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Open Access Publications from the University of California

Essays on Structural Estimation in the European Car Market

  • Author(s): Noton Norambuena, Carlos Esteban
  • Advisor(s): Obstfeld, Maurice
  • et al.

This dissertation consists of two essays of structural estimation in the European car market, where the first chapter focuses on the demand side and the second chapter focuses on the supply side.

In the first chapter, I incorporate home bias in a structural demand, consistent with the strong dominant position of domestic car manufacturers in Europe. I use the Berry, Levinsohn, and Pakes (1995) methodology which considers heterogeneous consumers, controls for price endogeneity, and does not impose decision nests. My estimates suggest that home bias is a key determinant of the market shares differences and is well captured by a fixed effect. Contrary to previous finding, domestic producers do not face a less sensitive demand in their domestic markets than foreign competitors, which is a crucial distinction for pricing behavior.

In the second chapter, I estimate the underlying cost structure of the car manufacturers to rationalize two key features: incomplete degree of exchange rate pass-through and gradual price adjustments. Using the methodology developed by Bajari, Benkard, and Levin (2007) to estimate dynamic games, I identify structural cost parameters including destination-currency cost components and price adjustment costs. The main results are: i) the destination-currency cost component should be about 20-30% of total costs in order to rationalize the observed incomplete degree of exchange rate pass-through; ii) relatively small price adjustment costs can rationalize the observed inertia in car prices; iii) there are heterogeneous price adjustment costs at producer-market level suggesting a new dimension of pricing to market behavior; and iv) in this particular dynamic environment, there is a positive relationship between price elasticities and markups.

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