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.

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zlib/Business & Economics/Perloff J.M., Golan A., Karp L.S./Estimating Market Power and Strategies_780679.pdf

Jeffrey M. Perloff, Larry Karp, Amos Golan, Larry S. Karp

Perloff, Jeffrey M., Karp, Larry S., Golan, Amos

Perloff J.M., Golan A., Karp L.S.

Greenwich Medical Media Ltd

United Kingdom and Ireland, United Kingdom

Cambridge [England] ; New York, 2007

New York, NY, New York State, 2007

Illustrated, 2007

2007-08-30

2010

Mexmat -- 2010

lg355885

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Includes bibliographical references and index.

Half-title......Page 3
Title......Page 5
Copyright......Page 6
Dedication......Page 7
Contents......Page 8
Foreword......Page 13
THREE MAIN QUESTIONS......Page 15
STRUCTURE–CONDUCT–PERFORMANCE......Page 17
STATIC MODELS......Page 19
DYNAMICS......Page 21
STRATEGIES......Page 25
TWO Structure–Conduct–Performance......Page 27
RATE OF RETURN......Page 28
Price–Cost Margins......Page 32
MEASURES OF MARKET STRUCTURE......Page 33
Concentration Statistics......Page 34
Problems with Using Concentration Measures......Page 36
Summary Statistic Biases......Page 37
Barriers to Entry......Page 38
Rates of Return and Industry Structure......Page 39
Price–Average Cost Margins......Page 41
Price–Marginal Cost Margins......Page 42
International Studies of Performance and Structure......Page 44
Measurement and Statistical Problems......Page 45
Conceptual Problems......Page 46
Theory......Page 48
Exogenous Sunk Cost......Page 49
Endogenous Sunk Costs......Page 51
Empirical Research......Page 53
PROBLEMS......Page 54
THREE Industry Models of Market Power......Page 56
STRUCTURAL APPROACH......Page 57
Interpretations of λ......Page 59
Identification......Page 61
Estimation and Hypothesis Tests......Page 64
Taxes: An Application......Page 65
Comparative Statics......Page 67
Hall’s Reduced-Form Approach......Page 69
Structural Oligopsony Model......Page 72
HOW WELL THESE METHODS WORK......Page 73
Oligopoly Simulations......Page 74
Structural Model......Page 76
Hall’s Reduced-Form Model......Page 79
Empirical Comparisons......Page 83
SUMMARY......Page 84
PROBLEMS......Page 86
FOUR Differentiated-Product Structural Models......Page 88
RESIDUAL DEMAND......Page 89
Multilevel Demand Specifications......Page 91
An Almost Ideal Demand System Example......Page 92
Identification......Page 94
Instruments......Page 95
Hypothesis Tests......Page 96
Linear Random Utility Model......Page 97
Estimating the Random-Parameter Model......Page 100
Market Power......Page 103
PROBLEMS......Page 105
FIVE Strategic Reasons for a Dynamic Estimation Model......Page 107
SUPERGAMES......Page 108
EMPIRICAL IMPLICATIONS......Page 112
MODELS OF REPEATED GAMES WITH TRIGGER STRATEGIES......Page 113
MODELS OF REPEATED GAMES WITH CONTINUOUS STRATEGIES......Page 118
SUMMARY......Page 122
PROBLEMS......Page 123
SIX Dynamic Games Involving Economic Fundamentals......Page 127
Production Fundamentals......Page 128
Demand Fundamentals......Page 130
A DYNAMIC GAME WITH A QUASI-FIXED INPUT......Page 131
OPEN-LOOP RULES......Page 135
Time Consistency of Open-Loop Rules......Page 136
Different Approaches to Obtaining Necessary Conditions......Page 137
SUBGAME PERFECTION AND MARKOV STRATEGIES......Page 139
DIFFERENTIABLE MARKOV PERFECT STRATEGIES......Page 141
A STICKY PRICE MODEL......Page 142
Multiplicity of Equilibria......Page 144
COMPARING OPEN-LOOP AND MARKOV EQUILIBRIA......Page 146
MARKOV PERFECT EQUILIBRIA AND CONJECTURAL VARIATIONS......Page 149
