Testing for \monopoly " market power when products are di®erentiated in quality

This paper proposes a reduced form approach to identify the presence of \monopoly " market power in markets with vertical product di®erentiation. In a general model I derive an explicit solution for the reduced form pricing equations under the hypothesis that prices are set to maximize the joint prof-its of all products. The central comparative statics result states that each product's price depends only on its own quality and not on the quality of its competitors. This contrasts with the solution under Bertrand-Nash behav-ior, and thus provides an identi¯cation argument for conduct under vertical product di®erentiation. I propose empirical tests implied by this result. They require only the data used in popular hedonic studies (prices and physical char-acteristics). The tests are applied to the U.S. market for spreadsheets and to the French market for optional car engines. J.E.L. Classi ̄ cation Number: L1