Rent sharing in the European airline industry

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