RENT SHARING IN THE EUROPEAN AIRLINE INDUSTRY

To the extent that product market competition affects managerial incen tives to control costs, price-cost margins offer a poor guide to the e valuation of market power. We propose a method to evaluate simultaneou sly both market power and its pass through on cost. We focus on rent s haring between unions and management as a mechanism through which cost s are endogenised. We develop and estimate a structural model of compe tition where wages are endogenously determined in the first stage, wit h a price-setting market game following in the second stage, This stru ctural model is then estimated using data for 8 European airlines from 1976-1990. We find a strong support for the hypothesis that lax compe tition induces extensive rent sharing through excessive wages.