Industrial Organization

Industrial Organization

Members of the NBER's Industrial Organization Program met at the Stanford Institute for Economic Policy Research on February 9-10. Faculty Research Fellow Myrto Kalouptsidi of Harvard University and Research Associate Jesse M. Shapiro of Brown University organized the meeting. These researchers' papers were presented and discussed:

John Asker, University of California, Los Angeles and NBER; Allan Collard-Wexler, Duke University and NBER; and Jan De Loecker, Princeton University and NBER

Market Power, Production (Mis)Allocation and OPEC

Asker, Collard-Wexler, and De Loecker estimate the extent to which market power is a source of production misallocation. Productive inefficiency occurs through more production being allocated to higher-cost units of production, and less production to lower-cost production units, conditional on a fixed aggregate quantity. The researchers rely on rich micro-data covering the global market for crude oil, from 1970 to 2014, to quantify the extent of productive misallocation attributable to market power exerted by the OPEC. The researchers find substantial productive inefficiency attributable to market power, ranging from 14.1 percent to 21.9 percent of the total productive inefficiency, or 105 to 163 billion USD.

Jan De Loecker, Princeton University and NBER, and Jan Eeckhout, University College London

The Rise of Market Power and the Macroeconomic Implications (NBER Working Paper No. 23687)

De Loecker and Eeckhout document the evolution of markups based on firm-level data for the US economy since 1950. Initially, markups are stable, even slightly decreasing. In 1980, average markups start to rise from 18% above marginal cost to 67% now. There is no strong pattern across industries, though markups tend to be higher, across all sectors of the economy, in smaller firms and most of the increase is due to an increase within industry. The researchers do see a notable change in the distribution of markups with the increase exclusively due to a sharp increase in high markup firms. The researchers then evaluate the macroeconomic implications of an increase in average market power, which can account for a number of secular trends in the last 3 decades: A decrease in labor share, a increase in capital share, a decrease in low skill wages, a decrease in labor force participation, a decrease in labor flows, a decrease in migration rates, and a slowdown in aggregate output.

Stefano DellaVigna, University of California, Berkeley and NBER, and Matthew Gentzkow, Stanford University and NBER

Uniform Pricing in US Retail Chains (NBER Working Paper No. 23996)

DellaVigna and Gentzkow show that most U.S. grocery, drug, and mass merchandise chains charge nearly-uniform prices across stores, despite wide variation in consumer demographics and the level of competition. Estimating a model of consumer demand reveals substantial within-chain variation in price elasticities and suggests that chains sacrifice 3-10 percent of variable profits relative to a benchmark of flexible prices. In contrast, differences in average prices between chains broadly conform to the predictions of the model. The researchers show that the uniform pricing they document dampens the overall response of prices to local economic shocks, shifts the incidence of taxes and intra-national trade costs, and significantly increases the prices paid by poorer households relative to the rich. The researchers discuss fixed costs of managerial decision making, tacit collusion, and fairness concerns as possible explanations for near-uniform pricing.

Germán Gutiérrez, New York University, and Thomas Philippon, New York University and NBER

Declining Competition and Investment in the U.S. (NBER Working Paper No. 23583)

The U.S. business sector has under-invested relative to Tobin's Q since the early 2000's. Gutiérrez and Philippon argue that declining competition is partly responsible for this phenomenon. The researchers use a combination of natural experiments and instrumental variables to establish a causal relationship between competition and investment. Within manufacturing, they show that industry leaders invest and innovate more in response to exogenous changes in Chinese competition. Beyond manufacturing the researchers show that excess entry in the late 1990's, which is orthogonal to demand shocks in the 2000's, predicts higher industry investment given Q. Finally, the researchers provide some evidence that the increase in concentration can be explained by increasing regulations.

Xiang Hui, MIT; Maryam Saeedi, Carnegie Mellon University; Steven Tadelis, University of California, Berkeley and NBER; and Giancarlo Spagnolo, SITE-Stockholm School of Economics

Certification, Reputation and Entry: An Empirical Analysis

How does quality-certification affect entry and product quality in markets? Hui, Saeedi, Tadelis, and Spagnolo exploit rich data and a policy change on eBay to explore the effects of a more stringent certification policy on the distribution of entrants and incumbents across a large number of markets segments. The researchers find that the policy change had two main effects. First, entry increased in markets where it was harder to get certified, until a new steady state was reached. Second, the quality distribution of entrants exhibits fatter tails, though overall quality is slightly higher. The researchers discuss implications for the design of certification policies in markets.

