Inventory dynamics: market power measures when inputs are capital goods

Abstract

This paper incorporates inventory dynamics into an analysis of market power. A Cournot duopoly model of competition is presented in which firms account for the effects of current choices on their competitors’ current actions on future actions (both their own and their competitors’). We show that measures of market power which ignore inventory dynamics produce biased estimates of true market power, although the direction of the bias cannot be theoretically determined. We then apply the model to the beef packing industry using data on cattle stocks and slaughter from 1948-1999. Our estimates suggest that static measures underestimate true market power levels.