Abstract
In a previous paper in this Review, Hyde and Perloff ask the question, “Can Market Power be Estimated?” using the “structural model” or two proposed alternatives. They find that none of the three methods produce consistent, meaningful results in the food and beverage industries and that simulations suggest great sensitivity of results to model misspecification. This paper offers an explanation for these disappointing results. The difficulty is that the structural model (and its proposed alternatives) is based on an overly-ambitious estimating form that over-simplifies the diversity and true complexity of oligopoly pricing. By neglecting accounting data on costs and by arbitrarily relying on an assumption that outputs are set by subtracting a constant proportion of the difference between Price and Marginal Revenue, the “structural model” and proposed alternatives try to fit an elegant form to a messy world with predictably disappointing results.
Similar content being viewed by others
References
Bain, Joe S. (1951) ‘Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936–40’, Quarterly Journal of Economics, 65, 293–324.
Baumol, W. J., Panzar, J. C. and Willig, R. D. (1988) Contestable Markets and the Theory of Industry Structure, Revised Edition, Academic Press, San Diego.
Bresnahan, T. F. (1982) ‘The Oligopoly Solution Concept Is Identified’, Economic Letters, 10, 87–92.
Bresnahan, T. F. (1989) ‘Empirical Studies of Industries with Market Power’, in R., Schmalensee and R. D., Willig (eds.), Handbook of Industrial Organization, North-Holland, Amsterdam.
Carlton, D. W. (1986) ‘The Rigidity of Prices’, American Economic Review, 76(4), 637–58.
Caves, R. E. and Porter, M. E. (1977) ‘From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition’, Quarterly Journal of Economics, 91(2), 241–61.
Domowitz, I., Hubbard, R. G., and Petersen, B. C. (1986) ‘Business Cycles and the Relationship Between Concentration and Price-Cost Margins’, Rand Journal of Economics, 17, 1–17.
Geroski, P., Gilbert, R. J. and Jacquemin, A. (1990) Barriers to Entry and Strategic Competition, Harwood Academic Publishers, Chur.
Hyde, C. E. and Perloff, J. M. (1995) ‘Can Market Power Be Estimated?’ Review of Industrial Organization.
Kahn, J. A. (1992) ‘Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout Avoidance Motive for Inventory Holding’, Quarterly Journal of Economics, 107(2), 481–510.
Lau, L. J. (1982) ‘On Identifying the Degree of Competitiveness from Industry Price and Output Data’, Economic Letters 10, 93–99.
Machlup, F. (March, 1967) ‘Theories of the Firm: Marginalist, Behavioral, Managerial’, American Economic Review, 1–33.
Mason, E. S. (1957) Economic Concentration and the Monopoly Problem, Harvard University Press, Cambridge.
Scherer, F. M. and Ross, D. (1990) Industrial Market Structure and Economic Performance: Third Edition, Houghton Mifflin Co, Boston.
Scherer, F. M. (ed.) (1993) Monopoly and Competition Policy, Elgar Reference Collection, Aldershot, U.K.
Shepherd, W. G.: (1972) ‘The Elements of Market Structure’, Review of Economics and Statistics, 54, 25–37.
Williamson, O. E. (1989) ‘Transactions Cost Economics’, in R., Schmalensee and R. D., Willig (eds.), Handbook of Industrial Organization, North-Holland, Amsterdam.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Boyer, K.D. Can market power really be estimated?. Rev Ind Organ 11, 115–124 (1996). https://doi.org/10.1007/BF00163602
Issue Date:
DOI: https://doi.org/10.1007/BF00163602