Is it possible to tell anything about market structure if I have annual price data of the industries?

Question

I have three goods:

• beer
• carp (fish)
• museum ticket

Is it possible to tell anything about market structure if I have annual price data of the industries? Here's the time-series plot on a single graph: I would like to give advice whether a firm should entry the market or not. Is is it possible to decode price data like "the incumbent firms must have been playing a Bertrand's price competition game at the carp market"? Or do I need further details to say anything about the market structure?

Is it possible to apply IO theory if I have only price data of an industry? I really need some clues, please.

Answer 1

That that we have linear supply and demand functions, pretty much the simplest case such that quantity supplied of good $i$ is: $$ Q_{s,i,t} = \alpha_{0,i,t} + \alpha_{1,i,t} \cdot P_{i,t}$$ and quantity demanded is: $$ Q_{d,i,t} = \beta_{0,i,t} + \beta_{1,i,t} \cdot P_{i,t}$$

In equilibrium $Q_{i,t}=Q_{d,i,t}=Q_{s,i,t}$ so substitute and solve: $$ Q_{i,t} = \alpha_{0,i,t} + \alpha_{1,i,t} \cdot P_{i,t} = \beta_{0,i,t} + \beta_{1,i,t} \cdot P_{i,t}$$ $$ P_{i,t} = \frac{\alpha_{0,i,t}-\beta_{0,i,t}}{\beta_{1,i,t} - \alpha_{1,i,t}}$$

As you can see, the price depends on supply and demand. Unfortunately, shifts to the level or slope of either the supply or demand functions both affect the price. Therefore, in general, you can't tell anything about the supply function from the behavior of the price. And if you can't tell anything about the supply function I don't see how you'd know anything about the IO of the producer industries.

Answer 2

You cannot say anything about the underlying market structure if you only have aggregated data. This phenomenon is known as heterogeneity, and it can pose significant problems even for studies of the aggregated data itself.

But that doesn't mean your data is useless. I'm guessing IO theory stands for Industrial Organization theory, and this is a very wide field. I am sure you can come up with something interesting and use the data that you've got.

Note, though, that what you have graphed is data of price levels, but of price changes. This may be something you want to explore. For example, do you think the change in average market price is relevant for a single firm in that market? And what does this imply for entry into a market? And more generally, should the market price be the deciding factor for market entry decision?