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When Is the “Kennedy Correction” Appropriate in Estimating Overcharges?

In: Healthcare Antitrust, Settlements, and the Federal Trade Commission

Author

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  • Wenqing Li
  • James F. Nieberding

Abstract

In regressions using a semi-logarithmic functional form that include a dummy variable, Kennedy (1981) showed that instead of interpreting the dummy coefficient directly, one needs to “correct” it to estimate the percentage effect of the dummy variable on the dependent variable. In the context of an antitrust application, we show that when using a dummy variable to estimate the overcharge as a percentage of the actual price, one should not apply the correction proposed by Kennedy because doing so will lead to an overcharge estimate with a larger bias.

Suggested Citation

  • Wenqing Li & James F. Nieberding, 2018. "When Is the “Kennedy Correction” Appropriate in Estimating Overcharges?," Research in Law and Economics, in: Healthcare Antitrust, Settlements, and the Federal Trade Commission, volume 28, pages 423-431, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:rlwezz:s0193-589520180000028009
    DOI: 10.1108/S0193-589520180000028009
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    More about this item

    Keywords

    Dummy variable; overcharge; antitrust; bias; reduced-form; collusion; price-fixing; C22; K21; L4;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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