Competition, monopoly and oligopoly
Internal market structure analysis infers brand positions in an attribute space from preference and choice data, given a market in which consumers have heterogeneous tastes for attributes. Previous market structure models have adopted a static framework. Furthermore, they assumed that consumer perceptions of brand attributes do not vary across consumers. Yet, these approaches may render inaccurate representations of market structure if there is state dependence in consumer choice behavior.
This paper attempts to incorporate consumer choice dynamics into market structure models by specifying the source of choice dynamics into market structure models by specifying the source of choice dynamics explicitly. In particular, the process by which past purchases affect current choices is modeled in a framework which captures both consumer habit persistence and variety seeking behavior.
More specifically, consumer preferences for brand attributes are modeled to depend on the attributes of brands bought on the previous purchase occasion. Furthermore, the modeling approach adopted incorporates heterogeneity in both consumer preferences and includes practitioners and academics interested in understanding consumer choice processes and inferring market structure from consumer choice data.
These results provide strong evidence for habit persistence and variety seeking in brand attributes to be the behavioral source of consumer choice dynamics in food categories. Thus, consumer tastes (utility weights) seem to be affected by the attributes of the brands consumed in the past. Given the empirical result that a large proportion of consumers are habit persistent, this suggests that tastes are reinforced by the brand attributes consumed in the past.
The empirical results also show that not accounting for state dependence in market structure models for panel data may produce misleading results, that is, depending on consumer behavior patterns, models that do not account for state dependence may distort the true nature of competition among brands. More specifically, the results confirm the expectation that if there is habit persistence, that is, if consumer tastes are reinforced by attributes of brands consumed in the past, models that do not capture this choice dynamics will overestimate the distance between (similar) brands.
Furthermore, the policy experiments conducted suggest that (1) static models overestimate the short-run impact of a price cut on the sales of the brand on promotion, (2) price cuts hurt the sales of the more similar brands more, and (3) free samples affect relatively less similar brands the most.
A diagram illustrating alternative degrees of market control held by different types of market structures based on the number of firms in the market and the degree of competitiveness. As the number of competitors along the continuum ranges from one to many, the degree of market control ranges complete to none. At one end of the continuum, with many competitors on no market control, is perfect competition.
At the other end, with one competitor and complete market control, is monopoly. Oligopoly and monopolistic competition comprise the interior of the continuum, with monopolistic competition having many competitors but limited market control and oligopoly having few competitors and greater market control. The continuum illustrates that clear-cut dividing lines really do not exist between the market structures, especially for monopolistic competition and oligopoly.
Market Structure and Competition Policy applies modern advances in game theory to the analysis of competition policy and develops some of the theoretical and policy concerns associated with the pioneering work of Louis Phlips.
When economists use such words as "monopoly" and "competition" they have in mind certain complex relations among firms in an industry. An industry, as economists define it, is a group of sellers of close-substitute products who supply a common group of buyers. For the economy as a whole, an industry would include all sellers having this relation. Thus one can recognize a cigarette or automobile or aluminum industry - in all, hundreds of industries.
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