Nonparametric Tests for Monopsonistic Market Power Exertion

Abstract

Measurement of market power exerted in imperfectly competitive markets has received considerable attention in recent years. This literature has become known as the New Empirical Industrial Organization (NEIO). Bresnahan (1989) provides an extensive review of these studies. Most often, empirical work relies on estimating monopoly market power exertion from first-order profit maximization conditions using aggregate industry data. Estimates of market power exertion depend on the functional forms selected for aggregate supply and demand. Importantly, econometric identification of the market power parameter estimated from the first-order conditions depends critically on second-order curvature properties of the functions selected (Bresnahan 1982, Lau). Little is known about the effects of model misspecification on estimated market power parameters. While most of the NEIO market power literature focuses on monopoly power, it is likely that firms with potential market power in agricultural and natural resource markets more of-