Industrial Organization
The NBER's Program on Industrial Organization, directed by Nancy L. Rose of MIT, met at NBER's California office on January 28 and 29. Andrea Shepard, NBER and Stanford University, and Aviv Nevo, NBER and University of California, Berkeley, organized this program:
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Reiss and White develop a model of household demand for electricity and use it to assess the consequences of restructuring the electric industry in California. Using data for a representative sample of California households, they also derive measures of the willingness of consumers to pay. Reiss and White then evaluate the effects on household welfare of various price changes expected under California's 1996 electric utility restructuring law. The authors estimate that current implementation proposals would yield a welfare gain to California households of $1.1 billion annually (in 1998 dollars) by 2002, and $2.4 billion by 2008. These figures equal 5.4 percent and 12.3 percent respectively of the 1996 state personal income tax. Reiss and White also find that these regulatory reforms are remarkably progressive in their distributional impact.
Genesove shows that the move to offset printing from letterpress in the daily newspaper industry in the United States was determined in part by the structure of the local market. In monopoly markets, low circulation papers were quicker to adopt the new technology than high circulation papers; in duopoly markets the ranking was reversed. Genesove further shows that adoption of newer technology was at least partially determined at the firm rather than the newspaper level, although on the whole newspaper chains did not adopt earlier (or later) than nonchain newspapers. All else remaining the same, adoption occurred more quickly in nonindustrial states, Genesove finds.
Rysman studies the welfare tradeoff between competition and monopoly in a market characterized by network effects: the market for Yellow Pages directories. A competitive market with many small directories will fail to take advantage of the network effects between advertisers and consumers. Rysman simultaneously estimates consumer demand for use of a directory, advertiser demand for advertising, and a publisher's first-order condition (derived from profit-maximizing behavior). He shows that, for a given directory, the demand for advertising increases with the amount of consumer usage; consumer usage increases with the amount of advertising, thus implying a network effect. Rysman uses his estimates to determine the optimal level of advertising in a given market and whether the market would benefit from more or less competition. He finds that there is under-entry in the market in equilibrium and that network effects are important in driving a wedge between the social optimum and the market equilibrium.
Dranove, Kessler, McClellan, and Satterthwaite develop a framework for analyzing the competing arguments about the value of health care quality report cards. These report cards are public disclosures of patient health outcomes at the level of the individual physician and/or hospital. Report cards may help to allocate the sickest patients to the highest quality providers, but they also may give providers the incentive to totally decline to treat sick patients in order to improve their quality ranking. Using national data on Medicare patients at risk for cardiac surgery, the authors find that, in the short run, report cards in New York and Pennsylvania led to increased sorting of patients among providers and increased selection of healthy patients for surgery. Existing cardiac surgery report cards decrease patient and social welfare on net.
Morton and Zettelmeyer examine why a retailer would want to introduce a store brand in a particular category. Store brands differ from other brands in that they are unadvertised and their location "on the shelf" is determined by the retailer instead of the manufacturer. The authors propose three explanations for why retailers use store brands: to improve their negotiating position in relation to manufacturers; to price discriminate among consumers; and to take advantage of the marginal-average cost gap of national brand manufacturers. They then demonstrate that the existence of a store brand in a category changes the bargaining over supply terms between a retailer and the national brand manufacturers in that category. Retailers are more likely to carry a store brand in a category if the share of the leading national brand is higher, but the leading national brand share does not affect the market share of the store brand. Thus there may be a bargaining motive for the introduction of the store brand; Morton and Zettelmeyer propose that this is because the retailer can position the store brand to mimic the leading national brand.
Theory predicts that in markets with increasing returns the number of differentiated products -- and resulting consumer satisfaction -- grow with market size. Waldfogel documents this phenomenon for 246 U.S. radio markets. By a mechanism that he terms "preference externalities," an increase in the size of the market brings additional products that are valued by others with similar tastes. Waldfogel examines preference externalities between black and white and between Hispanic and non-Hispanic radio listeners, as well as among listeners of different age groups. His findings are striking. Within groups, preference externalities are large and positive, but across groups they are small and possibly negative. For example, entry of black-targeted stations and black listening share will increase with the black population, but they are unaffected (or possibly reduced) by the size of the white population. Consequently, small groups receive less variety from the market. Forces that increase the size of the market, such as emerging satellite and Internet technologies, thus may increase the satisfaction of individuals whose preferences do not match those of their fellow local residents.
Using a sample of firms that undertook diversifying mergers between 1980 and 1995, Chevalier examines the investment behavior of these firms prior to their mergers. She shows that the investment patterns attributed in the literature to "cross-subsidization between divisions" are apparent in the pairs of merging firms prior to their mergers. Thus some of the cross-subsidization results in the literature may be attributable to selection bias. Chevalier also examines stock market responses to the announcement of diversifying acquisitions. The market believes that these acquisitions will create value. The event response to the merger is largely independent of measures of the extent to which the merger is diversifying, she finds.
Online auctions recently have gained widespread popularity and are one of the most successful forms of electronic commerce. Bajari and Hortacsu examine a dataset of eBay coin auctions to explore features of online bidding and selling behavior. They first measure the extent of the winner's curse and find that, for a representative auction in their sample, a bidder's expected profits fall by 3.2 percent when the expected number of bidders increases by one. Then they document that costly entry is a key component in understanding observed bidding behavior: for a representative auction in their sample, a bidder requires $3.20 of expected profit to enter the auction. Third, Bajari and Hortacsu study the seller's choice of reserve prices. They find that items with higher book value tend to be sold using a secret, as opposed to a posted, reserve price with a low minimum bid. The authors find that this is roughly consistent with maximizing behavior.