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Review of Industrial Organization

, Volume 40, Issue 2, pp 131–138 | Cite as

Collinearity in Linear Structural Models of Market Power

  • Jeffrey M. PerloffEmail author
  • Edward Z. Shen
Article

Abstract

The well-known structural model used to estimate market power suffers from a severe collinearity problem if both the marginal cost and demand equations are linear. If the equations hold exactly, the variables are perfectly collinear so the model cannot be estimated. If the true linear model equations hold with errors, one can estimate the equations, but the estimated coefficients are likely to be highly unstable and unreliable due to nearly perfect collinearity.

Keywords

Collinearity Estimation Market power Structural model 

JEL Classification

L13 C1 

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Copyright information

© Springer Science+Business Media, LLC. 2012

Authors and Affiliations

  1. 1.Department of Agricultural and Resource EconomicsUniversity of CaliforniaBerkeleyUSA
  2. 2.China MinSheng BankBeijingChina
  3. 3.Giannini FoundationBerkeleyUSA

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