Timothy F. Bresnahan

Empirical studies of industries with market power

Publisher Summary This chapter describes the econometric studies of market power in single markets and in groups of related markets. The recent increase in the number of such studies and substantial advances in the methods for carrying them out constitute a dramatic shift in the focus of empirical work in the industrial organization (IO) field. The chapter discusses time series data from single industries or on data from closely related markets. The new empirical industrial organization (NEIO) is clearly somewhat different than the previously dominant empirical method in the field, the structure–conduct–performance paradigm (SCPP). The chapter presents the formation and enforcement of tacitly collusive arrangements, the nature of noncooperative oligopoly interaction in the world, the degree of single-firm market power under product differentiation, and the size and determinants of the industry price-cost margin. It reviews the various empirical models of monopoly power and of oligopoly interaction and describes the theoretical and empirical arguments for why it is monopoly power that is being measured.

Entry And Competition In Concentrated Markets

This paper proposes an empirical framework for measuring the effects of entry in concentrated markets. Building on models of entry in atomistically competitive markets, we show how the number of producers in an oligopolistic market varies with changes in demand and market competition. These analytical results structure our empirical analysis of competition in five retail and professional industries. Using data on geographically isolated monopolies, duopolies, and oligopolies, we study the relationship between the number of firms in a market, market size, and competition. Our empirical results suggest that competitive conduct changes quickly as the number of incumbents increases. In markets with five or fewer incumbents, almost all variation in competitive conduct occurs with the entry of the second or third firm. Surprisingly, once the market has between three and five firms, the next entrant has little effect on competitive conduct.

The oligopoly solution concept is identified

Oligopoly theory predicts that market price will be at least as high as the competitive price and no higher than the monopoly price. Particular oligopoly solution concepts offer more exact predictions, but it is difficult to know which solution concept holds in any real market. This paper shows that the oligopoly solution concept can be estimated econometrically.

Competition and Collusion in the American Automobile Industry: The 1955 Price War

Movements in total quantity and in quality-adjusted price suggest a supply-side shock in the American automobile market in 1955. This paper tests the hypothesis that the shock was a transitory change in industry conduct, a price war. The key ingredients of the test are alternative equilibrium models of oligopoly under product differentiation. In nonnested (Cox) tests of hypotheses, a collusive solution is sustained in 1954 and in 1956, while a competitive solution holds in 1955. The result does not appear to be an artifact, since it is robust in tests against alternative specifications. Copyright 1987 by Blackwell Publishing Ltd.

Computerization and Wage Dispersion: An Analytical Reinterpretation

The United States has recently seen a dramatic rise in income inequality, all the more surprising because the long-term trend had been toward equality. This paper examines one of the leading explanations: computerization in the workplace. I offer a theory of computers? impact on white-collar work which goes far toward explaining the timing, form, and locus of recent labor market changes. The theory looks at the bureaucratic and organizational applications of computers that have been first, largest, and most influential. They have two effects on firms? demand for labor at different skill levels. Computer decisionmaking has been a substitute for human decisionmaking over a limited range of tasks. Low- and middle-skill white collar work has been the most affected. Substitution of computers for high-skill workers has been quite limited. The rising demand for more highly skilled workers is driven by broad changes in the economics of the firm with many causes including computerization. While this theory is in agreement with many recent analyses pointing to computers, the specifics are quite different. Complementarities between computer use and individual workers? skills are not an important component of change. This very different view of the mechanisms of skill biased technical change has new implications for understanding labor markets over the last 25 years, for the policy debate, and for predicting the future evolution of labor demand.

Departures from marginal-cost pricing in the American automobile industry: Estimates for 1977-1978

Abstract How are prices set in the American automobile oligopoly? This paper seeks empirical estimates of the extent of departure from marginal-cost pricing and of the effects of foreign competition. The model estimated has product differentiation, multiproduct firms, and heterogeneity in consumer tastes. The estimation presumes that product type (proxied by engineering specifications) is exogenous to the price/quantity market equilibrium. Cross-section results for the 1977 and 1978 model years yield price-cost margins around 10%. Import competition has the effect of lowering equilibrium margins for compact and subcompact models.

Do Entry Conditions Vary across Markets

THE NUMBER OF FIRMS in a market is a primary determinant of market concentration and performance. In the long run the number of firms is affected by the ease with which they can enter and exit. Many recent theoretical models of entry have emphasized that strategic behavior by incumbents may have an important bearing on the number of firms that enter the market. For instance, these models illustrate how the extent of postentry competition and opportunities for erecting strategic entry barriers might affect the likelihood that another firm will enter a market.1 In contrast to these strategic models, other models of the long-run number of firms emphasize that technological factors, such as economies of scale, determine entry. These theories minimize the importance of strategic behavior in the long run and instead emphasize that highly concentrated industries are simply ones for which few firms will fit given the degree of returns to scale.

Estimating the residual demand curve facing a single firm

This paper presents an econometric technique for estimating the single firm residual demand curve that does not require the estimation of demand cross-elasticities. The technique is particularly suited for the estimation of firm market power in product differentiated industries, where cross-elasticities are notoriously difficult to measure. One estimated parameter is directly related to a firms markup of price over marginal cost when product differentiation is extensive, when an industry consists of a dominant firm and a price-taking fringe, when a Consistent Conjectures Equilibrium is the correct oligopoly solution concept, when firms are Stackelberg leaders relative to their environment, or when firms are perfect competitors. The estimates can indicate power over price in other circumstances. An instrumental variables technique is employed, using firm-individuated factor prices to identify firm-specific residual demand. Yet even when instruments are unavailable, the technique produces elasticity estimates biased in the conservative direction of disproving market power. This methodology is applied to estimate the market power of three firms in an industry characterized by product differentiation: brewing. Over our 1962–82 sample period, Pabst and Coors had similar national market shares and each had high shares in several states. Yet Pabst was virtually a price-taker while Coors possessed substantial market power. Anheuser-Busch had market power in the early part of the sample, but little after 1975 when Miller Brewing changed the competitive nature of the industry.

Dealer and manufacturer margins

When retail dealers carry only one product line, the size of the dealer margin is crucial in the success of both the manufacturer and the dealer. This article proposes a successive monopoly model of patterns in exclusive dealer and manufacturer margins across a product line. The predictions of the model then are compared with the pricing practices of a major U.S. automobile manufacturer and its dealers. The data support a special case of our theory. Our analysis also indicates that we cannot reject the hypothesis that the retail demand curves for these models are (locally) linear. Finally, we use the margin data to provide updated evidence on the extent to which retail prices depart from list price.

Intra-Industry Heterogeneity and the Great Depression: The American Motor Vehicles Industry, 1929–1935

Reliance on a “representative firm†approach in studying industrial behavior during the Great Depression obscures economically interesting patterns. A newly discovered data source lets us form and study an establishment-level panel dataset on the motor vehicles industry, one of the largest in 1929. Substantial intraindustry heterogeneity led to large composition effects in employment, output, and productivity: the large number of plants that shut down were unlike the continuing ones. Oddly, output does not seem to have shifted among continuing producers to the relatively low-cost ones. Reconciling these should illuminate links between industrial organization and macroeconomics.