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We present new identification results for nonparametric models of differentiated products markets, using only market level observables. We specify a nonparametric random utility discrete choice model of demand allowing rich preference heterogeneity, product/market unobservables, and endogenous prices. Our supply model posits nonparametric cost functions, allows latent cost shocks, and nests a range of standard oligopoly models. We consider identification of demand, identification of changes in aggregate consumer welfare, identification of marginal costs, identification of firms' marginal cost functions, and discrimination between alternative models of firm conduct. We explore two complementary approaches. The first demonstrates identification under the same nonparametric instrumental variables conditions required for identification of regression models. The second treats demand and supply in a system of nonparametric simultaneous equations, leading to constructive proofs exploiting exogenous variation in demand shifters and cost shifters. We also derive testable restrictions that provide the first general formalization of Bresnahan's (1982) intuition for empirically distinguishing between alternative models of oligopoly competition. From a practical perspective, our results clarify the types of instrumental variables needed with market level data, including tradeoffs between functional form and exclusion restrictions.

Empirical models of differentiated products demand (and often supply) are widely used in industrial organization and other fields of economics. We review some recent work studying identification in a broad class of such models. This work shows that the parametric functional forms and distributional assumptions commonly used for estimation are not essential for identification. Rather, identification relies primarily on the standard requirement that instruments be available for the endogenous variables-here, typically, prices and quantities. We discuss the types of instruments that can suffice, as well as how instrumental variables requirements can be relaxed by the availability of individual-level data or through restrictions on preferences. We also review new results on discrimination between alternative models of oligopoly competition. Together, these results reveal a strong nonparametric foundation for a broad applied literature, provide practical guidance for applied work, and may suggest new approaches to estimation and testing.

We revisit the classic discussion comparing price and quantity competition, but in a mixed oligopoly in which one state-owned public firm competes against private firms. It has been shown that in a mixed duopoly, price competition yields a larger profit for the private firm. This implies that firms face weaker competition under price competition, which contrasts sharply with the case of a private oligopoly. Here, we adopt a standard differentiated oligopoly with a linear demand. We find that regardless of the number of firms, price competition yields higher welfare. However, the profit ranking depends on the number of private firms. We find that if the number of private firms is greater than or equal to five, it is possible that quantity competition yields a larger profit for each private firm. We also endogenize the price-quantity choice. Here, we find that Bertrand competition can fail to be an equilibrium, unless there is only one private firm.

A model of differentiated mixed oligopoly is developed to systematically discuss the welfare consequences of partial privatization of a public firm. We analytically derive the optimal degree of partial privatization not only in the short run with restricted entry but also in the long run with free entry. It is shown that the shortrun optimal policy is non-monotonic in the degree of love of variety, while the optimal degree of privatization is monotonically increasing in the consumer's preference for variety in the long run.

Supply-then-price competition is common in settings in which capacity commitments precede pricing decisions. We provide a characterization of when and why equilibria of such games clear the market at the Cournot outcomes. The paper extends the seminal work of Kreps and Scheinkman (1983) to differentiated product settings with an arbitrary number of firms and general demand and spill functions. We identify two new fundamental properties that drive the result: independence from irrelevant supply and spill inertia. These properties are satisfied by common demand and spill models. Our result provides a shortcut approach to analyzing supply-then-price games and highlights the importance of demand specification, compared with spill specification, in determining the outcome of such games. We study a two-stage deterministic differentiated-product oligopoly competition game, called the quantity precommitment game, in which firms compete on quantity in the first stage and then compete on price in the second stage. We compare this game with a single-stage Cournot game, in which firms compete on quantity only and prices are set to clear the market. We show that any equilibrium of the quantity precommitment game is an equilibrium of the Cournot game under certain conditions that allow for commonly used demand functions and general spill models. Our approach yields insight into key properties that enable this relationship to hold. The electronic companion is available at https://doi.org/10.1287/opre.2018.1760 .

For this study, to examine optimal environmental policy, pollution intensity is measured to depend positively on an environmental index such as temperature. Great increases in temperature might cause greater damage to an economy even when production processes are unchanged. This presumption implies that optimal environmental policy varies with the environmental index. Pollution intensity increases with an observable index. Findings indicate that, under certain conditions, the degree of internalization of environmental damage by environmental policy decreases at small indexes, but it increases at higher indexes, that is, the internalization degree of the environmental tax has a U-shape with respect to the index. Optimal environmental policy tolerates environmental damage for more consumption of goods at lower pollution intensities, but it depresses production of goods for less environmental damage at higher pollution intensities. Environmental awareness leads policy to become more eco-friendly for higher environmental indexes, although preferences for product differentiation have the opposite influence.

This paper aims to identify the possible implications of quantity competition in markets with differentiated products on entry deterrence. If capacity commitments characterise this industry, quantities can be expected as the choice variable of rational players, even in the presence of product differentiation. Different equilibria of a static game occur depending on the degree of asymmetry of players, incumbent and entrant, which will crucially affect the shape of their best response functions. Asymmetry can stem from players’ advantage in demand and costs, their different objective functions, or the first-mover advantage. We will analyse entry where incumbent maximises the weighted average of profit and revenue while entrant is maximising profit. The reduction of asymmetry may intensify competition in the industry and, consequently, reduce entry barriers. Our findings provide an insight that could be used for practical recommendations for conducting competition policy and other sector-specific regulations, where the introduction and higher intensity of competition are desirable.

We analyze a general model in which, at each echelon of the supply process, an arbitrary number of firms compete, offering one or multiple products to some or all of the firms at the next echelon, with firms at the most downstream echelon selling to the end consumer. At each echelon, the offered products are differentiated and the firms belonging to this echelon engage in price competition. The model assumes a general set of piecewise linear consumer demand functions for all products (potentially) brought to the consumer market, where each product’s demand volume may depend on the retail prices charged for all products; consumers’ preferences over the various product/retailer combinations are general and asymmetric . Similarly, the cost rates incurred by the firms at the most upstream echelon are general as well. We fully characterize the equilibrium behavior under linear price-only contracts, and we show how all equilibrium performance measures can be computed via a simple recursive scheme. Moreover, we establish how changes in the model parameters, in particular, exogenous cost rates or intercept values in the demand functions, impact the system-wide equilibrium. These comparative statics results allow for the quantification of cost pass-through effects and the measurement and characterization of the firms’ brand value. Lastly, we illustrate what qualitative impacts various changes in the structure of the supply chain network may bring forth.

On the occasion of the 10th anniversary of the 2010 U.S. Horizontal Merger Guidelines, this article provides an overview of the state of economic analysis of unilateral effects in mergers with differentiated products. Drawing on our experience with merger enforcement in Europe, we discuss both static and dynamic competition, with a special emphasis on the calibration of competitive effects. We also discuss the role of market shares and structural presumptions in differentiated product markets.