners and losers in the regulation of Spanish electricity distribution (1988-2002)

The main aim of this article is to evaluate the actions of the Spanish regulator as far as the activity of electricity distribution is concerned. In contrast to other European Union countries, in Spain this activity has historically been in the hands of the private sector. To this end, we shall firstly analyze whether the legislative changes introduced by the regulator have led to the distribution companies improving their efficiency levels; secondly, whether the benefits they have obtained have been linked to these levels; and lastly, whether the consumer has shared in these improvements. The analysis was carried out by comparing the income obtained by the companies as reward for their electricity distribution activity during the 1988-2002 period with those they would have received had the regulation model proposed by Bogetoft (1997) been applied to them. The results show that the Spanish electricity regulator has not linked the reward given to the companies with their efficiency, and in addition, they have benefited at the expense of the interests of the consumer

An index approach to measuring product differentiation : a hedonic analysis of airfares

The main objective of this paper is to introduce an Allen-type index of differentiation based on cost functions. With this index, we create an economic measure of product differentiation that quantifies differences between products. Applied research has some generally accepted economic measures, for example, the Herfindahl-Hirschman Index for market concentration, or the Gini coefficient for inequality. Product differentiation, however, does not yet have an established measure. Our objective is to fill that gap and introduce a measure that can be used in market-related applied research such as market power, antitrust, price indexes, or market strategy. To operationalize the index, we introduce the concept of a core product and use cost functions to measure the degree of differentiation from the core product. To demonstrate the use of the index, we study the effect of product differentiation on price formation in the airline industry using an enhanced hedonic model. The model is empirically tested on 103,980 observations of quarterly US domestic airfare data between 2002 and 2016 and shows that product differentiation has a significant effect on both price and mark-u

Multi-output compensation system in electricity distribution : the case of Spain

The Marco Legal Estable provides us with a rare opportunity to study a system of multi-output reimbursements applied to the distribution of electricity in Spain over an extensive period of time: 1988 - 1997. To do so, an analysis structure is proposed based on a Bennet-type indicator (1920), which allows us to identify the variations in the revenues associated with the activity of electricity distribution, for each of the companies and each one of the outputs. The Law recognized, regulated and compensated four products differently. This indicator is broken down into a quantity effect and a reimbursement effect. The quantity effect evaluates the impact on revenues of the variations in demand for each of the outputs, and the reimbursement effect the modifications in revenues due to the changes in the remuneration per product, which are based on standard costs. Modern production theory is used to explain the quantity indicator by means of a productivity and activity effect. Lastly, the productivity indicator is broken down into operating efficiency, allocative efficiency and technical change. To do so, a sequential-type technology is defined whose information begins in 1952. Mathematical programming techniques are used to resolve the proposed economic decomposition

Cost and productivity

We develop an analytical model capable of decomposing both intertemporal and multilateral cost variation. We begin by attributing cost variation to a price effect and a quantity effect. We then decompose the quantity effect into a productivity effect and an activity effect. The productivity effect in turn decomposes into a cost efficiency effect and, in the intertemporal context, a technical change effect. We also show how the intertemporal and multilateral cost decompositions can be implemented, using linear programming techniques. These techniques offer certain advantages over conventional econometric techniques whenever a substantial portion of cost variation is due to variation in cost efficiency. We illustrate the two cost decompositions with a pair of benchmarking exercises based on a panel of 93 US electric power generating companies, in which variation in cost efficiency does play a key role

Testing the product test

The product test asks the product of a quantity index number and a price index number to equal the corresponding value change. The literature treats the product test as being so important that it is used to identify acceptable index number pairs, and to construct implicit index numbers when an otherwise desirable pair fails the test. We treat the product test as a hypothesis to be tested, and we provide an empirical application

Profits and productivity

In this study we consider the linkage between productivity change and profit change. We develop an analytical framework in which profit change between one period and the next is decomposed into three sources: (i) a productivity change effect (which includes a technical change effect and an operating efficiency effect), (ii) an activity effect (which includes a product mix effect, a resource mix effect and a scale effect), and (iii) a price effect. We then show how to quantify the contribution of each effect, using only observed prices and quantities of products and resources in the two periods. We illustrate our analytical decomposition of profit change with an empirical application to Spanish banking during the period 1987 - 1994

Measuring sustained superior performance at the firm level

This paper proposes a two-dimensional Strategic Performance Measure (SPM) to evaluate the achievement of sustained superior performance. This proposal builds primarily on the fact that, under the strategic management perspective, a firm's prevalent objective is the pursuit of sustained superior performance. Three basic conceptual dimensions stem from this objective: relativity, sign dependence, and dynamism. These are the foundations of the SPM, which carries out a separate evaluation of the attained superior performance and of its sustainability over time. In contrast to existing measures of performance, the SPM provides: (i) a dynamic approach by considering the progress or regress in performance over time, and (ii) a cardinal measurement of performance differences and its changes over time. The paper also proposes an axiomatic framework that a measure of strategic performance should comply with to be theoretically and managerially sound. Finally, an empirical illustration of the Spanish banking sector during 1987-1999 is herein provided by discussing some relevant cases

Product specialization, efficiency and productivity change in the spanish insurance industry

In this paper we analyze the levels of technical efficiency and productivity growth attained by Spanish insurance companies during a period of deregulation. We compute Malmquist productivity indexes using the estimates of parametric distance function for several specialized insurance branches. In this way, we show that branch specialization matters a great deal and that firms combining two or three product lines (Health, Property-Liabilities and Life) perform better than firms operating in one insurance line exclusively. In the light of these results, we recommend that the remaining restrictions coming from the European Third Directives on the operations of multi-branch firms should be removed. Moreover, from a management point of view, it would be appropriate to encourage the creation of multi-branch insurance firms. However, in all cases, the estimated scores indicate low productivity growth (less than 2% per year) compared with a huge increase in insurance activity (premiums were multiplied by nearly 3 in a decade)