EMPIRICAL IMPLICATIONS......Page 150
DIFFERENT WAYS TO INTERPRET OPEN-LOOP EQUILIBRIUM......Page 154
SUMMARY......Page 155
PROBLEMS......Page 156
OVERVIEW OF TWO EXAMPLES......Page 161
THE STICKY PRICE MODEL......Page 163
The Dynamic Programming Equation......Page 165
The Euler Equation for a Special Case......Page 166
Other Approaches to Deriving the Euler Equation......Page 167
The Estimation Model......Page 168
The General Model......Page 169
An Additional Assumption about Demand......Page 170
Random Demand Shifters......Page 171
Estimation Using the Dynamic Programming Equation......Page 172
A Related Dynamic Oligopoly Model......Page 176
A DYNAMIC MODEL WITH ADVERTISING......Page 177
The Open-Loop Equilibrium to the Advertising Model......Page 178
The Markov Perfect Equilibrium to the Advertising Model......Page 180
The Hybrid Model......Page 182
ESTIMATION OF MARKOV PERFECT EQUILIBRIA......Page 184
SUMMARY......Page 192
PROBLEMS......Page 193
EIGHT Estimation of Market Power Using a Linear-Quadratic Model......Page 195
ASSUMPTIONS AND DEFINITIONS......Page 196
THE STATIC ANALOG......Page 197
THE DYNAMIC MODEL......Page 198
IMPLICATIONS OF THE LINEAR-QUADRATIC STRUCTURE......Page 199
The Recursive Structure of the Solution......Page 200
The Principle of Certainty Equivalence......Page 201
PROPERTIES OF THE EQUILIBRIA......Page 203
EQUILIBRIUM CONDITIONS USED FOR ESTIMATION......Page 206
Necessary Conditions for the Open-Loop Equilibrium......Page 207
Necessary Conditions for the Markov Perfect Equilibrium......Page 209
Additional Restrictions and Testing......Page 211
Coffee......Page 212
Rice......Page 213
Classical Estimates......Page 214
Bayesian Estimates......Page 216
Simulations......Page 218
SUMMARY......Page 219
APPENDIX 8A: DERIVATION OF RESTRICTIONS......Page 220
The Markov Perfect Restrictions......Page 221
PROBLEMS......Page 222
NINE Estimating Strategies: Theory......Page 225
RELATED STUDIES......Page 227
MIXED STRATEGIES......Page 231
The Strategies and the Game......Page 233
Econometric Adjustments for the Game......Page 234
THE ESTIMATION MODEL......Page 235
Classical Maximum Entropy Formulation for the Multinomial Problem......Page 236
Incorporating the Sample Information......Page 237
Incorporating the Nonsample, Game-Theoretic Information......Page 241
The GME-Nash Estimator: Hypothesis Testing......Page 243
SUMMARY......Page 246
APPENDIX 9A: PROOF THAT THE GME-NASH ESTIMATOR IS CONSISTENT......Page 247
PROBLEMS......Page 248
AIRLINES GAME......Page 249
Airlines Model......Page 250
Estimates......Page 251
Comparing Estimators......Page 255
Hypothesis Tests......Page 257
Sampling and Sensitivity Experiments......Page 259
Airlines Summary......Page 260
Cola Model......Page 261
Estimates......Page 263
Basic Statistics and Tests of the Cola Market......Page 266
Effects of the Exogenous Variables......Page 271
SUMMARY......Page 273
APPENDIX 10A: EXPECTED LERNER MEASURE......Page 274
ESTIMATING ILL-POSED PROBLEMS......Page 277
Information......Page 278
Maximum Entropy Principle......Page 279
GENERALIZED MAXIMUM ENTROPY MODEL......Page 280
Extensions......Page 283
Inference and Diagnostics......Page 284
Empirical Examples for the Linear Model......Page 285
Maximum Likelihood Approach......Page 287
GME Approach......Page 290
EMPIRICAL LIKELIHOOD, GENERALIZED METHOD OF MOMENTS, AND BAYESIAN METHOD OF MOMENTS MODELS......Page 293
Empirical Likelihood Formulation......Page 294
Discussion......Page 299
Bayesian Method of Moments......Page 300
SUMMARY......Page 301
Bibliography......Page 303
Answers......Page 317
Index......Page 339

