Industrial Organization

Members of the NBER's Industrial Organization Program met February 8-9 in Stanford. Research Associates Eric Budish of University of Chicago and Jean-François Houde of University of Wisconsin-Madison organized the meeting. These researchers' papers were presented and discussed:

Gaston Illanes, Northwestern University, and Manisha Padi, University of Chicago

Competition, Asymmetric Information, and the Annuity Puzzle: Evidence from a Government-run Exchange in Chile

Purchasing an annuity insures an individual against the risk of outliving their money, by promising a steady stream of income until death. Despite the fact that retirement asset allocation models predict high annuitization rates, private annuity markets tend to function poorly, with low annuitization rates and high markups. Chile provides a counterexample to this phenomenon, as over 60% of eligible retirees purchase annuities from the private market and observed markups are low. Illanes and Padi show that Chilean social security policy promotes private annuitization, in contrast to U.S. social security policy. They do so by building a lifecycle consumption-savings model and showing through calibrations that the Chilean setting is likely to have lower levels of adverse selection and is more robust to market unraveling than the US. The researchers then use a novel administrative dataset on all annuity offers made to Chilean retirees between 2004 and 2013 to estimate a flexible demand system built on top of the consumption-savings model. The model estimates allow us to simulate how the Chilean equilibrium would shift under alternative regulatory regimes. The researchers find that reforming the Chilean system to more closely resemble the U.S. Social Security system, by introducing mandatory annuitization of a fraction of wealth at the actuarially fair rate, raises prices and can lead to full market unravelling. When comparing welfare between both systems, however, retirees with high valuations for annuitization tend to prefer a U.S. style system while retirees with low valuations tend to prefer the Chilean system. The former tend to value the high annuity rate from Social Security, even if further annuitization is not possible, while the latter dislike mandatory annuitization. Highly heterogeneous preferences across retirees appear to drive annuity market behavior.

Rebecca Diamond and Petra Persson, Stanford University and NBER; Michael J. Dickstein, New York University and NBER; and Timothy McQuade, Stanford University

Take-Up, Drop-Out, and Spending in ACA Marketplaces (NBER Working Paper No. 24668)

The Affordable Care Act (ACA) established health insurance marketplaces where consumers can buy individual coverage. Leveraging novel credit card and bank account micro-data, Diamond, Dickstein, McQuade, and Persson identify new enrollees in the California marketplace and measure their health spending and premium payments. Following enrollment, the researchers observe dramatic spikes in individuals' health care consumption. The researchers also document widespread attrition, with more than half of all new enrollees dropping coverage before the end of the plan year. Enrollees who drop out re-time health spending to the months of insurance coverage. This drop-out behavior generates a new type of adverse selection: insurers face high costs relative to the premiums collected when they enroll strategic consumers. The researchers show that the pattern of attrition undermines market stability and can drive insurers to exit, even absent differences in enrollees' underlying health risks. Further, using data on plan price increases, the researchers show that insurers largely shift the costs of attrition to non-dropout enrollees, whose inertia generates low price sensitivity. The results suggest that campaigns to improve use of social insurance may be more efficient when they jointly target take-up and attrition.

Keaton S. Miller, University of Oregon; Amil Petrin, University of Minnesota and NBER; Robert Town, University of Texas at Austin and NBER; and Michael Chernew, Harvard University and NBER

Optimal Managed Competition Subsidies

The Medicare Advantage program enables Medicare recipients to receive their health care benefits via private insurance plans instead of through the federal government. Insurers receive a payment from the government for each individual enrolled, and may add additional benefits and charge an additional premium - an approach which mirrors many other goods provided via a government subsidy. The optimal subsidy in different markets - conditional on a fixed amount of government expenditures across all markets - depends on the interactions between consumer demand and supply-side responses to changes in the payments offered by the government. However, governments subsidies are typically pegged only to a measure of average cost. Miller, Petrin, Town, and Chernew study optimal subsidy design in Medicare Advantage by estimating a flexible supply and demand systems in an oligoply setting that features demand-side heterogeneity and switching costs, and supply-side price-setting and benefit design behavior. They find that the optimal subsidy structure differs from the implemented one and significantly improves consumer surplus.

Thomas G. Wollmann, University of Chicago and NBER

How to Get Away with Merger: Stealth Consolidation and its Effects on US Healthcare

Most US mergers are not reported to the federal government on the basis of their size. This can effectively exempt them from antitrust scrutiny, resulting in mergers to monopoly and duopoly, even in industries where enforcement is otherwise robust. This paper studies the impact of premerger notification exemptions in the context of US dialysis providers. First, Wollmann finds large effects on enforcement. For instance, many proposed dialysis facility acquisitions that would otherwise be blocked over 95% of the time are blocked less than 5% of the time when exempt from premerger notification requirements. Second, he finds equally important effects on market structure. Exempt facility acquisitions account for nearly all of the rise in industry-wide within-market concentration over the last two decades. In fact, applying the enforcement rates faced by reportable mergers to exempt mergers stalls the dramatic consolidation of the dialysis industry. Finally, facility acquisitions associated with exempt mergers compromise the quality of care received by patients.

