Linear estimation approach for including strategic competition in market simulations

Abstract

The present paper proposes an empirical approach for including the effect of strategic competition in market simulation, avoiding the use of time consuming game theoretical models. The methodology is based on a linear estimation of the Lerner Index, that is a common measurement for price mark up, depending on the Residual Supply Index values of the strategic suppliers. The empirical model is estimated on data from four European markets. The proposed methodology is applied to a small didactical example.