Economic Resources: Abstracts of Working Papers

FTC Bureau of Economics Working Papers are preliminary materials circulated to stimulate discussion and critical comment. The analyses and conclusions set forth are those of the authors and do not necessarily reflect the views of other members of the Bureau of Economics, other Commission staff, or the Commission itself. References in publications to FTC Bureau of Economics Working Papers by FTC economists (other than acknowledgment by a writer that he has access to such unpublished materials) should be cleared with the author to protect the tentative character of these papers.

Working Papers are in Acrobat PDF form. If you have trouble accessing one of these papers, please email ReportRequests@ftc.gov.

Decomposing the American Obesity Epidemic
(Working Paper No. 318)
Nathan E. Wilson, Thomas G. Koch
May 2013
Abstract:

In recent decades, the prevalence of obesity in America has increased dramatically. Though it has attracted less attention, the demographic composition of the American population also changed during this period. We decompose the increase in the average body mass index of the American population over 30 years and show that demographic changes explain a statistically significant but economically marginal amount of the change. Instead, the rise in average obesity is best explained by increases in BMI within demographic groups. Furthermore, our results indicate that groups' experiences have been heterogeneous with younger women experiencing especially large gains in weight. We uncover some evidence consistent with the hypothesis that this can be at least partially attributed to increased labor force participation.
Estimating the Effect of Entry on Generic Drug Prices Using Hatch-Waxman Exclusivity
(Working Paper No. 317)
Luke M. Olson, Brett W. Wendling
April 2013
Abstract:

Generic drugs play an important role in disciplining drug prices and controlling rising drug costs. However, the effect that an additional generic drug competitor has on drug prices is difficult to measure because the number of firms competing in a market is endogenously determined. We identify the causal effects of a second and a third generic competitor on generic drug prices by exploiting the 180-day period of marketing exclusivity created by provisions of the Hatch- Waxman Act. The effects of the second and third competitors on price have important implications for drug competition policy and the interpretation of theory relating price to competition in generic drug markets. We find significant biases associated with estimates that do not properly account for endogenous entry. Specifically, we find that the failure to account for endogenous entry leads to significant underestimation of the effects of two and three competitors on generic drug prices, especially among large drugs.
All-units Discounts and Double Moral Hazard
(Working Paper No. 316)
Daniel P. O’Brien
March 2013
Abstract:

An all-units discount is a price reduction applied to all units purchased if the customer's total purchases equal or exceed a given quantity threshold. Since the discount is paid on all units rather than marginal units, the tariff is discontinuous and exhibits a negative marginal price at the threshold that triggers the discount. Why would suppliers offer such tariffs? This paper shows that all-units discounts can arise in optimal contracts between upstream and downstream firms with market power who make non-contractible investments that enhance demand. I present conditions under which all-units discounts dominate two-part tariffs and other continuous tariffs. I also examine these tariffs when the upstream market faces a threat of entry. In the cases considered, continuous tariffs are a more profitable device for managing entry than all-units discounts. These findings begin filling the gap in economists' understanding of the equilibrium effects of all-units discounts in intermediate markets in which contract design affects incentives for pricing, investment, and competitive entry.
“Nobody goes there anymore - it's too crowded:" Level-k Thinking in the Restaurant Game
(Working Paper No. 315)
Matthew T. Jones
February 2013
Abstract:

A game of herding with capacity constraints is studied experimentally. Differences between Level-k strategies depend on the cost of choosing an alternative that has reached capacity, with a maximum difference between Level-1 and higher levels when the cost is high. This design makes Level-1 behavior relatively easy to identify. Though strategies consistent with higher levels are also found, a substantial proportion of observed strategies are consistent with Level-1. Within-subject correlations across settings suggest that Level-1 thinking can explain overweighting of private information in herding games. In addition, evidence of a correlation between cognitive ability and level of thinking is found.
For-Profit Status & Industry Evolution in Health Care Markets: Evidence from the Dialysis Industry
(Working Paper No. 314)
Nathan E. Wilson
February 2013
Abstract:

