Econometric issues related to identification of the market power parameter

Abstract

This study demonstrates the crucial role the specification of the cost function plays in identifying the market power parameter in autarky models. For constant marginal cost or marginal cost with quantity interacting with input prices, the market power parameter in autarky models in identified without a rotation of the demand curve. If a comodity is sold in both domestic and foreign markets, the market power parameters are identified regardless of the specific form of the marginal cost and demand specifications.

Keywords:

• conjectural elasticities
• identification
• market power
• trade

JEL Clasification:

• L11
• L13

View correction statement:

Erratum

Acknowledgements

We gratefully acknowledge the constructive comments of anonymous reviewers. This study was supported by the Agricultural food Research Initiative of the National Institute of Food and agriculture Grant No. 2010-65400-20431.

Notes

1.  In Equation 2, under monopoly , the demand flexibility dictates the degree of market power; under oligopoly Cournot competition, the markup depends on the firm’s market share and the demand flexibility; and under perfect competition , marginal cost pricing prevails.

2.  Sexton et al. (2007) provide a comprehensive review of studies related to market power estimation.