Estimating market power and strategies

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 Notes

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).

Foreword	p. xi
1 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
2 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
3 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
4 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
5 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
6 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
7 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
8 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
Appendix 8A Derivation of Restrictions	p. 206
The Open-Loop Restrictions	p. 206
The Markov Perfect Restrictions	p. 207
Problems	p. 208
9 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
Appendix 9A Proof that the GME-Nash Estimator Is Consistent	p. 233
Problems	p. 234
10 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
Appendix 10A Expected Lerner Measure	p. 260
Problems	p. 261
Statistical Appendix	p. 263
Bibliography	p. 289
Answers	p. 303
Index	p. 325

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