Over the last 25 years, for-profit facilities have supplanted non-profits as the modal providers of hemodialysis treatment to American sufferers of end-stage renal disease. To understand what may underpin this dramatic change in industry structure, this paper uses a dynamic equilibrium model to develop intuition about how variation in different economic primitives might affect the evolution of industry structure. Subsequently, the paper exploits a comprehensive 20+ year panel dataset to examine entry, exit, and output patterns in relation to changes in demand and local market structure. Examining the empirical results in light of the model's comparative statics suggests that for-profit firms enjoy a significant advantage in static competition, perhaps as a result of lower marginal costs. By comparison, I find negligible evidence that for-profit facilities have lower entry costs. Interestingly, the data also suggest that competition among dialysis clinics may be differentiated.
Do Retail Mergers Affect Competition? Evidence from Grocery Retailing
(Working Paper No. 313 )
Daniel Hosken, Luke M. Olson, Loren K. Smith, December 2012
Abstract:

This study estimates the price effects of horizontal mergers in the U.S. grocery retailing industry. We examine fourteen regions affected by mergers including both highly concentrated and relatively unconcentrated markets. We identify price effects by comparing markets affected by mergers to unaffected markets using both difference-in-difference estimation and the synthetic control method. Our results are robust to the choice of control group and estimation technique. We find that mergers in highly concentrated markets are most frequently associated with price increases, while mergers in less concentrated markets are most often associated with price decreases.
Better Product at Same Cost, Lower Sales and Lower Welfare
(Working Paper No. 312)
David J. Balan, George Deltas, June 2012
Abstract:

We analyze the effect of product quality on the output of a high-quality dominant firm facing a low-quality competitive fringe. Using a standard vertical differentiation model, we show that profit maximizing output decreases with product quality when the dominant firm's marginal cost is lower than that of the fringe, is independent of quality when marginal cost is the same for all firms, and is increasing in quality when the dominant firm's marginal cost is higher than that of the fringe. The driving force behind this result is that an increase in product quality does not cause a parallel shift in the dominant firm's residual demand, but rather causes it to pivot. This, in turn, causes the dominant firm's marginal revenue curve to rotate, rather than shift outwards, resulting in inwards movement around the equilibrium output when the dominant firm's marginal cost is lower than the fringe's. Equally strikingly, higher quality at the original marginal cost may result in all consumers being weakly worse off, with some being strictly worse off. Similar results can be obtained without a competitive fringe, but only under some more restrictive conditions.
Local Market Structure and Strategic Organizational Form Choices
(Working Paper No. 311)
Nathan Wilson, March 2012
Abstract:

An extensive literature shows that agency issues and transactions costs influence vertical integration. Another mature literature indicates that market structure influences competitive behavior. However, less consideration has been given to how vertical integration and market structure may interact. I address this gap by focusing on the potential for moral hazard caused by intra-firm competition in retail gasoline markets. I argue that when multiple stations share a common brand in a market, a vertically separated station has an incentive to deviate from the cooperative strategy that the brand-owning refiner would prefer. I empirically test this prediction using rich data, and find evidence of such moral hazard. Moreover, I find that refiners behave in a way consistent with the desire to minimize it: They are more likely to employ vertically separated contracts in markets where the number of affiliated stations is small.
The Impact of Vertical Contracting on Firm Behavior: Evidence from Gasoline Stations
(Working Paper No. 310)
Nathan E. Wilson, January 2012
Abstract:

Analyses of organizational form's impact on economic behavior have been rarer than studies of the determinants of organizational form itself. To fill this gap, I develop a theoretical model tailored to the retail gasoline industry that endogenizes the choice of both organizational form and price. The model predicts that vertical separation should be associated with higher prices due to both effort-induced shifts in demand and double marginalization. It also demonstrates the confoundedness of contract choice and pricing, but suggests that identification can be achieved by focusing on variation in monitoring costs across organizational forms. Explicitly addressing the endogeneity of contract choice, I test the model's predictions using a unique dataset containing information on both the characteristics and behavior of gasoline stations. Consistent with the model's predictions, I find that vertical separation is associated with higher prices even after controlling for the endogeneity of form choice. Moreover, the data suggest that the increase in price is due both to demand shifting and double marginalization.
Branding, Cannibalization, and Spatial Preemption: An Application to the Hotel Industry
(Working Paper No. 309)
Nathan E. Wilson, November 2011
Abstract:

