Testing Models of Differentiated Products Markets: Consolidation in the Cable TV Industry

48 Pages Posted: 27 Apr 2011 Last revised: 29 Apr 2014

Date Written: March 9, 2014

Abstract

Research on differentiated products markets often uses structural demand/supply models to identify firms’ marginal costs as product-level cost data is unavailable. Using unique demand and cost data from the cable TV industry, this paper evaluates a differentiated products model’s ability to identify marginal costs. I find firms systematically price below profit-maximizing levels, leading to biases in the model’s marginal cost estimates. I study the implications for merger simulations, and find that these biases compromise estimates of merger-related cost efficiencies, yet do not prevent these models from generating useful predictions of the price and non-price effects of mergers.

Keywords: model validation, merger simulation, cable TV industry, consolidation, price regulation, endogenous product quality, discrete-choice demand, translog cost function

JEL Classification: L12, L96, C33, C52

Suggested Citation

Byrne, David P., Testing Models of Differentiated Products Markets: Consolidation in the Cable TV Industry (March 9, 2014). Available at SSRN: https://ssrn.com/abstract=1802347 or http://dx.doi.org/10.2139/ssrn.1802347

David P. Byrne (Contact Author)

University of Melbourne ( email )

Level 4
111 Barry Street
Melbourne, Victoria 3010
Australia

HOME PAGE: http://sites.google.com/view/dprbyrne/

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