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ESTIMATING MARKUPS UNDER NONLINEAR PRICING
(Click above to download a pdf copy of the paper)
- Abstract: This paper provides a structural interpretation to the estimates
of the shape and position of nonlinear tariffs. We focus on the evaluation of
price-cost margins, and thus we need to identify marginal cost from an
equilibrium model of nonlinear pricing competition. We estimate these
price-cost margins using quarterly data from the early U.S. cellular
telephone industry between 1984 and 1988. Our results indicate that the
margins are increased under duopoly, due to a significant reduction in
marginal costs. Moreover, we find that the price-cost margins vary over the
consumption levels and that low end users are subject to higher price-cost
margins than high-end users. The impact of competition further increases the
margins in the low-end user segment, relative to high end-users. In that
sense the benefits of competition, which are largely due to increased
efficiencies, are passed on relatively more to high-end users. We also show
that these findings are robust even if one includes a number of observable
market demand and cost variables.
- Co-author: Lars-Hendrik Röller (WZB and Humboldt University).
- Publication: Journal of the European Economic Association, 2, 526-535, April-May 2004.
- JEL: D43, D82, L96.
- First version: August 2003.
- Final version: December 2003.
- Funding: NSF Grant No. SES-0318208.
- Seminars: None.
- Conferences: Invited Lecture at the XVIII Meeting of the European Economic Association, Stockholm 2003.
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