In many settings where spatial preemption might be expected to produce tightly concentrated industry structures, firms share the market instead. Using a strategic investment model, I show that this can be rationalized by heterogeneous brand preferences, which cause new product introductions by incumbent firms to disproportionately cannibalize sales from existing affiliated products. I then present an empirical example using data on the branded segment of the lodging industry, which has many characteristics associated with spatial preemption, but is also characterized by strong brand-preferences. Consistent with the theoretical model, I find large within-firm revenue cannibalization effects from new hotel openings. These effects are attenuated -- but not removed -- by brand-proliferation strategies. Moreover, I find evidence that the industry practice of franchising through non-exclusive contracts softens inter-firm competition. Analyses of growing hotel markets support the conclusion that intra-firm cannibalization inhibits spatial preemption. Growth is far more likely to occur as a result of entry than expansion.
Dynamics in a Mature Industry: Entry, Exit, and Growth of Big-Box Grocery Retailers
(Working Paper No. 308)
Dan Hanner, Daniel Hosken, Luke Olson, Loren Smith, September, 2011
Abstract:

This paper measures market dynamics within the U.S. grocery industry (defined as supermarket, supercenter and club retailers). We find that the composition of outlets changes substantially, roughly 7%, each year, and that store sizes have increased as the result of growth by supercenter and club retailers. We find significant changes in the relative position of brands in markets over time. These changes are largely the result of expansion (or contraction) by incumbents rather than entry or exit. There is little entry or exit, except by small firms. Moreover, only in small markets do entrants gain substantial market share.
A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare
(Working Paper No. 307)
David J. Balan, Patrick S. Romano, November 2010
Abstract:

In 2004, the Federal Trade Commission brought legal action retrospectively challenging the 2000 acquisition of Highland Park Hospital by Evanston Northwestern Healthcare in Evanston, Illinois. A major issue in the case was whether the merger had resulted in improved clinical quality at Highland Park. In this paper, we report the findings of our analysis of that issue. We examined numerous quantitative measures of clinical quality and found little evidence that the merger improved quality. We also describe the conceptual framework in which we evaluated the case-specific evidence, as well as the applicability of that framework to the prospective analysis of unconsummated hospital mergers.
Naked Exclusion by a Dominant Supplier: Exclusive Contracting and Loyalty Discounts
(Working Paper No. 306)
Patrick DeGraba, November 2010
Abstract:

Recent literature has shown that an incumbent can use exclusive contracts to maintain supra-competitive prices, but only if he completely prevents a more efficient potential entrant from entering, and if the entrant is exogenously prevented from making exclusive offers. Such models cannot explain how exclusive contracts can lower welfare when they do not completely foreclose a small rival, when the rival can make exclusive offers, nor can they identify rudimentary relationships such as how a dominant supplier’s size affects his incentive and ability to exclude and lower welfare. I formally model competition between a dominant input supplier and a small rival selling to competing downstream firms. I show that a dominant supplier can pay downstream firms for exclusivity, allowing it to maintain supra-competitive input prices, even when a small rival that is more efficient at serving some portion of the market can make exclusive offers. I also show exclusives need not completely exclude the small rival to cause competitive harm. The payment the dominant supplier makes for exclusivity must equal the incremental rents that the rival’s input could generate if exactly one downstream firm sells goods using it.
Job Insecurity isn’t Always Efficient
(Working Paper No. 305)
David J. Balan, Dan Hanner, September 2010
Abstract:

Workers value job security. If at least some workers value it enough, then it is efficient for at least some firms to adopt policies in which they commit (implicitly or explicitly) not to dismiss employees except for “just-cause,” as opposed to policies in which employers are free to dismiss employees “at-will.” In this paper, we develop a simple model in which the equilibrium distribution of workers between just-cause firms and at-will firms is not generally efficient: there can be inefficiently many workers in just-cause firms or inefficiently few. If there are inefficiently few, then a tax or even a ban on at-will firms can be welfare-improving.
State Regulation of Alcohol Distribution: The Effects of Post & Hold Laws on Consumption and Social Harms
(Working Paper No. 304)
James C. Cooper, Joshua D. Wright, August 2010
Abstract:

