Discussion Paper Series 2008-E-2

Deflation in Durable Goods Markets:An Empirical Model of the Tokyo Condominium Market

Migiwa Tanaka

Throughout the 1990s, the supply of new condominiums in Tokyo significantly increased while prices persistently fell. This paper 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, a dynamic durable goods oligopoly model of the condominium market-one incorporating time-variant costs and a secondary market-is constructed and structurally estimated using a nested GMM procedure.
On the basis of estimates and counterfactual experiments using the estimated model, the following results are obtained. First, the data provide no evidence that firms in the primary market have substantial market power in this industry. Second, 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.

Keywords: Durable Goods; Dynamic Oligopoly; Housing Market

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2008 Bank of Japan All Rights Reserved.

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