Half-title 3
Title 5
Copyright 6
Dedication 7
Contents 8
Foreword 13
ONE Introduction and Overview 15
THREE MAIN QUESTIONS 15
STRUCTURE–CONDUCT–PERFORMANCE 17
STATIC MODELS 19
DYNAMICS 21
STRATEGIES 25
TWO Structure–Conduct–Performance 27
MEASURES OF MARKET PERFORMANCE 28
RATE OF RETURN 28
Price–Cost Margins 32
Tobin’s q 33
MEASURES OF MARKET STRUCTURE 33
Firm Size Distribution 34
Concentration Measures 34
Concentration Statistics 34
Problems with Using Concentration Measures 36
Summary Statistic Biases 37
Barriers to Entry 38
Unionization 39
THE RELATIONSHIP OF STRUCTURE TO PERFORMANCE 39
Rates of Return and Industry Structure 39
Price–Cost Margins and Industry Structure 41
Price–Average Cost Margins 41
Price–Marginal Cost Margins 42
Other Explanatory Variables 44
International Studies of Performance and Structure 44
Performance and Structure in Individual Industries 45
Measurement and Statistical Problems 45
Conceptual Problems 46
A MODERN STRUCTURE–CONDUCT–PERFORMANCE APPROACH 48
Theory 48
Exogenous Sunk Cost 49
Endogenous Sunk Costs 51
Empirical Research 53
SUMMARY 54
PROBLEMS 54
THREE Industry Models of Market Power 56
STRUCTURAL APPROACH 57
Interpretations of λ 59
Identification 61
Estimation and Hypothesis Tests 64
Taxes: An Application 65
NONPARAMETRIC AND REDUCED-FORM MODELS 67
Comparative Statics 67
Hall’s Reduced-Form Approach 69
OLIGOPSONY 72
Structural Oligopsony Model 72
Hall’s Reduced-Form Oligopsony Model 73
HOW WELL THESE METHODS WORK 73
Tests Based on Cost Evidence 74
Oligopoly Simulations 74
Structural Model 76
Hall’s Reduced-Form Model 79
Empirical Comparisons 83
SUMMARY 84
PROBLEMS 86
FOUR Differentiated-Product Structural Models 88
RESIDUAL DEMAND 89
NEOCLASSICAL DEMAND SYSTEM 91
Multilevel Demand Specifications 91
An Almost Ideal Demand System Example 92
Estimation 94
Identification 94
Instruments 95
Hypothesis Tests 96
RANDOM PARAMETER MODEL 97
Linear Random Utility Model 97
Estimating the Random-Parameter Model 100
Market Power 103
PROBLEMS 105
FIVE Strategic Reasons for a Dynamic Estimation Model 107
SUPERGAMES 108
EMPIRICAL IMPLICATIONS 112
MODELS OF REPEATED GAMES WITH TRIGGER STRATEGIES 113
MODELS OF REPEATED GAMES WITH CONTINUOUS STRATEGIES 118
SUMMARY 122
PROBLEMS 123
SIX Dynamic Games Involving Economic Fundamentals 127
FUNDAMENTAL REASONS FOR DYNAMICS 128
Production Fundamentals 128
Demand Fundamentals 130
A DYNAMIC GAME WITH A QUASI-FIXED INPUT 131
OPEN-LOOP RULES 135
Time Consistency of Open-Loop Rules 136
Different Approaches to Obtaining Necessary Conditions 137
SUBGAME PERFECTION AND MARKOV STRATEGIES 139
DIFFERENTIABLE MARKOV PERFECT STRATEGIES 141
A STICKY PRICE MODEL 142
Multiplicity of Equilibria 144
Selecting a Particular Equilibrium 146
COMPARING OPEN-LOOP AND MARKOV EQUILIBRIA 146
MARKOV PERFECT EQUILIBRIA AND CONJECTURAL VARIATIONS 149
EMPIRICAL IMPLICATIONS 150
DIFFERENT WAYS TO INTERPRET OPEN-LOOP EQUILIBRIUM 154
SUMMARY 155
PROBLEMS 156
SEVEN Estimation of Dynamic Games Involving Economic Fundamentals 161
OVERVIEW OF TWO EXAMPLES 161
THE STICKY PRICE MODEL 163
The Dynamic Programming Equation 165
The Euler Equation for a Special Case 166
Other Approaches to Deriving the Euler Equation 167
The Estimation Model 168
The General Model 169
An Additional Assumption about Demand 170
Random Demand Shifters 171
Estimation Using the Dynamic Programming Equation 172
A Related Dynamic Oligopoly Model 176
A DYNAMIC MODEL WITH ADVERTISING 177