The Twenty-first Amendment repealed prohibition, but granted the states broad power to regulate the distribution and sale of alcohol to consumers within their borders. Pursuant to this authority, states have established a complex web of regulations that limit the ability of beer, wine, and liquor producers to control the distribution of their product. From a consumer welfare perspective, one of the most potentially harmful state alcohol distribution regulations are “post and hold” laws (“PH laws”). PH laws require that alcohol distributors share future prices with rivals by “posting” them in advance, and then “hold” these prices for a specified period of time. Economic theory would suggest that PH laws reduce unilateral incentives for distributors to reduce prices and may facilitate tacit or explicit collusion, both to the detriment of consumers. Consistent with economic theory, we show that the PH laws reduce consumption by 2-8 percent. We also test whether, by reducing consumption, PH laws provide offsetting societal benefits in the form of reducing drunk driving accidents and underage drinking. We find no measurable relationship between PH laws and these social harms. These results suggest a socially beneficial role for antitrust challenges to PH laws and similar anticompetitive state regulation. If states wish to reduce the social ills associated with drinking, our results also suggest that directly targeting social harms with zero tolerance laws and lower drunk driving thresholds are superior policy instruments to PH laws.
Edgeworth Price Cycles in Gasoline: Evidence from the U.S.
(Working Paper No. 303)
Paul Zimmerman, John M. Yun and Christopher T. Taylor, June 2010
Abstract:

Studies of gasoline prices in multiple countries have found a repeated sequence of asymmetric cycles where a sharp price increase is followed by gradual decreases. This price pattern is linked to Maskin & Tirole’s (1988) theoretical duopoly pricing game that produces a similar pattern, Edgeworth price cycles. We examine data on average daily city-level retail gasoline and diesel prices for 355 cities in the U.S. from 2001-2007 using multiple methods to identify price cycles. We show that a relatively small number of U.S. cities concentrated in a number of contiguous upper Midwestern states evidence Edgeworth cycle-like pricing behavior. Within our data set cities tend to either cycle in all years or they do not cycle at all. We examine prices in cycling and non-cycling cites controlling for other factors and find consumers are no worse off, and likely better off, on average, in cycling than non-cycling cities. Finally, unlike previous studies, we find that some vertically integrated (branded) retail gasoline stations are themselves potentially important drivers of the scale and scope of cycling in retail gasoline prices.
Asymmetric Pass-Through in U.S. Gasoline Prices
(Working Paper No. 302)
Matthew Chesnes, June 2010
Abstract:

This paper presents new evidence of asymmetric pass-through, the notion that upward cost shocks are passed through faster than downward cost shocks, in U.S. gasoline prices. Much of the extant literature comes to seemingly contradictory conclusions about the existence of an asymmetry, though the differences may be due to different aggregation (both over time and geographic markets) and the use of different price series including crude oil, wholesale, and retail gasoline prices. I utilize a large and detailed dataset to determine where evidence of a pass-through asymmetry exists, and how it depends on the aggregation and price series chosen by the researcher.

Using the standard error correction model, I find evidence of pass-through asymmetry in the response of daily and weekly retail prices to wholesale rack price changes, though the magnitude varies by geographic market. On average, retail prices rise more than four times as fast as they fall. Branded gasoline features significantly more asymmetry with respect to rack prices compared with unbranded gasoline. Over time, nation-wide asymmetry varies significantly from year to year peaking in 2005. Midwest cities, like Louisville and Minneapolis, feature more asymmetry compared with other parts of the country. F-tests broadly confirm the results and illustrate that data selection and aggregation, as well as model specification, can have important implications on the findings of asymmetric pass-through.
Entry Threats and Pricing in the Generic Drug Industry
(Working Paper No. 301)
Brett Wendling, Steven Tenn, June 2010
Abstract:

