A Cautionary Note on the Applicability of the Bresnahan-Lau Framework

This policy note evaluates the inferrence of market power using a technique which rests on a very particular class of behavioral models of firm pricing. I document the specific context for which the pioneering framework of Bresnahan (1982) and Lau (1982) was designed. I then consider alternative, though well-established, behavioral models under which the framework yields inconsistent estimates. In view of its low testing power, use of the framework demands caution.