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Estimating Price-Cost Markups Under Nonlinear Pricing Competition

  • Eugenio J. Miravete

    (University of Pennsylvania and CEPR,)

  • Lars-Hendrik Röller

    (WZB and Humboldt University,)

This paper provides a structural interpretation to the estimates of the shape and position of nonlinear tariffs. We focus on the evaluation of price-cost margins, and thus we need to identify marginal cost from an equilibrium model of nonlinear pricing competition. We estimate these price-cost margins using quarterly data from the early U.S. cellular telephone industry between 1984 and 1988. Our results indicate that the margins are increased under duopoly, due to a significant reduction in marginal costs. Moreover, we find that the price-cost margins vary over the consumption levels and that low end users are subject to higher price-cost margins than high-end users. The impact of competition further increases the margins in the low-end user segment, relative to high-end users. In that sense the benefits of competition, which are largely due to increased efficiencies, are passed on relatively more to high-end users. We also show that these findings are robust even if one includes a number of observable market demand and cost variables. (JEL: D43, D82, L96) Copyright (c) 2004 The European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 2-3 (04/05)
Pages: 526-535

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:2-3:p:526-535
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