Recent berkeley_econ221 items

An Estimable Demand System for a Large Auction Platform Market

Fri, 6 Nov 2009 00:00:00 +0000

Economists have developed a range of empirically tractable demand systems for fixed price markets. But auction mechanisms also play an important part in allocating goods, and yet existing empirical auction techniques treat each auction in isolation, obscuring market interactions. Here we provide a framework for estimating a demand system in a large auction platform market with a dynamic population of buyers, heterogeneous objects and unit demand. We construct a model of repeated second-price auctions in which bidders have multidimensional private valuations, developing an equilibrium concept under which strategies reflect option values. We prove existence of this equilibrium and characterize the ergodic distribution of types. Having developed a demand system, we show that it is non-parametrically identified from panel data. Relatively simple nonparametric and semiparametric estimation procedures are proposed and tested by Monte Carlo simulation. Our analysis highlights the...

The Relation Between Competition and Investment – Towards a Synthesis

Wed, 21 Oct 2009 00:00:00 +0000

Using a general two-stage framework, this paper gives sufficient conditions for increasing competition to have negative or positive effects on R&D-investment, respectively. Both possibilities arise in plausible situations, even if one uses relatively narrow definitions of increasing competition. The paper also shows that competition is more likely to increase the investments of leaders than those of laggards. When R&D-spillovers are strong, competition is less likely to increase investments. The paper also identifies conditions under which low initial levels of competition make positive effects of competition on investment more likely. Extending the basic framework, the paper shows that separation of ownership and control, endogenous entry and cumulative investments make positive effects of competition on investment more likely. Imperfect upstream competition weakens the effects of competition on investment. Keywords: competition, investment, cost reduction. JEL: L13,...

Making Sense of Non-Binding Retail-Price Recommendations

Thu, 15 Oct 2009 00:00:00 +0000

We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer’s profit is independent of production costs and punishment strategies are chosen appropriately. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs. Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations. JEL Classification: D23; D43; L14; L15.

Structural Estimation of Price Adjustment Costs in the European Car Market

Mon, 5 Oct 2009 00:00:00 +0000

Exchange rate pass-through literature identifies an important delay in price responses, especially in differentiated products. Using the methodology of Bajari, Benkard and Levin (2007), I estimate the structural price adjustment cost consistent with this fact in the European car market. My approach differs from previous work in that my framework allows me greater flexibility in estimating dynamic games. My main result is that relatively small adjustment costs rationalize the observed inertia in car prices. Intuitively, forward looking price setters face an autocorrelated economic environment (like the nominal exchange rates, GDP and wages) such that just a small cost of repricing justify the persistent prices in the European car market. Additionally, my estimates stress a market-specific heterogeneity in price stickiness suggesting a new dimension of pricing to market behavior.

The Effect of Information on Auction Outcomes: A Large Scale Field Experiment

Wed, 9 Sep 2009 00:00:00 +0000

When choosing auction mechanisms sellers can decide how much information to reveal to buyers regarding the quality of the goods sold. Using a field experiment in a market for wholesale automobile auctions we are able to measure the effects of information on auction outcomes. We create random assignments of information about quality, and manipulate the availability of information over time. Our results suggest that, as the theoretical literature generally predicts, more information increases expected revenues. Furthermore, by measuring the effects on different quality grades of automobiles it seems like the increase in revenues are due to more competition for any given vehicle. Finally, we quantify the value of gathering information and releasing it to potential buyers in this setup. JEL classifications C93, D44, D82, L15.

Do All Markets Ultimately Tip? Experimental Evidence

Wed, 9 Sep 2009 00:00:00 +0000

Do All Markets Ultimately Tip? Experimental Evidence

Anti-Lemons: School Reputation and Educational Quality

Thu, 27 Aug 2009 00:00:00 +0000

Friedman (1962) argued that a free market in which schools compete based upon their reputation would lead to an efficient supply of educational services. This paper explores this issue by building a tractable model in which rational individuals go to school and accumulate skill valued in a perfectly competitive labor market. To this it adds one ingredient: school reputation in the spirit of Holmstrom (1982). The first result is that if schools cannot select students based upon their ability, then a free market is indeed efficient and encourages entry by high productivity schools. However, if schools are allowed to select on ability, then competition leads to stratification by parental income, increased transmission of income inequality, and reduced student effort---in some cases lowering the accumulation of skill. The model accounts for several (sometimes puzzling) findings in the educational literature, and implies that national standardized testing can play a key role in...

Beyond Testing: Empirical Models of Insurance Markets

Sat, 15 Aug 2009 00:00:00 +0000

We describe recent advances in the empirical analysis of insurance markets. This new research proposes ways to estimate individual demand for insurance and the relationship between prices and insurer costs in the presence of adverse and advantageous selection. We discuss how these models permit the measurement of welfare distortions arising from asymmetric information and the welfare consequences of potential government policy responses. We also discuss some challenges in modeling imperfect competition between insurers, and outline a series of open research questions. JEL classification numbers: C51, D82. Keywords: Insurance markets; Asymmetric information; Adverse selection.

Bankruptcies and low-cost Carrier Expansion in the Airline Industry

Wed, 12 Aug 2009 00:00:00 +0000

Bankruptcies and low-cost Carrier Expansion in the Airline Industry

Scarcity of Ideas and R&D Options: Use it, Lose it or Bank it.

