NEIO : Some Often Neglected Aspects of Specification and Inference

The New Empirical Industrial Organization (NEIO) approach maintains that the effect of market power of a firm on its conduct and performance can be adequately examined only by estimating a properly specified behavioural model. However, most of the tests of discretionary managerial behaviour are based on inappropriate reduced form specifications. It will be shown that a proper specification of the behavioural models of NEIO necessitates recognition of some often overlooked behavioural constraints. Appropriate estimation will be possible if the Systematic Two-step Estimation Procedure (STEP) outlined in this study is utilized.