NBER Reporter: Spring 2001

Industrial Organization

The NBER's Project on Industrial Organization, directed by Nancy L. Rose of Stanford University, met at the Bureau's California office on February 10. Rose and her co-organizer, Susan Athey of NBER and MIT, chose the following papers for discussion:

Judith A. Chevalier and Anil K Kashyap, NBER and University of Chicago, and Peter Rossi, University of Chicago, "Why Don't Prices Rise During Periods of Peak Demand? Evidence from Scanner Data" (NBER Working Paper No. 7981)

Discussant: Robert Porter, NBER and Northwestern University

Philip Leslie, University of California, Los Angeles, and Ginger Jin, University of Maryland, "The Effects of Disclosure Regulation: Evidence from Restaurants"

Discussant: Daniel Kessler, NBER and Stanford University

Brian Viard, Stanford University, "Do Switching Costs Make Markets More or Less Competitive? The Case of 800-Number Portability"

Discussant: Chris Knittel, Boston University

Alan T. Sorensen, University of California, San Diego, "Price Dispersion and Heterogeneous Consumer Search for Retail Prescription Drugs"

Discussant: Florian Zettelmeyer, University of California, Berkeley

Margaret Slade, University of British Columbia, "Assessing Market Power in U.K. Brewing"

Discussant: Steven T. Berry, NBER and Yale University

Chevalier and her coauthors examine the retail and wholesale prices of a large supermarket chain in Chicago over seven and a half years. They show that prices tend to fall during the seasonal demand peak for a product and that changes in retail margins explain most of those price changes. In other word, markups are counter cyclical. The pattern observed in this data is consistent with "loss leader" models of retailer pricing and advertising competition. Manufacturer behavior plays a more limited role in the counter-cyclicality of prices.

Jin and Leslie examine the effect on firm behavior of increased product information to consumers. They show that mandatory disclosure of hygiene grades - required by Los Angeles County in 1998 - causes restaurants to increase hygiene quality by an average of 5.3 percent. They find little difference between these results and those obtained with voluntary but verifiable disclosure. Economic incentives drive these results: average restaurant revenue is higher because of the introduction of grade cards, and the increase in revenue is higher for restaurants with better hygiene quality grades.

Before portability of 800, or toll free, phone numbers, a customer had to change numbers to change service providers. This imposed significant switching costs on users, who generally invested heavily to publicize these numbers. In May 1993, a new database made 800-numbers portable. Viard uses contracts for virtual private network (VPN) services to test how AT&T adjusted its prices for toll-free services in response to portability. He finds that AT&T reduced margins for toll-free calls (both switched and dedicated) under VPN contracts as the portability date approached, implying that the switching costs under non-portability made the market less competitive. Portability also lowered margins for toll services because of cross-subsidization across services within contracts. Viard's results suggest that, despite toll-free services growing rapidly during this time period, AT&T's incentive to charge a higher price to "locked-in" consumers exceeded its incentive to capture new consumers in the high switching costs era of non-portability.

Sorensen uses detailed data on retail pharmacy transactions to make inferences about the nature and intensity of consumer search for prescription drugs. He estimates that fora typical prescription, approximately 10 percent of consumers price shop. However, variation in this estimated search intensity across drugs is substantial and appears to be consistent with explanations based on rational search. For example, price shopping is more prevalent for maintenance medications than for one-time purchases, presumably because the benefits of finding a low price are magnified for prescriptions that are purchase repeatedly. The cost of conducting an exhaustive price search is about $15 for the average consumer, and search costs are substantially lower among females than males.

Slade examines market power in U.K. brewing, an industry that has witnessed a number of recent mergers and has been scrutinized by both U.K. and EU authorities. She estimates two classes of demand equations and approximates marginal costs in three different ways. Finally, she compares various notions of industry equilibrium. It turns out that the most important decision from the point of view of market-power assessment is the choice of demand model. Different classes of demand equations yield very different predictions concerning elasticities and markups; within a demand-model class, all methods of assessing market power result in similar predictions concerning industry performance. Both differentiation among firms in the brewing industry and their small number endow the industry with the power to charge prices in excess of marginal costs, but Slade finds no evidence of collusion.