Abstract
Assumptions of competitive structure are often crucial for marginal cost estimation and counterfactual predictions. This paper introduces tests for price competition among multi-product firms. The tests are based on the firm’s revealed preference (revealed profit function). In contrast to other approaches based on estimated demand functions such as conduct parameter estimation, the proposed tests do not require any instrumental variables, even though the models can accommodate structural error terms. In this paper, I employ a demand structure introduced by Nocke and Schutz (Econometrica 86(2):523–557, 2018. https://doi.org/10.3982/ECTA14720), the discrete/continuous choice model, which nests the multinomial logit demand and CES demand functions. Any price and quantity data can be rationalized by price competition under a discrete/continuous choice model and increasing marginal costs. Adding more assumptions to the demand functions, such as logit, CES, or the co-evolving and log-concave property produces some falsifiable restrictions.
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Acknowledgements
This paper is a revised version of Chapter 1 of the author’s doctoral dissertation. I am grateful to Ichiro Obara for his guidance, and to Volker Nocke for his advice in the early stage of the project. For helpful discussions and suggestions, I thank Rahul Deb, Brett Hollenbeck, Akina Ikudo, Toshihiro Matsumura, Moritz Meyer-ter-Vehn, Susumu Sato, and seminar participants at UCLA and University of Tokyo. I also thank the editor, the accosiate editor, and the anonymous referee for valuable comments. All remaining errors are my own.
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Yasui, Y. Revealed preference tests for price competition in multi-product differentiated markets. Econ Theory 76, 1115–1144 (2023). https://doi.org/10.1007/s00199-023-01487-z
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DOI: https://doi.org/10.1007/s00199-023-01487-z