Revealed preference tests for price competition in multi-product differentiated markets

Abstract

AbstractAssumptions of competitive structure are often crucial for marginal cost estimation and counterfactual predictions. This paper introduces tests for price competition among multi-product firms. The tests are based on the firm’s revealed preference (revealed profit function). In contrast to other approaches based on estimated demand functions such as conduct parameter estimation, the proposed tests do not require any instrumental variables, even though the models can accommodate structural error terms. In this paper, I employ a demand structure introduced by Nocke and Schutz (Econometrica 86(2):523–557, 2018. https://doi.org/10.3982/ECTA14720), the discrete/continuous choice model, which nests the multinomial logit demand and CES demand functions. Any price and quantity data can be rationalized by price competition under a discrete/continuous choice model and increasing marginal costs. Adding more assumptions to the demand functions, such as logit, CES, or the co-evolving and log-concave property produces some falsifiable restrictions.