Estimating market power in the presence of capacity constraints: An application to high-fructose corn sweetener

We develop a structural econometric model within which to measure market power in an industry that has capacity constraints. We implement our empirical framework using quarterly data from the market for high-fructose corn sweetener between 1980:1 and 2000:4. We demonstrate that ignoring the natural restrictions, from the capacity constraints as well as the existence of a near-perfect substitute (sugar in this case), can lead to inconsistent estimates. This may cause researchers to overestimate the market power of firms. These results have implications for anti-trust litigation.