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Testing for 'Monopoly' Market Power When Products Are Differentiated in Quality

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  • Verboven, Frank

Abstract

This paper proposes a reduced form approach to identify the presence of "monopoly" market power in markets with vertical product differentiation. In a general model I derive an explicit solution for the reduced form pricing equations under the hypothesis that prices are set to maximize the joint profits of all products. The central comparative statics result states that each product's price depends only on its own quality and not on the quality of its competitors. This contrasts with the solution under Bertrand-Nash behaviour and thus provides an identification argument for conduct under vertical product differentiation. I propose empirical tests implied by this result. They require only the data used in popular hedonic studies (prices and physical characteristics). The tests are applied to the US market for spreadsheets and to the French market for optional car engines. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 70 (2002)
Issue (Month): 1 (January)
Pages: 115-33

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Handle: RePEc:bla:manchs:v:70:y:2002:i:1:p:115-33

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Cited by:
  1. Wolfgang Sofka & Joerg Zimmermann, 2007. "Regional Dimensions of Liability of Foreignness: Between a Rock and a Hard Place?," Jena Economic Research Papers 2007-023, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Ulrich Kaiser & Wolfgang Sofka, 2007. "The Pulse of Liability of Foreignness: Dynamic Legitimacy and Experience Effects in the German Car Market," CIE Discussion Papers 2007-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  3. Sofka, Wolfgang & Zimmermann, Jörg, 2005. "There's no Place Like Home: A Strategic Framework to Overcome Liability of Foreignness in the German Car Market," ZEW Discussion Papers 05-84, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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