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Biases in Static Oligopoly Models? Evidence from the California Electricity Market

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Author Info
Knittel, Christopher (U of California, Davis)
Kim, Dae-Wook (U of California, Davis)

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Abstract

Estimating market power is often complicated by a lack of reliable marginal cost data. Instead, policy-makers often rely on summary statistics of the market, thought to be correlated with price cost margins--such as concentration ratios or the HHI. In many industries, these summary statistics may be only weakly correlated with deviations from marginal cost pricing. Beginning with Gollop and Roberts (1979), a number of empirical studies identify industry competition and marginal cost levels by estimating the firms' first order condition within a conjectural variations framework. Despite the prevalence of such "New Empirical Industrial Organization" (NEIO) studies, Corts (1999) illustrates the estimated mark-ups may be biased, since the estimated conjectural variations model forces the supply relationship to be a ray through the marginal cost intercept, whereas this need not be true in dynamic games. In this paper, we use direct measures of marginal cost for the California electricity market to measure the extent to which estimated mark-ups and marginal costs are biased. Our results suggest that the NEIO technique poorly estimates mark-ups and the sensitivity of marginal cost to cost shifters.

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Paper provided by University of California at Davis, Department of Economics in its series Working Papers with number 05-26.

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Date of creation: Sep 2005
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Handle: RePEc:ecl:ucdeco:05-26

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Cotterill, Ronald W., 2005. "Antitrust Analysis of Supermarket Retailing: Common Global Concerns that Play Out in Local Markets," Research Reports 25184, University of Connecticut, Food Marketing Policy Center. [Downloadable!]
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