Tuesday, August 20, 2013
Posted by D. Daniel Sokol
Vardges Hovhannisyan, University of Minnesota, Kyle W. Stiegert, University of Wisconsin-Madison, and Marin Bozic University of Minnesota provide thoughts ON ENDOGENEITY OF RETAIL MARKET POWER IN AN EQUILIBRIUM ANALYSIS: A CONTROL FUNCTION APPROACH.
ABSTRACT: 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 con- ceptual framework with consumer preferences represented by a benet function. We further oer three test procedures to evaluate the endogene- ity 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 evi- dence for market power endogeneity. Moreover, ignoring the issue results in downward bias in retail market power.