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Testing for 'Monopoly' Market Power When Products Are Differentiated in Quality

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  • Verboven, Frank

Abstract

This paper proposes a reduced form approach to identify the presence of "monopoly" market power in markets with vertical product differentiation. In a general model I derive an explicit solution for the reduced form pricing equations under the hypothesis that prices are set to maximize the joint profits of all products. The central comparative statics result states that each product's price depends only on its own quality and not on the quality of its competitors. This contrasts with the solution under Bertrand-Nash behaviour and thus provides an identification argument for conduct under vertical product differentiation. I propose empirical tests implied by this result. They require only the data used in popular hedonic studies (prices and physical characteristics). The tests are applied to the US market for spreadsheets and to the French market for optional car engines. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

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  • Verboven, Frank, 2002. "Testing for 'Monopoly' Market Power When Products Are Differentiated in Quality," Manchester School, University of Manchester, vol. 70(1), pages 115-133, January.
    • Handle: RePEc:bla:manchs:v:70:y:2002:i:1:p:115-33
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    Cited by:

    1. Kaiser, Ulrich & Sofka, Wolfgang, 2006. "The pulse of liability of foreignness: dynamic legitimacy and experiences effects in the German car market," ZEW Discussion Papers 06-070, ZEW - Leibniz Centre for European Economic Research.
    2. Sofka, Wolfgang & Zimmermann, Jörg, 2005. "There's no Place Like Home: A Strategic Framework to Overcome Liability of Foreignness in the German Car Market," ZEW Discussion Papers 05-84, ZEW - Leibniz Centre for European Economic Research.
    3. Wolfgang Sofka & Jörg Zimmermann, 2007. "Regional Dimensions of Liability of Foreignness: Between a Rock and a Hard Place?," Papers on Entrepreneurship, Growth and Public Policy 2007-12, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    4. Evelyn Vezza, 2004. "Poder de Mercado en las Profesiones Autorreguladas: El Desempeño Médico en Argentina," CEDLAS, Working Papers 0016, CEDLAS, Universidad Nacional de La Plata.

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