Sumit Agarwal, Georgetown University; John Grigsby, University of Chicago; Ali Hortaçsu, University of Chicago and NBER; Gregor Matvos, University of Texas at Austin and NBER; Amit Seru, Stanford University and NBER; and Vincent Yao, Georgia State University

Searching for Approval

Agarwal, Grigsby, Hortaçsu, Matvos, Seru and Yao study the interaction of search and application approval in credit markets. They combine a unique dataset, which details search behavior for a large sample of mortgage borrowers, with loan application and rejection decisions. The data reveal substantial dispersion in mortgage rates and search intensity, conditional on observables. However, in contrast to predictions of standard search models, the researchers find a novel non-monotonic relationship between search and realized prices: borrowers, who search a lot, obtain more expensive mortgages than borrowers' with less frequent search. The evidence suggests that this occurs because lenders screen borrowers' creditworthiness, rejecting unworthy borrowers, which differentiates consumer credit markets from other search markets. Based on these insights, the researchers build a model that combines search and screening in presence of asymmetric information. Risky borrowers internalize the probability that their application is rejected, and behave as if they had higher search costs. The model rationalizes the positive relationship between search and interest rates, and highlights the tight link between credit standards and pricing. The researchers estimate the parameters of the model and study several counterfactuals. The model suggests that overpayment may be a poor proxy for consumer unsophistication since it partly represents rational search in presence of rejections. Moreover, the development of improved screening technologies from an abundance of data endogenously leads to more severe adverse selection in credit markets. Finally, place based policies, such as the Community Reinvestment Act, may affect equilibrium prices through endogenous search responses rather than increased credit risk.

Panle Jia Barwick, Cornell University and NBER; Myrto Kalouptsidi, Harvard University and NBER; and Nahim B. Zahur, Cornell University

China's Industrial Policy: an Empirical Evaluation

Industrial policies, broadly defined as policies that shape a country's or region's industry structure by either promoting or limiting certain industries or sectors, have been widely used in developed and developing countries. Despite its importance, few empirical studies directly evaluate the welfare consequences of these policies using micro-level data. Barwick, Kalouptsidi, and Zahur examine an important industrial policy in China -- the policy to develop the country's shipbuilding industry to the largest worldwide in the 2000s. Using comprehensive data on shipyards worldwide, they quantify the magnitude of China's industrial policies in supporting its domestic ship building industry using a dynamic model. The researchers' estimates suggest that the combined policy support was around 500 billion RMB from 2006 to 2013, boosted China's domestic investment and entry by 270% and 200%, respectively, and enhanced its world market share by 40%. On the other hand, the policy created sizable distortions and led to increased fragmentation and idleness. Production and investment subsidies can be justified based on market share considerations, but entry subsidies are wasteful. The distortions induced by industrial policy could have been significantly reduced by implementing counter-cyclical policies and by targeting subsidies towards more productive firms. The researchers find little evidence in support of the traditional justifications for industrial policies. The results point to the importance of non-economic considerations in contributing to the policy design.

Daniel Bjorkegren, Brown University

Competition in Network Industries: Evidence from Mobile Telecommunications in Rwanda

Bjorkegren develops a method to analyze the effects of competition policy in a network industry. Competition has mixed effects on incentives to invest: when a network is split between competitors, each captures only a fraction of potential network effects. However, a firm may invest in components that are not shared, to attract customers to its network. Bjorkegren estimates the network utility of adopting a phone based on its subsequent usage, using transaction data from nearly the entire network of Rwandan mobile phone subscribers over 4.5 years. A structural model is built to simulate the equilibrium choices of consumers and network operators, and consider Rwanda's decision to delay the introduction of competition. The research finds that adding an additional competitor earlier would have reduced prices and can in some cases increase incentives to invest in rural towers, increasing welfare by the equivalent of 1.4% of GDP. The study then analyzes the effects of setting different interconnection rates, reducing switching costs through number portability, and introducing competition at different times in the evolution of the network.

Michael Ostrovsky, Stanford University and NBER, and Michael Schwarz, Microsoft

Carpooling and the Economics of Self-Driving Cars (NBER Working Paper No. 24349)

Ostrovsky and Schwarz study the interplay between autonomous transportation, carpooling, and road pricing. They discuss how improvements in these technologies, and interactions among them, will affect transportation markets. The main results show how to achieve socially efficient outcomes in such markets, taking into account the costs of driving, road capacity, and commuter preferences. An important component of the efficient outcome is the socially optimal matching of carpooling riders. The researchers' approach shows how to set road prices and how to share the costs of driving and tolls among carpooling riders in a way that implements the efficient outcome.

