4 hypotheses that they test. Our motive for discussing the theories is not to produce a comprehensive survey of their richness but rather to provide us with a framework within which to present the evidence. In particular, the evidence that we present is organized around the predictions of simple bare-bones models.Throughout our presentation we discuss some of the measurement challenges that authors face but mostly ignore econometric problems. We do this to keep the overview tractable and of reasonable length. This is not to say that the econometric problems are unimportant. To make this point clear, in each of the two segments we highlight some of the econometric issues that researchers must confront. Since those issues are not always dealt with satisfactorily, one can be skeptical about some of the conclusions that authors have reached. Nevertheless, taken as a body, the evidence is often so strong that it can overcome much of our skepticism.

We investigate the nature of price competition among firms that produce differentiated products and compete in markets that are limited in extent. We propose an instrumental variables series estimator for the matrix of cross price response coefficients, demonstrate that our estimator is consistent, and derive its asymptotic distribution. Our semiparametric approach allows us to discriminate among models of global competition, in which all products compete with all others, and local competition, in which products compete only with their neighbors. We apply our semiparametric estimator to data from U.S. wholesale gasoline markets and find that, in this market, competition is highly localized.

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