Testing firm conduct

Marco Duarte, Lorenzo Magnolfi, Mikkel Sølvsten*, Christopher Sullivan

*Corresponding author for this work

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

4 Citations (Scopus)

Abstract

Evaluating policy in imperfectly competitive markets requires understanding firm behavior. While researchers test conduct via model selection and assessment, we present the advantages of Rivers and Vuong (2002) (RV) model selection under misspecification. However, degeneracy of RV invalidates inference. With a novel definition of weak instruments for testing, we connect degeneracy to instrument strength, derive weak instrument properties of RV, and provide a diagnostic for weak instruments by extending the framework of Stock and Yogo (2005) to model selection. We test vertical conduct (Villas-Boas (2007)) using common instrument sets. Some are weak, providing no power. Strong instruments support manufacturers setting retail prices.

Original languageEnglish
JournalQuantitative Economics
Volume15
Issue3
Pages (from-to)571-606
Number of pages36
ISSN1759-7323
DOIs
Publication statusPublished - Jul 2024

Keywords

  • C52
  • Inference
  • L21
  • misspecification
  • model selection
  • Rivers and Vuong test
  • weak instruments

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