ESTIMATING MARKET POWER IN HOMOGENOUS PRODUCT MARKETS USING A COMPOSED ERROR MODEL: APPLICATION TO THE CALIFORNIA ELECTRICITY MARKET

Luis Orea and Jevgenijs Steinbuks

Economic Inquiry, 2018, vol. 56, issue 2, 1296-1321

Abstract: This study proposes a novel econometric approach to estimating market power in homogenous product markets. We use a composed error model to estimate the stochastic part of firms' strategic pricing equation. This part is formed by two random variables: a traditional error term, which captures random shocks, and a random conduct term, which measures the degree of market power. This approach allows for the conduct parameter to vary flexibly across firms and within firms over time, and avoids ad hoc structural restrictions for identifying firms' conduct. The empirical application of our approach is based on a well‐known California wholesale electricity market data set, which has been rigorously used to study market power. Our results suggest that realization of market power varies over both time and firms, and reject the assumption of a common or time‐invariant conduct parameter. (JEL C34, C51, L13, L94)

Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://doi.org/10.1111/ecin.12539

Related works:
Working Paper: Estimating market power in homogenous product markets using a composed error model: application to the California electricity market (2012)
Working Paper: Estimating Market Power in Homogeneous Product Markets Using a Composed Error Model: Application to the California Electricity Market (2012)
Working Paper: Estimating Market Power in Homogenous Product Markets Using a Composed Error Model: Application to the California Electricity Market (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:ecinqu:v:56:y:2018:i:2:p:1296-1321

Ordering information: This journal article can be ordered from
https://ordering.onl ... s.aspx?ref=1465-7295

Access Statistics for this article

Economic Inquiry is currently edited by Tim Salmon

More articles in Economic Inquiry from Western Economic Association International Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().