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Testing for Monopoly Power when Products are Differentiated in Quality

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Author Info

  • Verboven, F.

    (Tilburg University, Center for Economic Research)

Abstract

This paper proposes a reduced form approach toempirically identify the presence of monopoly power in oligopolies characterized by vertical product di erentia-tion. In a fairly general model I derive the reduced form pricing equation under the hypothesis that rms collude by maximizing their joint pro t. A central comparative statics result states that a product's price depends only on its own quality and not on the quality ofits competitors. I propose simple tests implied by this result, requiring data only on the prices and the physical characteristics of the products. The tests are applied to the market for spreadsheets inthe US (1986-1991) and to the market for `engine variants' in the 1990 French car market. The empirical results are promising, but also indicate the need for further generalizations of the model.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-70.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:199570

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Web page: http://center.uvt.nl

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  1. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  2. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  3. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  4. Neil Gandal, 1994. "Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 160-170, Spring.
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Cited by:
  1. Evelyn Vezza, 2004. "Poder de Mercado en las Profesiones Autorreguladas: El Desempeño Médico en Argentina," CEDLAS, Working Papers 0016, CEDLAS, Universidad Nacional de La Plata.

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