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Identifying and measuring market power with residual demand elasticity: Evidence from the United States aluminum market, 1954--1984
Abstract
The empirical methodology in identifying and measuring market power always seeks to orient a satisfactory basis; among these is the residual demand analysis. The residual demand curve facing a firm or an industry is the firm's or industry's demand curve taking into account the supply response of all other competitors. A firm's or an industry's market power is determined largely by the firm-specific or industry-specific demand curve so that the demand curve estimation potentially gains an insight into the firm's or industry's market power. This study presents various econometric techniques to demonstrate the existence or absence of Alcoa's and the primary aluminum industry's market power in the U.S. aluminum market based on the residual demand analysis. Alcoa's and the primary industry's estimated inverse residual demand elasticities imply the corresponding market power. The structural model is applied to estimate Alcoa's market power within the primary industry so that the product is homogeneous. Based on the DF/CF model, Alcoa's residual demand elasticity is calculated through the estimated market demand elasticity, fringe supply elasticity, and Alcoa's extant market share. The structural model is also applied to estimate the primary industry's market power with the aluminum market delineated with primary and secondary aluminum so that the product is heterogeneous. By simultaneously estimating the primary and secondary industries' inverse residual demand curves, the associated inverse residual demand elasticities correspond to the industries' market power in the aluminum market. By simultaneously estimating the industries' inverse partial residual demand curves, one can also infer the industries' market power when the tacit collusion is engaged across the industries. The time series linear feedback model is applied to estimate Alcoa's and the primary industry's market power, based on the bi-directional causality between the market demand and market power and the bi-directional causality between Alcoa's and the primary industry's market power. The former measures Alcoa's and the industry's abilities to adjust price given demand fluctuation, while the latter measures Alcoa's and the industry's conjectural variation given the inter-firm rivalry in the primary industry. The estimations of frequency feedback method and impulse response analysis further distinguish the causality into the long-run and short-run effects.
Subject Area
Economics
Recommended Citation
Yang, Sheng-Ping, "Identifying and measuring market power with residual demand elasticity: Evidence from the United States aluminum market, 1954--1984" (1998). ETD collection for University of Nebraska-Lincoln. AAI9902982.
https://digitalcommons.unl.edu/dissertations/AAI9902982