Estimating market power using a composed error model

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.