Revisiting the Identification of the Conduct Parameter in Homogeneous Goods Markets

TL;DR

This paper clarifies the conditions under which the conduct parameter in homogeneous goods markets can be identified, emphasizing the importance of demand rotation instruments, and corrects previous misconceptions about demand function separability.

Contribution

It provides a new characterization showing demand rotation instruments are necessary and sufficient for identifying the conduct parameter, extending prior results.

Findings

Demand rotation instruments are key for identification.

Lau's claim about separability is incorrect.

The role of demand rotation instruments is generalized.

Abstract

We revisit the identification of the conduct parameter in homogeneous goods markets. Lau (1982) argues that the conduct parameter is not identified if and only if the inverse demand function is separable, except for a specific separable function. This result has been regarded as an extension of the result in Bresnahan (1982) to more general settings. However, we show that Lau's claim is incorrect and provide a new characterization of the non-identification. Our characterization shows that a demand function with demand rotation instruments is the necessary and sufficient condition for the identification of the conduct parameter. Therefore, our result properly generalizes the role of demand rotation instruments in identifying the conduct parameter, as highlighted by Bresnahan (1982), to more general settings.