Estimating Market Power and Strategies
by Jeffrey M. Perloff , Larry S. Karp , Amos GolanFormat: Hardcover
Pub. Date: 2007-06-18
Publisher(s): Cambridge University Press
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Summary
This book presents, compares, and develops various techniques for estimating market power - the ability to set price profitably above marginal cost - and strategies - the game-theoretic plans used by firms to compete with rivals. The authors start by examining static model approaches to estimating market power. They extend the analysis to dynamic models. Finally, they develop methods to estimate firms' strategies directly and examine how these strategies determine market power. A detailed technical appendix reviews the relevant information-theoretic and other econometric models that are used throughout. Questions and detailed answers for students and researchers are provided in the book for easy use.
Author Biography
Jeffrey M. Perloff is a professor in and Chair of the Department of Agricultural and Resource Economics at the University of California, Berkeley. He has written the textbooks Modern Industrial Organization (coauthored with Dennis Carlton) and Microeconomics. Larry S. Karp is a professor in the Department of Agricultural and Resource Economics at the University of California, Berkeley. He also teaches at University of Southampton, U.K. Amos Golan is a professor in the Department of Economics at American University. He cowrote Maximum Entropy Econometrics: Robust Elimination with Limited Data (with George Judge and Douglas Miller).
Table of Contents
| Foreword | p. xi |
| Introduction and Overview | p. 1 |
| Three Main Questions | p. 1 |
| Structure-Conduct-Performance | p. 3 |
| Static Models | p. 5 |
| Dynamics | p. 7 |
| Strategies | p. 11 |
| Structure-Conduct-Performance | p. 13 |
| Measures of Market Performance | p. 14 |
| Rate of Return | p. 14 |
| Price-Cost Margins | p. 18 |
| Tobin's q | p. 19 |
| Measures of Market Structure | p. 19 |
| Firm Size Distribution | p. 20 |
| Concentration Measures | p. 20 |
| Concentration Statistics | p. 20 |
| Problems with Using Concentration Measures | p. 22 |
| Summary Statistic Biases | p. 23 |
| Barriers to Entry | p. 24 |
| Unionization | p. 25 |
| The Relationship of Structure to Performance | p. 25 |
| Rates of Return and Industry Structure | p. 25 |
| Price-Cost Margins and Industry Structure | p. 27 |
| Price-Average Cost Margins | p. 27 |
| Price-Marginal Cost Margins | p. 28 |
| Other Explanatory Variables | p. 30 |
| International Studies of Performance and Structure | p. 30 |
| Performance and Structure in Individual Industries | p. 31 |
| Measurement and Statistical Problems | p. 31 |
| Conceptual Problems | p. 32 |
| A Modern Structure-Conduct-Performance Approach | p. 34 |
| Theory | p. 34 |
| Exogenous Sunk Cost | p. 35 |
| Endogenous Sunk Costs | p. 37 |
| Empirical Research | p. 39 |
| Summary | p. 40 |
| Problems | p. 40 |
| Industry Models of Market Power | p. 42 |
| Structural Approach | p. 43 |
| Interpretations of &lamda; | p. 45 |
| Identification | p. 47 |
| Estimation and Hypothesis Tests | p. 50 |
| Taxes: An Application | p. 51 |
| Nonparametric and Reduced-Form Models | p. 53 |
| Comparative Statics | p. 53 |
| Hall's Reduced-Form Approach | p. 55 |
| Oligopsony | p. 58 |
| Structural Oligopsony Model | p. 58 |
| Hall's Reduced-Form Oligopsony Model | p. 59 |
| How Well These Methods Work | p. 59 |
| Tests Based on Cost Evidence | p. 60 |
| Oligopoly Simulations | p. 60 |
| Structural Model | p. 62 |
| Hall's Reduced-Form Model | p. 65 |
| Empirical Comparisons | p. 69 |
| Summary | p. 70 |
| Problems | p. 72 |
| Differentiated-Product Structural Models | p. 74 |
| Residual Demand | p. 75 |
| Neoclassical Demand System | p. 77 |
| Multilevel Demand Specifications | p. 77 |
| An Almost Ideal Demand System Example | p. 78 |
| Estimation | p. 80 |
| Identification | p. 80 |
| Instruments | p. 81 |
| Hypothesis Tests | p. 82 |
| Random Parameter Model | p. 83 |
| Linear Random Utility Model | p. 83 |
| Estimating the Random-Parameter Model | p. 86 |
| Market Power | p. 89 |
| Summary | p. 91 |
| Problems | p. 91 |
| Strategic Reasons for a Dynamic Estimation Model | p. 93 |
| Supergames | p. 94 |
| Empirical Implications | p. 98 |