Pietro Tebaldi and Alexander Torgovitsky, University of Chicago, and Hanbin V. Yang, Harvard University

Nonparametric Estimates of Demand in the California Health Insurance Exchange

Tebaldi, Torgovitsky, and Yang estimate the demand for health insurance in the California Affordable Care Act marketplace (Covered California) without using parametric assumptions about the unobserved components of utility. To do this, they develop a computational method for constructing sharp identified sets in a nonparametric discrete choice model. The model allows for endogeneity in prices (premiums) and for the use of instrumental variables to address this endogeneity. The researchers use the method to estimate bounds on the effects of changing premium subsidies on coverage choices, consumer surplus, and government spending. They find that a $10 decrease in monthly premium subsidies would cause between a 3.3% and 8.4% decline in the proportion of low-income adults with coverage. The reduction in total annual consumer surplus would be between $56 and $70 million, while the savings in yearly subsidy outlays would be between $441 and $768 million. These nonparametric estimates reflect substantially greater price sensitivity than in comparable logit or probit models.

Yuyu Chen, Peking University; Mitsuru Igami and Masayuki Sawada, Yale University; and Mo Xiao, University of Arizona

Privatization and Productivity in China

Chen, Igami, Sawada, and Xiao study how changes in ownership affect the productivity of firms. Privatization of state-owned enterprises (SOEs) was a major economic reform during China's rapid growth, but its true impact remains controversial. Although private firms seem more productive than SOEs, the government selectively privatized (or liquidated) nonperforming SOEs, which complicates the measurement of productivity. The researchers address this selection problem by incorporating endogenous ownership change into a nonparametric estimation method and exploiting a lag structure in data. Results suggest privatization conferred both short-run and long-run productivity gains. The private-SOE productivity gap is larger among older firms and in less economically liberal regions.

Guangyu Cao, Peking University & Guanghua-ofo Center for Sharing Economy Research; Ginger Zhe Jin, University of Maryland and NBER; and Xi Weng and Li-An Zhou, Peking University

Market Expanding or Market Stealing? Competition with Network Effects in Bike-Sharing (NBER Working Paper No. 24938)

The recent rise of dockless bike-sharing is dominated by two firms in China: one started first in 82 cities, 59 of which were subsequently entered by the second firm. Using these variations, Cao, Jin, Weng, and Zhou study how the entrant affects the incumbent's market performance. To the researchers' surprise, the entry expands the market for the incumbent. Not only does the entry boost it's total number of trips and encourage more bike investment, it but also allows the incumbent to achieve higher revenue per trip, improve bike utilization rate, and form a wider and more evenly distributed network. The market expansion effect on new users dominates a significant market-stealing effect on the incumbent's old users. These findings, together with a theoretical model that highlights consumer search and network effects, suggest that a market with positive network effects is not necessarily winner-takes-all, especially when users multi-home across compatible networks.

Mark L. Egan, Harvard University; Gregor Matvos, University of Texas at Austin and NBER; and Amit Seru, Stanford University and NBER

Arbitration with Uninformed Consumers (NBER Working Paper No. 25150)

Egan, Matvos, and Seru examine whether firms have an informational advantage in selecting arbitrators in consumer arbitration, and the impact of the arbitrator selection process on outcomes. They collect data containing roughly 9,000 arbitration cases in securities arbitration. Securities disputes present a good laboratory: the selection mechanism is similar to other major arbitration forums, arbitration is mandatory for all disputes, eliminating selection concerns, and the parties choose arbitrators from a randomly generated list. The researchers first document that some arbitrators are systematically industry friendly while others are consumer friendly. Firms appear to utilize this information in the arbitrator selection process. Despite a randomly generated list of potential arbitrators, industry-friendly arbitrators are forty percent more likely to be selected than their consumer friendly counterparts. Better informed firms and consumers choose more favorable arbitrators. The researchers develop and calibrate a model of arbitrator selection in which, like the current process, both the informed firms and uninformed consumers have control over the selection process. Arbitrators compete against each other for the attention of claimants and respondents. The model allows for interpretation of the empirical facts in equilibrium and to quantify the effects of changes to the current arbitrator selection process on consumer outcomes. Competition between arbitrators exacerbates the informational advantage of firms in equilibrium resulting in all arbitrators slanting towards being industry friendly. Evidence suggests that limiting the respondent's and claimant's inputs over the arbitrator selection process could significantly improve outcomes for consumers.

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