The Open-Loop Equilibrium to the Advertising Model 178
The Markov Perfect Equilibrium to the Advertising Model 180
The Hybrid Model 182
ESTIMATION OF MARKOV PERFECT EQUILIBRIA 184
SUMMARY 192
PROBLEMS 193
EIGHT Estimation of Market Power Using a Linear-Quadratic Model 195
ASSUMPTIONS AND DEFINITIONS 196
THE STATIC ANALOG 197
THE DYNAMIC MODEL 198
IMPLICATIONS OF THE LINEAR-QUADRATIC STRUCTURE 199
The Recursive Structure of the Solution 200
The Principle of Certainty Equivalence 201
PROPERTIES OF THE EQUILIBRIA 203
EQUILIBRIUM CONDITIONS USED FOR ESTIMATION 206
Necessary Conditions for the Open-Loop Equilibrium 207
Necessary Conditions for the Markov Perfect Equilibrium 209
Additional Restrictions and Testing 211
EMPIRICAL APPLICATIONS 212
Coffee 212
Rice 213
ESTIMATION RESULTS 214
Classical Estimates 214
Bayesian Estimates 216
Simulations 218
SUMMARY 219
APPENDIX 8A: DERIVATION OF RESTRICTIONS 220
The Markov Perfect Restrictions 221
PROBLEMS 222
NINE Estimating Strategies: Theory 225
RELATED STUDIES 227
MIXED STRATEGIES 231
OLIGOPOLY GAME 233
The Strategies and the Game 233
Econometric Adjustments for the Game 234
THE ESTIMATION MODEL 235
Classical Maximum Entropy Formulation for the Multinomial Problem 236
Incorporating the Sample Information 237
Incorporating the Nonsample, Game-Theoretic Information 241
Properties of the Estimators 243
The GME-Nash Estimator: Hypothesis Testing 243
SUMMARY 246
APPENDIX 9A: PROOF THAT THE GME-NASH ESTIMATOR IS CONSISTENT 247
PROBLEMS 248
TEN Estimating Strategies: Case Studies 249
AIRLINES GAME 249
Airlines Model 250
Estimates 251
Comparing Estimators 255
Hypothesis Tests 257
Sampling and Sensitivity Experiments 259
Airlines Summary 260
COLA GAME 261
Cola Model 261
Estimates 263
Basic Statistics and Tests of the Cola Market 266
Lerner Measures of Market Power 271
Effects of the Exogenous Variables 271
Cola Summary 273
SUMMARY 273
APPENDIX 10A: EXPECTED LERNER MEASURE 274
STATISTICAL APPENDIX New Econometric Methods 277
ESTIMATING ILL-POSED PROBLEMS 277
Information 278
Maximum Entropy Principle 279
GENERALIZED MAXIMUM ENTROPY MODEL 280
Extensions 283
Inference and Diagnostics 284
Empirical Examples for the Linear Model 285
Discrete Choice Problem 287
Maximum Likelihood Approach 287
GME Approach 290
EMPIRICAL LIKELIHOOD, GENERALIZED METHOD OF MOMENTS, AND BAYESIAN METHOD OF MOMENTS MODELS 293
Empirical Likelihood Formulation 294
Linear Example 299
Discussion 299
Bayesian Method of Moments 300
SUMMARY 301
Bibliography 303
Answers 317
Index 339

From the town of Comfort in the Central Hill Country of Texas to the Gulf Coast of Texas, in 1971, four boys, ages 17 and 15, set out in two canoes to travel via the Guadalupe River 500 miles to the Gulf. Parents had given their consent and met them every Sunday. Two boys, kept daily jounals and one took 80 pictures. Their adventure took them over a huge Canyon Lake -- showing whitecaps -- an encounter with an attacking granddaddy cottonmouth moccasin -- a six inch rainfall -- and logjams. The book concludes with brief biographies of the three remaining adventurers, (now successful buisnessmen) and one is a scientist at Texas A & M and also includes perspectives of how they view their daring odessey from today's vantage point. It is dedicated to all teenage boys who not only dream dreams of adventure, but are lucky enough to follow them and live to tell the story

2011-02-23