Biases in Static Oligopoly Models?:Evidence from the California Electricity Market

Estimating market power is often complicated by a lack of reliable marginal costdata. Instead, policy-makers often rely on summary statistics of the market, thoughtto be correlated with price cost margins? such as concentration ratios or the HHI. Inmany industries, these summary statistics may be only weakly correlated with devia-tions from marginal cost pricing. Beginning with Gollop and Roberts (1979), a numberof empirical studies identify industry competition and marginal cost levels by estimat-ing the ?rms??rst order condition within a conjectural variations framework. Despitethe prevalence of such ?New Empirical Industrial Organization?(NEIO) studies, Corts(1999) illustrates the estimated mark-ups may be biased, since the estimated conjec-tural variations model forces the supply relationship to be a ray through the marginalcost intercept, whereas this need not be true in dynamic games. In this paper, we usedirect measures of marginal cost for the California electricity market to measure theextent to which estimated mark-ups and marginal costs are biased. Our results suggestthat the NEIO technique poorly estimates mark-ups and the sensitivity of marginalcost to cost shifters