Industrial Organization Program Meeting

February 25 and 26, 2011
John Asker, NBER and New York University, and Tom Hubbard, NBER and Northwestern University, Organizers

Alessandro Gavazza, New York University
An Empirical Equilibrium Model of a Decentralized Asset Market

Gavazza estimates a search-and-bargaining model of a decentralized market to quantify the effects of trading frictions on asset allocations and asset prices, and to quantify the effects of intermediaries that facilitate trade. Using business aircraft data, he finds that, relative to the Walrasian benchmark, 12 percent of the assets are misallocated and prices are approximately 18.7 percent lower. Dealers play an important role in reducing frictions: in a market with no dealers, 20 percent of the assets would be misallocated. Perhaps surprisingly, in a market with no dealers, prices would decrease by only 0.6 percent, because sellers' outside options would improve relative to buyers', thus counteracting the effects of higher search costs and slower trade on asset prices.

Ryan C. McDevitt, University of Rochester
"A" Business by Any Other Name: Firm Name Choice as a Signal of Firm Quality

McDevitt considers a simple model in which a firm's name signals meaningful information about its quality, and he confirms the prediction that plumbing firms with names that begin with an "A" or a number receive more than five times as many complaints regarding poor service as other firms , on average. Other equilibrium implications confirmed in this setting include: 1) firms use names that begin with an "A" or a number more often in larger markets;2) firms that use multiple names receive more complaints; and 3) firms with names that begin with an "A" or a number have higher prices. The model also applies to position auctions: firms that advertise on Google receive more complaints, all else equal.

Allan Collard-Wexler, New York University and NBER
Mergers and Sunk Costs: An Application to the Ready-Mix Concrete Industry

Horizontal mergers have a large impact by inducing a long-lasting change in market structure. Only in an industry with substantial entry barriers, such as sunk entry costs, is a merger not immediately counteracted by postmerger entry. To evaluate the duration of the effects of a merger, Collard-Wexler develops a sunk-cost model of entry and exit in the spirit of Bresnahan and Reiss (1994) and Abbring and Campbell (2010). His model is estimated using data from the ready-mix concrete industry, which is subject to fierce local competition. Because of high sunk costs, the level of demand required to keep three firms in the market is comparable to the level of demand required to induce a single firm to enter the market in the first place. Simulations using estimates from the model predict that a merger from duopoly to monopoly generates between nine and ten years of monopoly in the market.

Mark R. Cullen and Liran Einav, Stanford University and NBER; Amy Finkelstein and Stephen P. Ryan, MIT and NBER; and Paul Schrimpf, MIT
Selection on Moral Hazard in Health Insurance

Existing empirical work on asymmetric information in insurance markets tends to focus either on selection or on moral hazard, but not on how they interact. Einav, Finkelstein, Ryan, Schrimpf, and Cullen explore the possibility that individuals may select insurance coverage in part based on their anticipated behavioral response to the insurance contract. Such "selection on moral hazard" can have important implications for attempts to ameliorate the consequences either of selection or of moral hazard. To explore these issues, they develop a model of plan choice and medical utilization, and estimate it using individual-level panel data from a single firm, including information about health insurance options, choices, and subsequent claims. To identify the behavioral response to health coverage and the heterogeneity in it, they take advantage of a change in the health insurance options offered to some, but not all, of the firms' employees. They find substantial selection on moral hazard in this setting, with individuals who exhibit greater behavioral response to coverage also selecting greater coverage. One implication of these estimates is that abstracting from selection on moral hazard could lead one to substantially over-estimate the spending reduction associated with introducing a high deductible health insurance option.

Brett R. Gordon, Columbia University, and Wesley Hartmann, Stanford University
Advertising Effects in Presidential Elections

Gordon and Hartmann estimate the effects of television advertising in presidential elections. Advertising shifts voters' preferences for candidates at the county level through an aggregate discrete choice model. The authors instrument for the endogenous advertising levels using the prior year's market price for advertising, in order to avoid the possibility that political advertising affects market prices. They also use an extensive set of fixed effects at the party-market level to control for other unobservable cross-sectional factors that might be correlated with advertising, outcomes, and instruments. The results indicate significant positive effects of advertising exposures for the 2000 and 2004 general elections. Advertising elasticities are smaller than typical for branded goods, yet significant enough to shift election outcomes. For example, if advertising were set to zero and all other factors held constant, five states' electoral votes would have changed parties in 2000, leading to a different president.

Joseph A. Cullen, Harvard University
Dynamic Response to Environmental Regulation in the Electricity Industry

Climate change, driven by rising carbon dioxide (CO2) levels, has become an important economic and political issue. Governments around the world are implementing environmental regulations that tax or price carbon dioxide emissions or significantly increase renewable energy production. Cullen seeks to understand the response of electricity producers to policy changes, given the current market structure. Electricity producers are the leading emitters of CO2 and other pollutants. They make their output decisions in response to fluctuating prices for electricity given their costs of production, which include substantial costs associated with starting up and shutting down generators. This paper recovers the cost parameters of the industry with a dynamic price taking model and uses them to solve for equilibrium prices and to simulate the supply of electricity, consumer surplus, and firm profits under counterfactual environmental policies. Results evaluating a carbon tax policy show that total emissions from the industry do not change significantly when faced with tax rates at the levels currently under consideration by legislators. Even a very large carbon tax, twice the expected level, lowers emissions by only 7 percent in the short run.

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