The measurement of market power: short-run, long-run, and dynamic adjustment models

Moon Mo Goo

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This study presents an industry analysis of market structure and demonstrates the use of theory-consistent models following the NEIO tradition. The objective of this dissertation is to measure the degree of market power within the context of each of three models: short-run, and long-run equilibrium models, and a dynamic cost of adjustment model with strategic capital investment; and to see how inferences of market power differ across the three cases. The models' differences in this dissertation center on the role of investment in capital. Specification tests are conducted between the short-run versus the long-run, and the short-run versus the dynamic models. Time-series data from the U.S. transformer industry producers, 1958-1991 are used to estimate the models;The empirical results suggest that we can reject the hypothesis of price-taking behavior in the output market from the three models. The Lerner's index is lower in the dynamic model than that in the static models. The specification test results show that the long-run and the dynamic models are rejected against the short-run model. However, the result of a joint test with the estimates of the adjustment cost and strategic effect parameters suggests the dynamic cost of adjustment model is superior to the long-run model. As for the strategic effect of capital investment in the dynamic model, the parameter estimate implies that we can reject the null hypothesis that there is no strategic effect of investment in the industry.

Date: 1997-01-01
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