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Competitive analysis using a flexible demand specification

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  • Jerry A. Hausman
  • Gregory K. Leonard

Abstract

Econometric methods can be helpful when one is trying to understand the nature of competition between products in differentiated products industries, an issue that arises in many competition policy contexts. However, misspecification of the consumer demand system can result in biased econometric results and misleading conclusions. We discuss some considerations that go into choosing a demand system specification and suggest that a ‘flexible functional form’ be used. This approach avoids placing restrictions on the demand elasticities. We identify and discuss other issues that arise in the estimation of demand systems. We conclude with an empirical example concerning the calculation of lost profits damages in a patent infringement case. This example demonstrates how using a flexible functional form leads to a substantially more reliable damages calculation than using the particular restrictive functional form that is commonly used to calculate lost profits damages in patent litigation.

Suggested Citation

  • Jerry A. Hausman & Gregory K. Leonard, 2005. "Competitive analysis using a flexible demand specification," Journal of Competition Law and Economics, Oxford University Press, vol. 1(2), pages 279-301.
    • Handle: RePEc:oup:jcomle:v:1:y:2005:i:2:p:279-301.
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    File URL: http://hdl.handle.net/10.1093/joclec/nhi008
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    Citations

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    Cited by:

    1. Lindström, Hanna, 2021. "The Swedish consumer market for organic and conventional milk: A demand system analysis," HFI Working Papers 21, Institute of Retail Economics (Handelns Forskningsinstitut).
    2. Bokhari, Farasat A.S. & Mariuzzo, Franco, 2018. "Demand estimation and merger simulations for drugs: Logits v. AIDS," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 653-685.
    3. Hausman, Jerry A. & Leonard, Gregory K., 2007. "Estimation of patent licensing value using a flexible demand specification," Journal of Econometrics, Elsevier, vol. 139(2), pages 242-258, August.
    4. Javier García-Enríquez & Cruz A. Echevarría, 2018. "Demand for culture in Spain and the 2012 VAT rise," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 42(3), pages 469-506, August.
    5. Jerry Hausman & Gregory K. Leonard, 2006. "Real Options And Patent Damages: The Legal Treatment Of Non‐Infringing Alternatives, And Incentives To Innovate," Journal of Economic Surveys, Wiley Blackwell, vol. 20(4), pages 493-512, September.
    6. Javier García-Enríquez & Cruz A. Echevarría, 2016. "Consistent Estimation of a Censored Demand System and Welfare Analysis: The 2012 VAT Reform in Spain," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(2), pages 324-347, June.
    7. Farasat A. S. Bokhari & Gary M. Fournier, 2013. "Entry in the ADHD drugs market: Welfare impact of generics and me-too's," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 339-392, June.
    8. Sreya Kolay & Rajeev K. Tyagi, 2018. "Product Similarity and Cross-Price Elasticity," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(1), pages 85-100, February.
    9. Ryo Sakamoto & Kyle Stiegert, 2018. "Comparing competitive toughness to benchmark outcomes in retail oligopoly pricing," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 44-60, December.
    10. Inge Geyskens & Barbara Deleersnyder & Marnik G. Dekimpe & Didi Lin, 2024. "Do consumers benefit from national-brand listings by hard discounters?," Journal of the Academy of Marketing Science, Springer, vol. 52(1), pages 97-118, January.
    11. Dai, Yingchun & Tuan, Francis C. & Lin, William W. & Zhong, Funing & Chen, Xi, 2006. "How does Biotech Labeling Affect Consumers' Purchasing Behavior? A Case Study of Vegetable Oils in Nanjing, China," 2006 Annual meeting, July 23-26, Long Beach, CA 21235, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Hanna Lindström, 2022. "The Swedish consumer market for organic and conventional milk: A demand system analysis," Agribusiness, John Wiley & Sons, Ltd., vol. 38(3), pages 505-532, July.
    13. Lindström, Hanna, 2021. "The Swedish consumer market for organic and conventional milk: A demand system analysis," Umeå Economic Studies 998, Umeå University, Department of Economics.

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