Deflation in Durable Goods Markets: An Empirical Model of the Tokyo Condominium Market
Abstract
Throughout the 1990s, the supply of new condominiums in Tokyo significantly increased while prices persistently fell. This article investigates whether the market power of condominium developers is a factor in explaining the outcome in this market and whether there is a relationship between production cost trend and the degree of market power that the developers were able to exercise. In order to respond to these questions, we construct and structurally estimate a dynamic durable goods oligopoly model of the condominium market – one incorporating time-variant costs and a secondary market – using a nested GMM procedure. We find that the data provide no evidence that firms in the primary market have substantial market power in this industry. Moreover, the counterfactual experiment provides evidence that inflationary and deflationary expectations on production cost trends have asymmetric effects to the market power of condominium producers. The increase in their markup when cost inflation is anticipated is significantly higher than the decrease in the markup when the same magnitude of cost deflation is anticipated.
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Acknowledgements
Acknowledgment
I wish to thank Matthew Shum and Joseph Harrington for their helpful comments and encouragement. I would also like to thank Susanna Esteban, Hiroshi Fujiki, Tanjim Hossain, Toshiaki Iizuka, Christopher Mayer, John Rust, and Katsumi Shimotsu for their valuable comments. Comments from the seminar audience at Aoyama Gakuin University, the Bank of Canada, the Bank of Japan, GRIPS, HKUST, Japan Economic Association 2008 Spring Meeting, Johns Hopkins University, La Pietra-Mondragone Workshop (2007), NBER 2008 Japan Project Meeting, Nihon University, and ISER at Osaka University, Advances in Econometrics Research Conference (2013) are likewise gratefully acknowledged. All remaining errors are mine.
Citation
Tanaka, M. (2013), "Deflation in Durable Goods Markets: An Empirical Model of the Tokyo Condominium Market", Structural Econometric Models (Advances in Econometrics, Vol. 31), Emerald Group Publishing Limited, Leeds, pp. 337-386. https://doi.org/10.1108/S0731-9053(2013)0000032011
Publisher
:Emerald Group Publishing Limited
Copyright © 2013 by Emerald Group Publishing Limited