We provide the first analysis of potential competition in the generic drug industry. Our identification strategy exploits a provision of the Hatch-Waxman Act that rewards 180 days of marketing exclusivity to the first generic drug applicant against the holder of a branded drug patent. This provision creates observable drug-level variation in both actual and potential competition that allows us to identify their separate effects. We find mixed evidence of price being used as a strategic entry deterrent. In smaller drug markets where entry is more easily deterred, we find that price falls in response to an increase in potential competition. We also find that few manufacturers enter these markets after the Hatch-Waxman exclusivity period, indicating this price reduction is an effective deterrent. In contrast, in larger drug markets the incumbent accommodates entry by lowering price only after competing manufacturers enter the market.
Petroleum Mergers and Competition in the Northeast United States
(Working Paper No. 300)
Louis Silvia, Christopher T. Taylor, April 2010
Abstract:

Sunoco’s 2004 acquisition of El Paso’s, New Jersey refinery and Valero’s 2005 acquisition of Premcor’s Delaware refinery significantly consolidated refinery control in the U.S. Northeast. The Federal Trade Commission investigated both transactions but challenged neither. We examine the FTC’s enforcement rationale and test whether these mergers were associated with post-merger price increases in either gasoline or diesel at retail and wholesale levels. Our findings indicate that the transactions were largely competitively neutral. There was some indication that some unbranded rack prices may have increased after the mergers, but this result was not robust across controls or assumptions. In some other instances, prices in merger affected areas may have fallen relative to prices elsewhere after the transactions.
The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms
(Working Paper No. 299)
Dan O’Brien, Ian Gale, February 1, 2010
Abstract:

A use-or-lose provision requires firms to employ a certain minimum fraction of their productive capacity. Variants have been used by regulators in the airline, natural gas transmission, and electric power industries, among others. The primary objective of these provisions is to limit capacity hoarding. We examine the welfare implications of imposing a use-or-lose provision on firms that are able to buy and sell capacity. We find that imposing such a constraint makes it more likely that a dominant firm will purchase capacity from a competitive fringe. Moreover, imposing the constraint makes aggregate output fall if the dominant firm is more efficient than the fringe. If the dominant firm is less efficient than the fringe, aggregate output rises. In both cases, total surplus can rise or fall.
Competition, Contracts, and Innovation
(Working Paper No. 298)
Christopher J. Metcalf, John D. Simpson, December 2009
Abstract:

Our paper contributes to the literature on the relationship between innovation and market power by considering how changes in the intensity of product market competition affect innovation when managerial compensation is a linear function of firm profits. Changes in the intensity of product market competition affect both the return from innovation and the cost of inducing managers to innovate. Several recent papers account for both the returns-to-investment effect and the agency-cost effect in analyzing the effect of additional product market competition on incentives to innovate (see e.g., Schmidt (1997), Raith (2003), and Piccolo, D'Amato, and Martina (2008)). Our model differs from these papers in the type of contract that we assume firms can use to induce innovation. With linear profit-sharing contracts, the cost of a non-drastic innovation declines as product market competition increases because the increment gained from innovation becomes a larger fraction of the total profit. We argue that this decline in the cost of attaining innovation as competition increases means that competition will often lead to more innovation even in models where the returns to innovation otherwise would fall as competition increases.
The Evolution of the Baby Food Industry 2000-2008
(Working Paper No. 297)
Viola Chen, April 2009
Abstract:

Eight years have elapsed since the Federal Trade Commission (FTC) prevented the merger of the formerly number two and number three baby food manufacturers in the U.S. Since the abandoned merger, the landscape of the baby food industry has significantly evolved. All of the major brands of jarred baby food have experienced changes in ownership. The product market may have slightly broadened beyond jarred baby food. And, market concentration has increased, but prices have not. Gerber increased its market share from 71 – 72% to 73 – 80%. Beech-Nut’s market share slightly declined from 13% to 11 – 12%, while Heinz’s former brand, Nature’s Goodness, declined from 13% to 2%. With no substantial entry, only Gerber and Beech-Nut enjoy double-digit market shares. Also, while the average price of baby food has fluctuated over the years, prices in 2008 are the same as prices in 2000, after adjusting for inflation and changes in the composition of consumption. By these measures, it appears that the market is not much different in 2008 than in 2000. No evaluative judgment on the merger decision is made in this paper because the paper does not attempt to predict the evolution of the hypothetical alternative.
The Success of Divestitures in Merger Enforcement: Evidence from the J&J-Pfizer Transaction
(Working Paper No. 296)
Steven Tenn, John M. Yun, April 2009
Abstract:

