Chapter 2: Classic Empirical Models of Static Equilbrium∗

In this chapter, we begin with the classic models of partial equilibrium markets. We review the theory, which should be familiar to readers, with a special emphasis on points that are of relevance to an empirical researcher. We emphasize methods for uncovering the parameters of market primitives (demand and cost) that a policy-maker would want to use to analyze alternative policies. The ratio of econometrics to theory in this chapter is especially high. Since the the theory ought to be perfectly familiar to anyone reading the book, we have a simple context in which to introduce empirical ideas and methods than will reoccur thoughout the notes. We begin with the classic problem of estimating the supply and demand curves in a perfectly competitive market. This leads us to review the empirical problem of endogeneity. In an important methodological aside, we consider “method of moments” as a motivating principle for estimation techniques; the problem of endogeneity and solutions suggested by method of moments will reoccur throughout the text. As noted in Chapter 1, however, we often that think that perfect competition is a poor approximation to the world. We then turn to the most classic oligopoly model, Cournot,