Estimating the Strategic Effect of Multi-Market Contact

Alon Eizenberg, Dalia Shilian and Daniel D. Blanga

No 18523, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Economic theory suggests that cross-market interactions affect the intensity of competition by aggregating Incentive Compatibility Constraints over markets. Building on this insight we develop a structural econometric model of multimarket contact. The model allows us to estimate the constraints and to evaluate the effect of their aggregation on the range of sustainable prices. We also derive analytical results and perform simulations that associate the multimarket contact effect with underlying demand parameters. This motivates demand estimation as an informative step in the empirical analysis of multimarket contact. We apply the model to a case-study of multimarket contact in the Israeli food sector. We find that profits and sales-weighted prices could potentially be increased, thanks to multimarket contact, by less than one percentage point, and interpret this modest effect through the lens of the model.

Keywords: Multimarket contact; Demand estimation; Supergames (search for similar items in EconPapers)
JEL-codes: L11 L13 L41 (search for similar items in EconPapers)
Date: 2023-10
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