Measuring Market Power in Bilateral Oligopoly: The Wholesale Market for Beef
Abstract:The last two decades have witnessed the development of a variety of approaches to the measurement of market power. In general, these studies base their inferences of market power on econometric models of firm conduct in which monopoly (or monopsony) and price-taking behavior have empirically distinguishable comparative static properties. One often cited and particularly illuminating example of this body of work is Bresnahan's 1982 paper. In it, he develops a simple two-equation empirical model of price and quantity determination in a homogeneous product oligopoly. The model consists of a linear market demand equation and a generalized supply relation incorporating a “conduct parameter” that indexes the degree of market power and nests some conventional oligopoly solution concepts: With λ (the conduct parameter) equal to zero, the model's equations reduce to perfectly competitive supply and demand. A value of one for λ implies the monopoly or perfect cartel solution. Intermediate values of λ correspond to outcomes “between” the polar cases of perfect competition and pure monopoly. Within this context, Bresnahan's fundamental insight is that the comparative statics of price and quantity with respect to exogenous parallel shifts of demand or marginal cost are, by themselves, insufficient to reveal the degree of competition. For λ to be econometrically identified, it is necessary that the model admit exogenous rotations of the demand curve as well.
Bresnahan's (1982) use of a conduct parameter as a means of parameterizing a range of potential solution concepts is a modeling device that has been applied in a wide variety of approaches using several different means of achieving econometric identification of the degree of market power. This conduct-parameter method can be readily adapted, moreover, to the measurement of oligopsony power. To the best of our knowledge, however, all previous applications of these methods assumed that the participants on a particular side of the market take price as given while the agents on the other side may or may not exercise market power. For example, in studies of oligopoly, buyers are assumed to be passive price-takers while sellers may exploit their influence on price. In studies of oligopsony, sellers are viewed as price-takers while buyers may or may not take advantage of an upward-sloping supply relation.