Despite being a widely used tool in merger enforcement, there have been few studies of whether antitrust divestitures are successful. We help fill this void by conducting a study of the divestitures relating to Johnson & Johnson’s $16.6 billion acquisition of Pfizer’s consumer health division in 2006. Six brands were divested in this matter to alleviate antitrust concern. For three of the brands, their pre- and post-divestiture performance is similar, while the remainder underwent changes that do not appear to be divestiture related. Overall, the results are consistent with the view that the divestitures maintained the pre-transaction level of competition.
The Effect of Hospital Mergers on Inpatient Prices: A Case Study of the New Hanover-Cape Fear Transaction
(Working Paper No. 295)
Aileen Thompson, January 2009
Abstract:

The Federal Trade Commission initiated a Hospital Merger Retrospective Project in 2002 to analyze the effects of consummated mergers. One of the mergers studied was the 1998 acquisition by New Hanover Regional Medical Center (“New Hanover”) of Columbia Cape Fear Memorial Hospital (“Cape Fear”) in Wilmington, North Carolina. In this paper, we employ patient-level claims data from four different insurers to estimate the effects of this merger on inpatient prices. Our results provide mixed evidence. Two of the insurers experienced substantial post-merger price increases relative to the control group of hospitals. The post-merger price changes for another insurer, however, were comparable to those for the control group, while the fourth insurer actually experienced a significant price decrease following the merger. Thus, it is difficult to draw conclusions about the impact of this merger on inpatient pricing.
Two Hospital Mergers on Chicago’s North Shore: A Retrospective Study
(Working Paper No. 294 )
Deborah Haas-Wilson and Christopher Garmon, January 2009
Abstract

We provide an in-depth analysis of the price effects of two hospital mergers that occurred in the north shore suburbs of Chicago in early 2000: Evanston Northwestern Healthcare’s (ENH) purchase of Highland Park Hospital (HPH) and the merger of St. Therese Medical Center (STMC) and Victory Memorial Hospital (VMH). Using standard difference-in-differences methods with data from multiple sources, including health insurance data with actual transactions prices, we find that the ENH/HPH merger led to a large and statistically significant post-merger price increase. We find no evidence of a price increase after the STMC/VMH merger. These results are robust across data sources, control groups, and case mix adjustment methods.
The Price Effects of Hospital Mergers: A Case Study of the Sutter-Summit Transaction
(Working Paper No. 293 )
Steven Tenn, November 2008

Abstract:

We conduct a retrospective study of the Sutter-Summit hospital merger to assess whether antitrust enforcement in this matter was appropriate. This consummated merger combined two hospitals located close together in the Oakland-Berkeley region of the San Francisco Bay Area. The greater metropolitan area contained many other hospitals that offered a similar range of services, but which were located farther away. A central issue raised by the Sutter-Summit transaction was whether travel costs were low enough such that these hospitals were a sufficient constraint on the merging parties to prevent an anticompetitive price increase. We use detailed claims data from three large health insurers to compare the post-merger price change for the merging parties to the price change for a set of control group hospitals. Our results show that Summit’s price increase was among the largest of any comparable hospital in California, indicating this transaction may have been anticompetitive.
The Role of Education in the Production of Health: An Empirical Analysis of Smoking Behavior
(Working Paper No. 292 )
Steven Tenn, Douglas A. Herman, Brett Wendling, June 2008

