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
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: Suggested Citation