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Testing for Monopoly Power when Products are Differentiated in Quality

Listed author(s):
  • Frank Verboben
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    This paper proposes a reduced form approach to identify the presence of monopoly power in oligopolies characterized by vertical product differentiation. In a fairly general model I derive an explicit solution for the reduced form pricing equations under the hypothesis that firms behave collusively. The central comparative statics result states that a product's price depends only on its own quality and not on the quality of its competitors. I propose econometric tests implied by this result, requiring only the data used in popular hedonic studies (prices and physical characteristics). The tests are applied to the market for spreadsheets in the U.S. (1986-1991) and to the market for "engine variants" in the 1990 French car market. The empirical results are encouraging, because they are consistent with some a priori evidence on these industries. Nevertheless, to widen to the scope for economic applications, some further generalizations of the model are called for. ZUSAMMENFASSUNG - (Überprüfung der Monopolmacht bei qualitativ differenzierten Produkten) In dem Beitrag wird ein reduzierter Gleichungsansatz vorgeschlagen, um Monopolmacht auf Oligopolmärkten mit vertikaler Produktdifferenzierung festzustellen. In einem ziemlich allgemeinen Modell wird die explizite Lösung für die reduzierte Form der Preisgleichung unter der Hypothese abgeleitet, daß die Unternehmen sich kollusiv verhalten. Das zentrale komparativ-statische Ergebnis besagt, daß der Produktpreis nur von der eigenen Qualität und nicht der Qualität der Konkurrenten abhängt. Es wird ein ökonometrischer Test vorgeschlagen, der dieses Ergebnis berücksichtigt und sich nur auf Daten stützt, die in üblichen hedonistischen Untersuchungen mit Preisen und Produktmerkmalen verwendet werden. Der Test wird auf den Markt für Tabellenkalkulations-Programme in den USA (1986-1991) angewendet und auf den Markt für "Motorvarianten" als Teilmarkt des französischen Automobilmarkts (1990). Die empirischen Ergebnisse sind vielversprechend, weil sie mit a priori Annahmen über diese Industriezweige konsistent sind. Dennoch erscheint ein gewisse Verallgemeinerung des Modells angebracht zu sein, um sein ökonomisches Anwendungsspektrum zu erweitern.

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    Paper provided by Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) in its series CIG Working Papers with number FS IV 97-02.

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    Length: 26 pages
    Date of creation: Jan 1997
    Publication status: Published in the Manchester School , Vol. 70(1), January 2002, pp. 115-133.
    Handle: RePEc:wzb:wzebiv:fsiv97-2
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    1. Neil Gandal, 1994. "Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 160-170, Spring.
    2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    3. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    4. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    5. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    6. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
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