Mitsuru Igami, Yale University, and Takuo Sugaya, Stanford University

Measuring the Incentive to Collude: The Vitamin Cartels, 1990-1999

Why do some cartels survive for a decade whereas others collapse within a few years? Models of collusion are difficult to identify, but the vitamins case, one of the largest in history, entails direct evidence from American courts and European agencies. Igami and Sugaya provide a theory-based measurement of the incentive to collude, and test a fundamental prediction of game theory that cooperation is self-enforcing if and only if it is incentive compatible. The researchers simple repeated-game model could explain the life and death of various vitamin cartels. Simulations suggest a hypothetical merger could have prolonged the vitamin C cartel.

John C. Haltiwanger, University of Maryland and NBER; Robert Kulick, NERA Economic Consulting; and Chad Syverson, University of Chicago and NBER

Misallocation Measures: The Distortion That Ate the Residual (NBER Working Paper No. 24199)

A large literature on misallocation and productivity has arisen in recent years, with Hsieh and Klenow (2009, hereafter HK) as its standard empirical framework. The framework's usefulness and theoretical founding make it a valuable starting point for analyzing misallocations. However, Haltiwanger, Kulick, and Syverson show that the empirical lynchpin of this approach can be very sensitive to model misspecification. The condition in the HK model that maps from observed production behaviors to the misallocative wedges/distortions holds in a single theoretical case, with strict assumptions required on both the demand and supply sides. The researchers demonstrate that applying the HK methodology when there is any deviation from these assumptions will mean that the "distortions" recovered from the data may not be signs of inefficiency. Rather, they may simply reflect demand shifts or movements of the firm along its marginal cost curve, quite possibly in directions related to higher profits for the business. The framework may then not just spuriously identify inefficiencies -- it might be more likely to do so precisely for businesses better in some fundamental way than their competitors. Empirical tests in the researchers' data, which allow them to separate price and quantity and as such directly test the model's assumptions, suggest the framework's necessary conditions do not hold. The researchers empirically investigate two of the possible sources of departures from the HK assumptions and implications and find support for both. They also find that measures of distortions that emerge from this approach are in fact strongly positively related with survival, suggesting they embody favorable profit conditions for the business. At the same time, however, once the researchers condition on demand and supply fundamentals, the distortion measure becomes inversely related with survival. This suggests the measure may contain a distortionary component, but it is empirically swamped by other factors.

Selin Akca, University of Zurich, and Anita Rao, University of Chicago

Value of Search Aggregators

Airlines are increasingly questioning the value of search aggregators, preferring to bypass online ticket aggregators and sell directly to consumers. However, airlines need aggregators to gain access to a wider audience. Similarly, aggregators need the presence of all airlines to make them comprehensive and useful to consumers. Akca and Rao investigate who benefits most in the airline-aggregator relationship. Specifically, they ask what would happen to airline and aggregator site visits and purchases in the absence of a comprehensive aggregator. The researchers first explore consumers' search patterns on Southwest: an airline that has never been part of any aggregator. In a descriptive exercise, the researchers find that consumers who book on Southwest are least likely to visit aggregator sites. Second, the researchers use the 2011 American dispute with Orbitz as an exogenous event, which led to American fares no longer being displayed on Orbitz for five months. The dispute creates a clear shift in the choice set available to consumers visiting Orbitz, with the timing being driven entirely by the contract renegotiation deadline, which creates a quasi-experimental setting. The researchers use this dispute to identify who was hurt the most — the aggregator or the airline — in the months following the dispute. Akca and Rao's findings indicate that the aggregator loses the most when it is not comprehensive.

Ying Li, Cornerstone Research; Joe Mazur, Purdue University; Yongjoon Park, University of Maryland; James W. Roberts, Duke University and NBER; Andrew Sweeting, University of Maryland and NBER; and Jun Zhang, University of Maryland

Endogenous and Selective Service Choices After Airline Mergers (NBER Working Paper No. 24214)

Li, Mazur, Park, Roberts, Sweeting, and Zhang estimate a model of service choice and price competition in airline markets, allowing for the carriers that provide nonstop service to be a selected subset of the carriers competing in the market. The researchers' model can be estimated without an excessive computational burden and we use the estimated model to illustrate the effects of selection on equilibrium market structure and to show how accounting for selection can change predictions about post-merger market power and repositioning, in ways that are consistent with what has been observed after actual mergers, and possible merger remedies.