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Estimating Firm-Specific Market Power: A Composed Error Term Approach

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  • Orea, Luis

Abstract

Measuring the degree of competition in oligopolistic markets is a key activity in empirical industrial organization. Earlier studies focused on estimating conduct parameters imposed some structure on the way the conduct parameter varies across firms and time. We bring market power and efficiency literatures together by treating firms’ behaviour as an asymmetric random parameter, which allows estimating firm-specific and time-varying market power even when no panel data is available. We show that different oligopolistic equilibrium outcomes are associated to different types of skewness of the conduct random term. Hence, analyzing the skewness of the conduct random term not only allows us to identify collusive and competitive (maverick) firms, but also it provides useful information about the nature of the competition among firms in a particular market.

Suggested Citation

  • Orea, Luis, 2007. "Estimating Firm-Specific Market Power: A Composed Error Term Approach," Efficiency Series Papers 2007/02, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    • Handle: RePEc:oeg:wpaper:2007/02
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