IDEAS home Printed from
   My bibliography  Save this paper

Modelling Pricing Behavior with Weak A‐Priori Information: Exploratory Approach


  • Russo, Carlo
  • Sabbatini, Massimo


In the absence of reliable a priori information, choosing the appropriate theoretical model to describe an industry’s behavior is a critical issue for empirical studies about market power. A wrong choice may result in model misspecification and the conclusions of the empirical analysis may be driven by the wrong assumption about the behavioral model. This paper develops a methodology aimed to reduce the risk of misspecification bias. The approach is based on the sequential application of a sliced inverse regression (SIR) and a nonparametric Nadaraya‐Watson regression (NW). The SIR‐NW algorithm identifies the factors affecting pricing behavior in an industry and provides a nonparametric characterization of the function linking these variables to price. This information may be used to guide the choice of the model specification for a parametric estimation of market power. The SIR‐NW algorithm is designed to complement the estimation of structural models of market behavior, rather than to replace it. The value of this methodology for empirical industrial organization studies lies in its data‐driven approach that does not rely on prior knowledge of the industry. The method reverses the usual hypothesis‐testing approach. Instead of first choosing the model based on a priori information and then testing if it is compatible with the data, the econometrician selects a theoretical model based on the observed data. Thus, the methodology is particularly suited for those cases where the researcher has no a priori information about the behavioral model, or little confidence in the information that is available .

Suggested Citation

  • Russo, Carlo & Sabbatini, Massimo, 2010. "Modelling Pricing Behavior with Weak A‐Priori Information: Exploratory Approach," 2010 Internatonal European Forum, February 8-12, 2010, Innsbruck-Igls, Austria 100478, International European Forum on Innovation and System Dynamics in Food Networks.
  • Handle: RePEc:ags:iefi10:100478

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Agribusiness; Agricultural and Food Policy; Farm Management; Food Consumption/Nutrition/Food Safety; Research Methods/ Statistical Methods;

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:iefi10:100478. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.