Explaining Pricing Conduct in a Product-Differentiated Oligopolistic Market: An Empirical Application of a Price Conjectural-Variations Model

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Abstract:

Most previous empirical studies of imperfectly competitive markets have assumed that all firms within the industry supply a homogeneous product and use quantity as a strategic variable. This framework is basically a generalization of the Cournot model. In this case, there is only one demand function and one common price generated in the market. Examples of such empirical studies include Appelbaum (1982); Azzam and Pagoulatos (1990); Bhuyan and Lopez (1997); Iwata (1974); Karp and Perloff (1989); Lopez (1984); Schroeter (1988); Suzuki, Lens, and Forker (1993); and Liu, Sun, and Kaiser (1995).

However, most imperfectly competitive industries are characterized by multiple differentiated products that compete with each other based on price as the strategic variable rather than quantity. As such, a separate market demand function and unique price exists for each brand, and the brands are incomplete substitutes with each other. In such cases, a product-differentiated oligopoly model with price as the strategic variable or a generalized Bertrand model should be applied. Several previous studies have developed and applied the Bertrand-type model to various industries; they include Cotterill (1994); Cotterill, Dhar, and Putsis (2000); Cotterill and Putsis (2000); Liang (1987, 1989); Peterson and Cotterill (1998); and Vickner and Davies (1999). This chapter applies a two-product Bertrand-type linear model to the Japanese dairy sector to gain insights into the pricing conduct for beverage-milk products made from fresh milk and reconstituted milk. The model is similar to one that was originally developed by Liang (1989). The analysis includes some statistical tests to determine whether these Japanese dairy firms have consistent pricing behavior. Japanese milk and reconstituted milk products are chosen for our analysis because many observers have pointed out that increases in Japan in the consumption of reconstituted milk products have resulted in a decrease in the demand for domestically produced raw milk there. While a competitive relationship between milk and reconstituted milk is expected, there currently is little documented empirical evidence of this relationship in Japan.

Document Type: Research Article

Publication date: January 1, 2006

More about this publication?
  • New Empirical Industrial Organization and the Food System
    The new empirical industrial organization (NEIO) is a pioneering framework developed by economists to measure the degree of competitiveness of economic sectors. The primary contribution of NEIO is the generalization of perfect-competition and monopoly models to intermediate imperfect-competition models that can be empirically estimated. This framework has been applied to many sectors to provide policymakers dealing with antitrust issues with empirical evidence of market power throughout the marketing channel. This is the first book to provide a detailed, systematic overview of NEIO. The authors present a comprehensive synopsis of the theory and application of NEIO as well as selected case studies to the food sector.
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