Abstract:
We estimate the effect of education and student status on the propensity to smoke. Our estimation strategy accounts for the endogeneity of education by “differencing out” the impact of unobserved characteristics correlated with educational attainment. This is accomplished by exploiting education differences between similarly selected groups that are one year apart in their life cycle. The results indicate that an additional year of education does not have a causal effect on smoking. Unobserved factors correlated with educational attainment entirely explain their cross-sectional relationship. We do find, however, that being a student reduces the likelihood of smoking. This may be a peer effect, which prior research shows has a significant impact on smoking decisions.
Vertical Relationships and Competition in Retail Gasoline Markets: Comment
(Working Paper No. 291)
Christopher T. Taylor, Nicholas Kreisle, Paul R. Zimmerman, September 2007

Abstract:
In a paper in the March 2004 AER, Justine Hastings concludes that the acquisition of an independent gasoline retailer, Thrifty, by a vertically integrated firm, ARCO, is associated with sizable price increases at competing stations. To better understand the novel mechanism to which she attributes this effect – which combines vertical integration and rebranding – we attempted but ultimately failed to reproduce the results using alternative data. In addition, we show that the welfare effects of the transaction are ambiguous in the theoretical model which she posits as underlying the empirical results.
Retail Gasoline Pricing: What Do We Know?
(Working Paper No. 290)
Daniel Hosken, Robert McMillan, Christopher Taylor, May 2007

Abstract:
We examine retail gasoline station pricing using three years of weekly prices for 272 stations in the Virginia suburbs of Washington, DC. We report a number of new empirical findings about station level pricing and describe how these findings relate to existing models of retail pricing. First, we find retail margins change substantially over time (by more than 50%) while the shape of the margin distribution remains relatively constant. Second, the distribution of retail gasoline prices has relatively thick tails. Third, stations frequently change their relative prices and margins. Fourth, there is substantial heterogeneity in pricing behavior: stations charging very low or high prices are more likely to maintain their pricing position than stations charging prices near the mean, even when controlling for permanent differences in marginal costs.
Slow Market Adjustment to Tax Changes: Evidence from the Market for Used Wide-body Commercial Aircraft
(Working Paper No. 289)
Loren K. Smith, May 2007

Abstract:
Investment tax credits are generally implemented to stimulate investment in new goods. However, in the case of durable goods, such policies may also affect secondary markets for used goods. Using a simple theoretical model, I show that an exogenous shock to the price of new durable goods (e.g., a change in tax policy) causes an increase in price and a decrease in the number of transactions in used good markets. After describing the theoretical model and its predictions, I use transaction and price data for new and used wide-body commercial aircraft to show that the data is qualitatively consistent with the predictions of the theoretical model. Given a 10 percent increase in the price of new goods, the price of used goods increases 15-20 percent, and used goods are kept longer on average before they are sold in secondary markets.
Consumer Perceptions of Heart-Health Claims for Cooking Oils and Vegetable Oil Spreads
(Working Paper No. 288)
R. Dennis Murphy, Pauline M. Ippolito, Janis K. Pappalardo, April 2007

Abstract:
This working paper presents the findings of copy test research on consumer perceptions of heart-health claims in print advertisements for a fictitious cooking oil low in saturated fat, and a vegetable oil spread containing no trans fatty acids. FDA regulations currently ban potentially useful heart-health claims in labeling for many such products, and this restriction also appears to have discouraged similar claims in advertising. One deception-based motivation for the ban would be that the heart-health claims might mislead consumers to believe that the products are healthy in all respects, when in fact they are high in total fat and calories, and their regular use could cause weight gain and associated heart problems unless the products are substituted for less healthy alternatives. Our research tested this deception hypothesis and found no support for it. Adding an explicit heart-health claim to a nutrient content claim (such as “low in saturated fat” or “no trans fats”) did not change consumer perceptions of the caloric content of the tested products or otherwise distort perceptions of the products’ overall healthiness. These conclusions not withstanding, our results also suggest that respondents as a whole, including those who did not see a nutrient content claim or a heart-health claim, underestimate the caloric content of cooking oils. Further, respondents did not appear to understand the significant impact that relatively small daily increases in caloric intake can have on long-term weight gain. Our findings emphasize the need for increased consumer education concerning the caloric content of cooking oils, and the implications of even modest changes in caloric intake, from whatever source, on weight gain and heart health.
Biases in Demand Analysis Due to Variation in Retail Distribution
(Working Paper No. 287)
Steven Tenn and John Yun, February 2007

