ON ENDOGENEITY OF RETAIL MARKET POWER IN AN EQUILIBRIUM ANALYSIS: A CONTROL FUNCTION APPROACH

The endogeneity of retail market power arises in the retail pricing equation due to the correlation between margins and unobserved cost components. Nevertheless, it has long been ignored in the equilibrium analysis of retail behavior. We address the issue via a control function approach in a new conceptual framework with consumer preferences represented by a benefit function. We further offer three test procedures to evaluate the endogeneity of retail market power. The empirical value of the model is illustrated in an application to the US yogurt industry. Outcomes from endogeneity tests provide strong evidence for market power endogeneity. Moreover, ignoring the issue results in downward bias in retail market power.


Issue Date:
2013
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/149830
Total Pages:
34
JEL Codes:
D22; L13




 Record created 2017-04-01, last modified 2017-04-26

Fulltext:
Download fulltext
PDF

Rate this document:

Rate this document:
1
2
3
 
(Not yet reviewed)