A Probabilistic Model for Testing Hypothesized Hierarchical Market Structures

In this paper a methodology for hierarchical market structure analysis is derived and illustrated. A probabilistic model is developed which provides a general, flexible framework which can be used to test hypothesized hierarchical market structures. Because the general probabilistic model can be translated in terms of a restricted latent class model it can be easily implemented. Among its other benefits, the proposed methodology, utilizing panel data, tracks households over a number of switches, furnishes explicit statistical tests for alternative hypothesized tree structures, as well as individual parameters, and can potentially identify clusters of households who structure the market in similar ways.