Abstract
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.
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