Industrial Economics: Burcin Yurtoglu & Christine Zulehner
Empirical Studies of Market Performance
Homework (Deadline: 20. April, 2007)
This homework assignment aims to enhance your understanding of the material related
to the early empirical studies of the Structure-Conduct-Performance (SCP) framework
and to the “Market Power versus Efficiency” debate.
Most of the exercises are applications of the empirical models that we have studied so
far.
In carrying out your work, please be as careful and clear as you can:
one
indispensable feature of good empirical work is its reproducibility by researchers
including yourself (at a later point in time)!
The exercises deliberately leave some room to make your own assumptions. This will
produce somewhat different results depending on the assumptions you choose to make.
It will also provide us with material to discuss during the presentation of the results in the
class room.
To answer the following questions, you have to use the following dataset, which is
provided in two different formats:
Excel format: dataset.xls
ASCII format: dataset.csv
------------------------------------------------------------------------------data file: dataset1
Obs: 6, 672
Variables: 23
All company specific variables are measured in million dollars unless otherwise stated.
Variable name Definition
------------------------------------------------------------------------------company
gvkey
year
sic
emp
Company name
firm specific code
year of observation (90, 91, 92)
Four-digit SIC code
Number of employees (in thousands)
ppent
at
sale
ib
xrd
xint
xadr1
irs_adv
cr4_92
cr8_92
cr20_92
cr50_92
hhi_92
Property, plant and equipment net
total assets
total sales
income before extraordinary items
R&D expenses
interest expense
four-digit Advertising to sales ratios*
2-digit Advertising to sales ratios derived from IRS reports (1991)
Four-firm concentration ratio (1992)
Eight-firm concentration ratio (1992)
Twenty-firm concentration ratio (1992)
Fifty-firm concentration ratio (1992)
Herfindahl index (1992)
cr4_87
cr8_87
cr20_87
cr50_87
hhi_87
Four-firm concentration ratio (1987)
Eight-firm concentration ratio (1987)
Twenty-firm concentration ratio (1987)
Fifty-firm concentration ratio (1987)
Herfindahl index (1987)
----------------------------------------------------------------------------------*: xadr1 is taken from Rogers, Richard T. and Tokle, Robert J. Advertising Expenditures in U.S.
Manufacturing Industries: 1967 and 1982, Working paper, Northeast Regional Research Project
165, 1993.
Please note that this is a firm-level panel dataset, i.e., the units (firms) are observed in
years 1992, 1993, 1994 and 1995. The various concentration ratios are specific to the
four-digit SIC industries.
The SIC classification is provided in a separate text file
(SIC.txt)
Exercise 1
Consider one of the earliest SCP studies by Bain (1951). See also Martin (2002, pp.
121-129).
a) What is the measure of profitability used by Bain (1951)? The dataset allows you
to construct Bain’s preferred measure of profitability.
Produce descriptive
statistics on the return on sales and return on assets as well as on other
variables of potential interest.
b) Try to replicate the basic results of Bain (1951). These are given in Table 5.2 of
Martin (2002, p. 125).
c) Which relevant variables are omitted from these equations and what does Bain
do in a later study (Bain, 1956) to overcome this shortcoming?
Exercise 2
The Excel dataset “dataset2.xls” includes the following variables:
year, q, y, pchick, pbeef, pcor, pf, cpi, qproda, pop, meatex, and time.
y: real disposable income per head
pchick: price of chicken
pbeef: price of beef
pcor: preis of corn
pf: price of chicken feed
cpi: Consumer price index
qproda: aggregate production of chicken meat (in pounds)
pop: Population of the USA
meatex: Exports of beef, pork and veal
Estimate the following equation:
ln_qc = a1 + a2*ln_pc + u
where, ln_qc=log(qproda) und ln_pc=log(pchick)
a) Interpret this equation.
b) Are there any missing variables in this specification, which theoretically belong to
a demand equation? Which variables and why?
c) Is the simultaneity of price and quantity a problem? How can one solve this
problem?
d) What role should the variables CPI and POP play?
e) Determine an estimate for he following
• Own price elasticity of demand for chicken meat.
• Cross price elasticity between beef and chicken meet.
• Income elasticity of demand.
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