Working Paper: CEPR ID: DP18523
Authors: Alon Eizenberg; Dalia Shilian; Daniel D. Blanga
Abstract: Economic theory suggests that cross-market interactions affect the intensity of competition by aggregating Incentive Compatibility Constraints over markets. Building on this insight we develop a structural econometric model of multimarket contact. The model allows us to estimate the constraints and to evaluate the effect of their aggregation on the range of sustainable prices. We also derive analytical results and perform simulations that associate the multimarket contact effect with underlying demand parameters. This motivates demand estimation as an informative step in the empirical analysis of multimarket contact. We apply the model to a case-study of multimarket contact in the Israeli food sector. We find that profits and sales-weighted prices could potentially be increased, thanks to multimarket contact, by less than one percentage point, and interpret this modest effect through the lens of the model.
Keywords: Multimarket contact; Demand estimation; Supergames
JEL Codes: L11; L13; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| multimarket contact (L14) | ability to sustain supracompetitive prices (L11) |
| multimarket contact (L14) | prices away from competitive benchmark (L11) |
| multimarket contact (L14) | profits (L21) |
| multimarket contact (L14) | sales-weighted prices (P22) |
| aggregation of ICCs (D70) | sustainability of supracompetitive prices (D41) |
| competitive fringe and asymmetric demand advantages (F12) | limit extent of multimarket contact effect (L19) |