Working Paper: NBER ID: w28350
Authors: Matthew Backus; Christopher Conlon; Michael Sinkinson
Abstract: Models of firm conduct are the cornerstone of both theoretical and empirical work in industrial organization. A recent contribution (Berry and Haile, 2014) has suggested the use of exclusion restrictions to test alternative conduct models. We propose a pairwise testing procedure based on this idea and show that the power of the test to discriminate between models is tied to the formulation of those restrictions as moments and how they reflect the nonlinearity of equilibrium markups. We apply this test to the ready-to-eat cereal market using detailed scanner and consumer data to evaluate the “common ownership” hypothesis, which has received significant attention. Although we show that the potential magnitude of common ownership effects would be large, our test finds that standard own-firm profit maximization is more consistent with the data.
Keywords: common ownership; competition; firm conduct; industrial organization
JEL Codes: C52; L13; L21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common ownership effects (G32) | firm conduct (L10) |
| standard own-firm profit maximization (L21) | observed data (Y10) |
| marginal cost shocks (E39) | excluded variables (C29) |
| nonlinearity of model (C51) | inconsistent results (C52) |
| 30% or more of common ownership incentives (G32) | firm pricing decisions (L11) |
| nonlinearity of equilibrium markups (D43) | power of the test (C12) |