The book shows economists how to estimate the ability of firms to raise their prices above their costs and how to estimate firms' strategies. It is designed for graduate students, researchers, and practitioners. It can be used as a textbook or as a guide to conducting research. Foreword xi 1 Introduction and Overview 1 Three Main Questions 1 Structure Conduct Performance 3 Static Models 5 Dynamics 7 Strategies 11 2 Structure Conduct Performance 13 Measures of Market Performance 14 Rate of Return 14 Price Cost Margins 18 Tobin's q 19 Measures of Market Structure 19 Firm Size Distribution 20 Concentration Measures 20 Concentration Statistics 20 Problems with Using Concentration Measures 22 Summary Statistic Biases 23 Barriers to Entry 24 Unionization 25 The Relationship of Structure to Performance 25 Rates of Return and Industry Structure 25 Price Cost Margins and Industry Structure 27 Price-Average Cost Margins 27 Price-Marginal Cost Margins 28 Other-Explanatory Variables 30 International Studies of Performance and Structure 30 Performance and Structure in Individual Industries 31 Measurement and Statistical Problems 31 Conceptual Problems 32 A Modern Structure Conduct Performance Approach 34 Theory 34 Exogenous Sunk Cost 35 Endogenous Sunk Costs 37 Empirical Research 39 Summary 40 Problems 40 3 Industry Models of Market Power 42 Structural Approach 43 Interpretations of ? 45 Identification 47 Estimation and Hypothesis Tests 50 Taxes: An Application 51 Nonparametric and Reduced-Form Models 53 Comparative Statics 53 Hall's Reduced-Form Approach 55 Oligopsony 58 Structural Oligopsony Model 58 Hall's Reduced-Form Oligopsony Model 59 How Well These Methods Work 59 Tests Based on Cost Evidence 60 Oligopoly Simulations 60 Structural Model 62 Hall's Reduced-Form Model 65 Empirical Comparisons 69 Summary 70 Problems 72 4 Differentiated-Product Structural Models 74 Residual Demand 75 Neoclassical Demand System 77 Multilevel Demand Specifications 77 An Almost Ideal Demand System Example 78 Estimation 80 Identification 80 Instruments 81 Hypothesis Tests 82 Random Parameter Model 83 Linear Random Utility Model 83 Estimating the Random-Parameter Model 86 Market Power 89 Summary 91 Problems 91 5 Strategic Reasons for a Dynamic Estimation Model 93 Supergames 94 Empirical Implications 98 Models of Repeated Games with Trigger Strategies 99 Models of Repeated Games with Continuous Strategies 104 Summary 108 Problems 109 6 Dynamic Games Involving Economic Fundamentals 113 Fundamental Reasons for Dynamics 114 Production Fundamentals 114 Demand Fundamentals 116 A Dynamic Game with a Quasi-Fixed Input 117 Open-Loop Rules 121 Time Consistency of Open-Loop Rules 122 Different Approaches to Obtaining Necessary Conditions 123 Subgame Perfection and Markov Strategies 125 Differentiable Markov Perfect Strategies 127 A Sticky Price Model 128 Multiplicity of Equilibria 130 Selecting a Particular Equilibrium 132 Comparing Open-Loop and Markov Equilibria 132 Markov Perfect Equilibria and Conjectural Variations 135 Empirical Implications 136 Different Ways to Interpret Open-Loop Equilibrium 140 Summary 141 Problems 142 7 Estimation of Dynamic Games Involving Economic Fundamentals 147 Overview of Two Examples 147 The Sticky Price Model 149 The Dynamic Programming Equation 151 The Euler Equal ion for a Special Case 152 Other Approaches to Deriving the Euler Equation 153 The Estimation Model 154 The General Model 155 An Additional Assumption about Demand 156 Demand Shifters 157 Estimation Using the Dynamic Programming Equation 158 A Related Dynamic Oligopoly Model 162 A Dynamic Model with Advertising 163 The Open-Loop Equilibrium to the Advertising Model 164 The Markov Perfect Equilibrium to the Advertising Model 166 The Hybrid Model 168 Estimation of Markov Perfect Equilibria 170 Summary 178 Problems 179 8 Estimation of Market Power Using a Linear-Quadratic Model 181 Assumptions and Definitions 182 The Static Analog 183 The Dynamic Model 184 Implications of the Linear-Quadratic Structure 185 The Recursive Structure of the Solution 186 The Principle of Certainty Equivalence 187 Properties of the Equilibria 189 Equilibrium Conditions Used for Estimation 192 Necessary Conditions for the Open-Loop Equilibrium 193 Necessary Conditions for the Markov Perfect Equilibrium 195 Additional Restrictions and Testing 197 Empirical Applications 198 Coffee 198 Rice 199 Estimation Results 200 Classical Estimates 200 Bayesian Estimates 202 Simulations 204 Summary 205 Appendix 8A: Derivation of Restrictions 206 The Open-Loop Restrictions 206 The Markov Perfect Restrictions 207 Problems 208 9 Estimating Strategies: Theory 211 Related Studies 213 Mixed Strategies 217 Oligopoly Game 219 The Strategies and the Game 219 Econometric Adjustments for the Game 220 The Estimation Model 221 Classical Maximum Entropy Formulation for the Multinomial Problem 222 Incorporating the Sample Information 223 Incorporating the Nonsample, Game-Theoretic Information 227 Properties of the Estimators 229 The GME-Nash Estimator: Hypothesis Testing 229 Summary 232 Appendix 9A: Proof that the GME-Nash Estimator Is Consistent 233 Problems 234 10 Estimating Strategies: Case Studies 235 Airlines Game 235 Airlines Model 236 Estimates 237 Comparing Estimators 241 Hypothesis Tests 243 Sampling and Sensitivity Experiments 245 Airlines Summary 246 Cola Game 247 Cola Model 247 Estimates 249 Basic Statistics and Tests of the Cola Market 252 Lerner Measures of Market Power 257 Effects of the Exogenous Variables 257 Cola Summary 259 Summary 259 Appendix 10A: Expected Lerner Measure 260 Problems 261 Statistical Appendix 263 Bibliography 289 Answers 303 Index 325