Estimating Markups Under Nonlinear Pricing Competition
WZB Working Paper No. SP II 2003-21
25 Pages Posted: 4 Feb 2004
Date Written: December 2003
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 consumption 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.
Keywords: Estimation of Equilibrium Oligopoly Models, Competitive Nonlinear Pricing, Common Agency
JEL Classification: D43, D82, L96
Suggested Citation: Suggested Citation