Collinearity in Linear Structural Models of Market Power

Collinearity in Linear Structural Models of Market Power The well-known structural model used to estimate market power suffers from a severe collinearity problem if both the marginal cost and demand equations are linear. If the equations hold exactly, the variables are perfectly collinear so the model cannot be estimated. If the true linear model equations hold with errors, one can estimate the equations, but the estimated coefficients are likely to be highly unstable and unreliable due to nearly perfect collinearity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Collinearity in Linear Structural Models of Market Power

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Publisher
Springer US
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC.
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1007/s11151-012-9336-x
Publisher site
See Article on Publisher Site

Abstract

The well-known structural model used to estimate market power suffers from a severe collinearity problem if both the marginal cost and demand equations are linear. If the equations hold exactly, the variables are perfectly collinear so the model cannot be estimated. If the true linear model equations hold with errors, one can estimate the equations, but the estimated coefficients are likely to be highly unstable and unreliable due to nearly perfect collinearity.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Feb 3, 2012

References

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