Estimation of competitive conduct when firms are efficiently colluding: addressing the Corts critique

Abstract

I address a recent critique by Corts (1999) who finds that traditional approaches in New Empirical Industrial Organization to estimate the competitive conduct in an oligopoly market can yield inconsistent estimates of the conduct parameter if firms are engaged in efficient collusion. This article derives a general empirical model that allows consistent estimation of the conduct parameter that is robust to efficient collusion.

Acknowledgment

I thank Severin Borenstein, James Bushnell, Greg Crawford, Richard Gilbert, Bronwyn Hall, Erin Mansur, Aviv Nevo, and Catherine Wolfram for their helpful comments.

Notes

¹ For empirical evaluations of the Corts critique, see Genesove and Mullin (1998), Wolfram (1999), Clay and Troesken (2003) and Kim and Knittel (2006).

² Note that if one wanted to generalize the model to asymmetric firms, then a single fixed effect for each time period still would suffice; only one firm has a binding incentive compatibility constraint in equilibrium. However, modelling the sharing rule under asymmetric costs adds complications, so I simplify by assuming symmetry.