| Models of Repeated Games with Trigger Strategies | p. 99 |
| Models of Repeated Games with Continuous Strategies | p. 104 |
| Summary | p. 108 |
| Problems | p. 109 |
| Dynamic Games Involving Economic Fundamentals | p. 113 |
| Fundamental Reasons for Dynamics | p. 114 |
| Production Fundamentals | p. 114 |
| Demand Fundamentals | p. 116 |
| A Dynamic Game with a Quasi-Fixed Input | p. 117 |
| Open-Loop Rules | p. 121 |
| Time Consistency of Open-Loop Rules | p. 122 |
| Different Approaches to Obtaining Necessary Conditions | p. 123 |
| Subgame Perfection and Markov Strategies | p. 125 |
| Differentiable Markov Perfect Strategies | p. 127 |
| A Sticky Price Model | p. 128 |
| Multiplicity of Equilibria | p. 130 |
| Selecting a Particular Equilibrium | p. 132 |
| Comparing Open-Loop and Markov Equilibria | p. 132 |
| Markov Perfect Equilibria and Conjectural Variations | p. 135 |
| Empirical Implications | p. 136 |
| Different Ways to Interpret Open-Loop Equilibrium | p. 140 |
| Summary | p. 141 |
| Problems | p. 142 |
| Estimation of Dynamic Games Involving Economic Fundamentals | p. 147 |
| Overview of Two Examples | p. 147 |
| The Sticky Price Model | p. 149 |
| The Dynamic Programming Equation | p. 151 |
| The Euler Equation for a Special Case | p. 152 |
| Other Approaches to Deriving the Euler Equation | p. 153 |
| The Estimation Model | p. 154 |
| The General Model | p. 155 |
| An Additional Assumption about Demand | p. 156 |
| Random Demand Shifters | p. 157 |
| Estimation Using the Dynamic Programming Equation | p. 158 |
| A Related Dynamic Oligopoly Model | p. 162 |
| A Dynamic Model with Advertising | p. 163 |
| The Open-Loop Equilibrium to the Advertising Model | p. 164 |
| The Markov Perfect Equilibrium to the Advertising Model | p. 166 |
| The Hybrid Model | p. 168 |
| Estimation of Markov Perfect Equilibria | p. 170 |
| Summary | p. 178 |
| Problems | p. 179 |
| Estimation of Market Power Using a Linear-Quadratic Model | p. 181 |
| Assumptions and Definitions | p. 182 |
| The Static Analog | p. 183 |
| The Dynamic Model | p. 184 |
| Implications of the Linear-Quadratic Structure | p. 185 |
| The Recursive Structure of the Solution | p. 186 |
| The Principle of Certainty Equivalence | p. 187 |
| Properties of the Equilibria | p. 189 |
| Equilibrium Conditions Used for Estimation | p. 192 |
| Necessary Conditions for the Open-Loop Equilibrium | p. 193 |
| Necessary Conditions for the Markov Perfect Equilibrium | p. 195 |
| Additional Restrictions and Testing | p. 197 |
| Empirical Applications | p. 198 |
| Coffee | p. 198 |
| Rice | p. 199 |
| Estimation Results | p. 200 |
| Classical Estimates | p. 200 |
| Bayesian Estimates | p. 202 |
| Simulations | p. 204 |
| Summary | p. 205 |
| Derivation of Restrictions | p. 206 |
| The Open-Loop Restrictions | p. 206 |
| The Markov Perfect Restrictions | p. 207 |
| Problems | p. 208 |
| Estimating Strategies: Theory | p. 211 |
| Related Studies | p. 213 |
| Mixed Strategies | p. 217 |
| Oligopoly Game | p. 219 |
| The Strategies and the Game | p. 219 |
| Econometric Adjustments for the Game | p. 220 |
| The Estimation Model | p. 221 |
| Classical Maximum Entropy Formulation for the Multinomial Problem | p. 222 |
| Incorporating the Sample Information | p. 223 |
| Incorporating the Nonsample, Game-Theoretic Information | p. 227 |
| Properties of the Estimators | p. 229 |
| The GME-Nash Estimator: Hypothesis Testing | p. 229 |
| Summary | p. 232 |
| Proof that the GME-Nash Estimator Is Consistent | p. 233 |
| Problems | p. 234 |
| Estimating Strategies: Case Studies | p. 235 |
| Airlines Game | p. 235 |
| Airlines Model | p. 236 |
| Estimates | p. 237 |
| Comparing Estimators | p. 241 |
| Hypothesis Tests | p. 243 |
| Sampling and Sensitivity Experiments | p. 245 |
| Airlines Summary | p. 246 |
| Cola Game | p. 247 |
| Cola Model | p. 247 |
| Estimates | p. 249 |
| Basic Statistics and Tests of the Cola Market | p. 252 |
| Lerner Measures of Market Power | p. 257 |
| Effects of the Exogenous Variables | p. 257 |
| Cola Summary | p. 259 |
| Summary | p. 259 |
| Expected Lerner Measure | p. 260 |
| Problems | p. 261 |
| Statistical Appendix | p. 263 |
| Bibliography | p. 289 |
| Answers | p. 303 |
| Index | p. 325 |
| Table of Contents provided by Ingram. All Rights Reserved. |
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