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Incorporating Flexible Demand Systems in Empirical Models of Market Power

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  • Everett B. Peterson
  • Ronald W. Cotterill

Abstract

Measuring the degree of price coordination between firms in a differentiated products industry is particularly challenging because it is necessary to utilize a demand system that is sufficiently flexible, allows the imposition of theoretical restrictions, and allow for the derivation of the functional form of the corresponding price reaction functions. Previous research has relied on restrictive demand systems in order to maintain the tractability of the price reaction functions. The purpose of this paper is determine whether using more flexible demand systems can yield a set of first-order profit maximization conditions that are mathematically tractable and amendable to estimation. The demand systems considered are the Almost Ideal Demand System (AIDS), the Linear Approximate Almost Ideal Demand System (LAIDS), and the Rotterdam demand system. This paper also expands prior work on estimating brand level demand elasticities by endogenizing category level expenditures in the context of a weakly separable demand system. This yields some new and interesting insights for the measurement of market power in differentiated product industries. We show that while it is not possible to derive explicit price reaction functions for any of these demand systems, given certain assumptions, the Rotterdam demand system does yield an explicit set of profit maximization first-order conditions that can be estimated.

Suggested Citation

  • Everett B. Peterson & Ronald W. Cotterill, 1998. "Incorporating Flexible Demand Systems in Empirical Models of Market Power," Food Marketing Policy Center Research Reports 043, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  • Handle: RePEc:zwi:fpcrep:043
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    File URL: http://fmpc.uconn.edu/publications/rr/rr43.pdf
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    References listed on IDEAS

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    1. Cotterill, Ronald W & Putsis, William P, Jr & Dhar, Ravi, 2000. "Assessing the Competitive Interaction between Private Labels and National Brands," The Journal of Business, University of Chicago Press, vol. 73(1), pages 109-137, January.
    2. Capps, Oral, Jr. & Tsai, Reyfong & Kirby, Raymond & Williams, Gary W., 1994. "A Comparison Of Demands For Meat Products In The Pacific Rim Region," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(01), July.
    3. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters,in: The Economics of New Goods, pages 207-248 National Bureau of Economic Research, Inc.
    4. Connor, John M & Peterson, Everett B, 1992. "Market-Structure Determinants of National Brand-Private Label Price Differences of Manufactured Food Products," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 157-171, June.
    5. Golan, Amos & Judge, George G. & Miller, Douglas, 1996. "Maximum Entropy Econometrics," Staff General Research Papers Archive 1488, Iowa State University, Department of Economics.
    6. Frank Asche & Cathy R. Wessells, 1997. "On Price Indices in the Almost Ideal Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1182-1185.
    7. Giancarlo Moschini, 1995. "Units of Measurement and the Stone Index in Demand System Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 63-68.
    8. Chalfant, James A, 1987. "A Globally Flexible, Almost Ideal Demand System," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 233-242, April.
    9. Adolf Buse, 1994. "Evaluating the Linearized Almost Ideal Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(4), pages 781-793.
    10. Lawrence E. Haller & Ronald W. Cotterill, 1996. "Evaluating Traditional Share-Price and Residual Demand Measures of Market Power in the Catsup Industry," Food Marketing Policy Center Research Reports 031, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    11. Brown, Mark G. & Behr, Robert M. & Lee, Jonq-Ying, 1994. "Conditional Demand And Endogeneity? A Case Study Of Demand For Juice Products," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(01), July.
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    Cited by:

    1. Francesco Torrisi & Gianluca Stefani & Chiara Seghieri, 2006. "Use of scanner data to analyze the table wine demand in the Italian major retailing trade," Agribusiness, John Wiley & Sons, Ltd., vol. 22(3), pages 391-403.
    2. Reimer Jeffrey J, 2004. "Market Conduct in the U.S. Ready-to-Eat Cereal Industry," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 2(1), pages 1-29, November.
    3. Regorsek, Darla & Erjavec, Emil & Pfajfar, Lovrenc, 2005. "Food Demand in Slovenia," 2005 Conference: Slovenia in the EU – challenges for Agriculture, Food Science and Rural Affairs, November 10-11, 2005, Moravske Toplice, Slovenia 183782, Slovenian Association of Agricultural Economists (DAES).

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    Keywords

    Demand and Price Analysis;

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