Testing For "Monopoly" Equilibrium

TLDR

The paper develops a general test for monopoly. Using comparative statics, the authors derive testable restrictions on a firm’s reduced‑form revenue equation and construct simple models of oligopoly, competition, and monopolistic competition to illustrate how the test statistic can be positive. For an unfettered monopolist, the sum of factor‑price elasticities in the reduced‑form revenue equation must be nonpositive, and the authors identify a nonempty set of alternative hypotheses. Copyright 1987 by Blackwell Publishing Ltd.

Abstract

This paper develops a very general test for monopoly. Using standard comparative statics analysis, the authors derive testable restrictions on the firm's reduced-form revenue equation which must be satisfied by any profit-maximizing firm whose choices are not affected by either strategic interactions or the threat of entry. For such an unfettered monopolist, the sum of the factor price elasticities of the reduced-form revenue equation must be nonpositive. The set of interesting alternative hypotheses is not empty. The authors develop simple models of oligopolistic, competitive, and monopolistically-competitive markets for which this test statistic may take on positive values. Copyright 1987 by Blackwell Publishing Ltd.