Wed, 12 Aug 2009 00:00:00 +0000

We investigate rewards to R&D in a model where substitute ideas for innovation arrive to random recipients at random times. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We characterize the welfare-maximizing reward structure when the social planner learns over time about the arrival rate of ideas, and when private recipients of ideas can bank their ideas for future use. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce."

Is Pay-For-Performance Detrimental to Innovation?

Wed, 12 Aug 2009 00:00:00 +0000

Previous research in economics shows that paying the agent based on performance induces the agent to exert more effort thereby enhancing productivity. On the other hand, research in psychology argues that performance-based financial incentives may inhibit creativity and innovation. In a controlled laboratory experiment, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, while golden parachutes can alleviate these innovation-reducing effects. Our results suggest that appropriately designed incentives are useful in motivating creativity and innovation.

Does Bankruptcy Protection Harm the Airline Industry?

Tue, 28 Apr 2009 00:00:00 +0000

Does Bankruptcy Protection Harm the Airline Industry?

Information and the Hold-Up Problem

Mon, 30 Mar 2009 00:00:00 +0000

We examine situations in which a party must make a sunk investment prior to contracting with a second party to purchase an essential complementary input. We study how the resulting old-up problem is affected by the seller’s information about the investing party’s likely returns from its investment. Our principal focus is on the effects of the investment’s being observable by the non-investing party. We establish conditions under which the seller’s ability to observe the buyer’s investment harms the seller, benefits the buyer, and reduces equilibrium investment and total surplus. We also note conditions under which investment and welfare rise when investment is observable.

International Trade in Used Vehicles: The Environmental Consequences of NAFTA

Wed, 11 Feb 2009 00:00:00 +0000

Over the last two decades an unprecedented increase in private vehicle ownership has taken place in the developing world. This growth is due, in part, to increased international trade in used vehicles. In this paper we use theory and empirical evidence to evaluate the environmental implications of free trade in vehicles and other used durable goods. With non‐homothetic preferences, used vehicles are relatively inexpensive in high‐income countries and free trade causes these goods to be exported to low‐income countries. We apply this framework to the North American Free Trade Agreement. Since trade restrictions were eliminated in 2005, over 2.5 million used cars have been exported from the United States to Mexico. Using a unique, vehicle‐level dataset, we find that traded vehicles are dirtier than the stock of vehicles in the United States and cleaner than the stock in Mexico, so trade leads average vehicle emissions to decrease in both countries. Total greenhouse gas emissions...

The Welfare Effects of Adverse Selection in Privatized Medicare

Wed, 11 Feb 2009 00:00:00 +0000

This paper estimates the welfare losses from market failures caused by adverse selection in privatized Medicare. I model insurers' premium and coverage choices in an environment where consumers have heterogeneous preferences and may impose different costs on their insurers. The model generates predictions about insurers' costs and behavior under varying degrees of adverse selection. I use the model and exogenous variation in market structure to identify a causal link between consumers' types and insurers costs. From the estimated parameters, I can infer whether consumers' preferences, which determine how much insurance they purchase, contain information about their expected health. The empirical results imply that adverse selection is indeed present in privatized Medicare. It is more costly to insure consumers with strong preferences for health insurance. With the estimated model, I simulate new equilibria after removing the distortionary effects of adverse selection from insurers'...

Why Do Intermediaries Divert Search?

Wed, 11 Feb 2009 00:00:00 +0000

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). There are three motives for diverting search (i.e. inducing consumers to search more than they would like): i) trading off higher total consumer traffic for higher revenues per consumer visit; ii) reducing the variance of store profits when store affiliation decisions are endogenous; and iii) influencing stores’ choices of strategic variables (e.g. pricing) once they have decided to affiliate. We show that search diversion remains a necessary strategic instrument for the intermediary even when the contracting space is significantly enriched: allowing the intermediary to charge consumers fixed fees, to offer them screening contracts, to subsidize search; allowing stores’ strategic decisions to be contractible or controlled by the intermediary. Keywords: Market Intermediation, Search, Two-Sided Markets, Platform Design. JEL Classifications:...

Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition

Wed, 11 Feb 2009 00:00:00 +0000

Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition

Competition with Social Externalities

Thu, 5 Feb 2009 00:00:00 +0000

Competition with Social Externalities

Monopolies in Two-Sided Markets: Comparative Statics and Identification

Wed, 4 Feb 2009 00:00:00 +0000

Many models of monopoly in two-sided markets have been proposed (Rochet and Tirole, 2006), but little is known about them. I provide a full set of comparative statics for three models, one that generalizes that of Rochet and Tirole (2003), a second that generalizes Armstrong (2006) and a third that fuses the two models. This answers a number of questions central to the theoretical literature, such as the effects of market power and price controls and the relationship between different models. I also show how, given exogenous cost variations, these models can be almost fully (locally) identified (e.g. market power and predatory pricing), tested and distinguished from one another. I highlight applications of the results to a wide variety of theoretical, empirical and policy questions, including merger analysis.

A Model of Vertical Oligopolistic Competition

Wed, 4 Feb 2009 00:00:00 +0000

This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and provide conditions under which they are welfare enhancing.

The Accident Externality from Driving

Thu, 1 Dec 2005 00:00:00 +0000

The Accident Externality from Driving

Putting a Smiley Face on the Dragon: Wal-Mart as Catalyst to

Thu, 8 Sep 2005 00:00:00 +0000

Putting a Smiley Face on the Dragon: Wal-Mart as Catalyst to

Internet Advertising and the Generalized Second Price Auction: Selling Billions of Dollars Worth of Keywords