ENDOGENEITY IN THE CONCENTRATION-PRICE RELATIONSHIP - CAUSES, CONSEQUENCES, AND CURES

The OLS estimator of the effect of concentration on price is biased fo r two reasons. First, performance feeds back into structure, causing a simultaneous equations bias. Second, as a function of outputs or reve nues, measured concentration is correlated with determinants of price that are, at best, measured with error, so measured concentration is c orrelated with the error term. With panel data, fixed-effects procedur es can be combined with instrumental variables to eliminate bias from both sources. In concentration-price regressions for the airline indus try, the bias is found to be substantial and negative.