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

Author

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  • Christopher Knittel
  • Dae-Wook Kim

    (Department of Economics, University of California Davis)

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 devia- tions from marginal cost pricing. Beginning with Gollop and Roberts (1979), a number of empirical studies identify industry competition and marginal cost levels by estimat- ing the ?rms??rst 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 conjec- tural 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

Suggested Citation

  • Christopher Knittel & Dae-Wook Kim, 2005. "Biases in Static Oligopoly Models?:Evidence from the California Electricity Market," Working Papers 526, University of California, Davis, Department of Economics.
  • Handle: RePEc:cda:wpaper:05-26
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Carlo Russo, 2012. "Estimating Market Power with Weak A Priori Information: An Exploratory Approach to the Model-Specification Problem," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(4), pages 339-354, June.
    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.
    3. Abhik Roy & Jagmohan Raju, 2011. "The influence of demand factors on dynamic competitive pricing strategy: An empirical study," Marketing Letters, Springer, vol. 22(3), pages 259-281, September.
    4. Rodrigo Zeidan & Marcelo Resende, 2009. "Measuring Market Conduct in the Brazilian Cement Industry: A Dynamic Econometric Investigation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(3), pages 231-244, May.
    5. Ramteen Sioshansi & Shmuel Oren, 2007. "How good are supply function equilibrium models: an empirical analysis of the ERCOT balancing market," Journal of Regulatory Economics, Springer, vol. 31(1), pages 1-35, February.
    6. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc.
    7. Unknown, 2005. "Antitrust Analysis of Supermarket Retailing: Common Global Concerns that Play Out in Local Markets," 2005 Conference (49th), February 9-11, 2005, Coff's Harbour, Australia 137831, Australian Agricultural and Resource Economics Society.
    8. Cotterill, Ronald W., 2006. "Antitrust analysis of supermarkets: global concerns playing out in local markets," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 0(Issue 1), pages 1-16, March.

    More about this item

    Keywords

    oligopoly models;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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