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Incorporating Flexible Demand Systems in Empirical Models of Market Power

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  • Peterson, Everett B.
  • Cotterill, Ronald W.

Abstract

Measuring the degree of price coordination between firms in a differentiated products industry is particularly challenging because it is necessary to utilize a demand system that is sufficiently flexible, allows the imposition of theoretical restrictions, and allow for the derivation of the functional form of the corresponding price reaction functions. Previous research has relied on restrictive demand systems in order to maintain the tractability of the price reaction functions. The purpose of this paper is determine whether using more flexible demand systems can yield a set of first-order profit maximization conditions that are mathematically tractable and amendable to estimation. The demand systems considered are the Almost Ideal Demand System (AIDS), the Linear Approximate Almost Ideal Demand System (LAIDS), and the Rotterdam demand system. This paper also expands prior work on estimating brand level demand elasticities by endogenizing category level expenditures in the context of a weakly separable demand system. This yields some new and interesting insights for the measurement of market power in differentiated product industries. We show that while it is not possible to derive explicit price reaction functions for any of these demand systems, given certain assumptions, the Rotterdam demand system does yield an explicit set of profit maximization first-order conditions that can be estimated.

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Bibliographic Info

Paper provided by University of Connecticut, Food Marketing Policy Center in its series Research Reports with number 25159.

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Date of creation: 1998
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Handle: RePEc:ags:uconnr:25159

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Keywords: Demand and Price Analysis;

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  1. Connor, John M. & Peterson, Everett B., 1991. "Market-Structure Determinants Of National Brand-Private Label Price Differences Of Manufactured Food Products," Working Papers 116099, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance.
  2. Frank Asche & Cathy R. Wessells, 1997. "On Price Indices in the Almost Ideal Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1182-1185.
  3. Capps, Oral, Jr. & Tsai, Reyfong & Kirby, Raymond & Williams, Gary W., 1994. "A Comparison Of Demands For Meat Products In The Pacific Rim Region," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(01), July.
  4. Golan, Amos & Judge, George G. & Miller, Douglas, 1996. "Maximum Entropy Econometrics," Staff General Research Papers 1488, Iowa State University, Department of Economics.
  5. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
  6. Brown, Mark G. & Behr, Robert M. & Lee, Jonq-Ying, 1994. "Conditional Demand And Endogeneity? A Case Study Of Demand For Juice Products," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(01), July.
  7. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  8. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248 National Bureau of Economic Research, Inc.
  9. Chalfant, James A, 1987. "A Globally Flexible, Almost Ideal Demand System," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 233-42, April.
  10. LaFrance, Jeffrey T., 1991. "When Is Expenditure "Exogenous" In Separable Demand Models?," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 16(01), July.
  11. Moschini, GianCarlo, 1995. "Units of Measurement and the 'Stone Index' In Demand System Estimation," Staff General Research Papers 5058, Iowa State University, Department of Economics.
  12. Cotterill, Ronald W & Putsis, William P, Jr & Dhar, Ravi, 2000. "Assessing the Competitive Interaction between Private Labels and National Brands," The Journal of Business, University of Chicago Press, vol. 73(1), pages 109-37, January.
  13. Haller, Lawrence E. & Cotterill, Ronald W., 1996. "Evaluating Traditional Share-Price and Residual Demand Measures of Market Power in the Catsup Industry," Research Reports 25193, University of Connecticut, Food Marketing Policy Center.
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Cited by:
  1. Regorsek, Darja & Erjavec, Emil, 2007. "Food Demand in Slovenia," 103rd Seminar, April 23-25, 2007, Barcelona, Spain 9409, European Association of Agricultural Economists.
  2. Francesco Torrisi & Gianluca Stefani & Chiara Seghieri, 2006. "Use of scanner data to analyze the table wine demand in the Italian major retailing trade," Agribusiness, John Wiley & Sons, Ltd., vol. 22(3), pages 391-403.

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