Abstract:
Aggregate demand models typically assume that consumers choose between all available products. Since consumers may be unwilling to search across every store in a given market for a particular item, this assumption is problematic when product assortments vary across stores. Using supermarket scanner data for five product categories we demonstrate that approximately one third of products have limited retail distribution, which account for one fourth of dollar sales. Monte Carlo analysis demonstrates that the level of limited product availability observed in the data can significantly bias the results of aggregate demand models that incorrectly assume all consumers in a given market face the same choice set.
Sometimes it's Better to Just Let them Shirk
(Working Paper No. 286)
David J. Balan, October 2006

Abstract:
In their famous 1984 paper, Shapiro & Stiglitz developed what has become the canonical efficiency wage model. In their model, all workers are paid an efficiency wage, and no one shirks. Their model is based on the assumption that shirking workers are completely unproductive. In this paper, I relax that assumption, and treat the effective labor provided by shirkers as a parameter that can range from zero (shirkers produce no effective labor) to one (shirkers and non-shirkers are equally productive). I show that when shirking workers are sufficiently unproductive the Shapiro & Stiglitz equilibrium applies, but when they are sufficiently productive everyone shirks in equilibrium. For intermediate levels of shirker productivity, some workers shirk in equilibrium, and some do not. I also perform comparative statics exercises where I show how changes in labor demand and changes in the relative productivity of shirkers affect employment, wages, and output. These exercises may have implications for the cyclicality of wages, and for the effects of technological progress.
Hospital Competition and Charity Care
(Working Paper No. 285)
Christopher Garmon, October 2006

Abstract: This paper explores the relationship between competition and hospital charity care by analyzing changes in charity care associated with changes in a hospital’s competitive environment (due to mergers and divestitures), using hospital financial and discharge data from Florida and Texas. Despite the pervasive belief that competition impedes a hospital’s ability to offer services to the uninsured and under-insured, I find no statistically significant evidence that increased competition leads to reductions in charity care. In fact, I find some evidence that reduced competition leads to higher prices for uninsured patients.
Technological Tying
(Working Paper No. 284)
Daniel E. Gaynor, August 2006

Abstract: This paper explores a firm's incentive to technologically tie when R&D is important and finds that technological tying increases innovation, which is an efficiency not considered in other tying models. Intuitively, technological tying protects the seller from aftermarket entry, ensuring that the seller internalizes the full effect of increased investment in technology on system profits. More importantly, the additional innovation, associated with technological tying, may benefit consumers more than anticompetitive effects hurt them, suggesting that innovation efficiency should be an important consideration in technological tying cases.
Prices and Price Dispersion in Online and Offline Markets for Contact Lenses
(Working Paper No. 283)
Revised: November 2006
James C. Cooper, April 2006

Abstract: I examine online and offline prices for popular disposable contact lenses. Idiosyncratic features of this market make it likely that offline firms set prices on the assumption that most of their customers are unaware of online prices. Consistent with lower online search costs, offline prices are more dispersed and approximately 11 percent higher than online prices when controlling for differentiated retail services. I also find that the Internet has had a smaller effect on the prices of widely-advertised lenses. Overall, the results suggest that contact lens consumers still are relatively uninformed about their options.
One Lump or Two: Unitary Versus Bifurcated Measures of Injury at the USITC
(Working Paper No. 282)
Kenneth H. Kelly and Morris E. Morkre, March 2006

Abstract:The most popular methodology used by the U.S. International Trade Commission (USITC) from 1989 through 1994 to determine whether unfairly traded imports injure competing domestic industries was known as the bifurcated approach. Injury determinations based on this approach have been rejected by reviewing bodies because the methodology does not distinguish injury caused by unfairly traded imports from other demand or supply changes. We estimate injury to the domestic industry due to changes in unfairly traded import price and to other causes for 44 USITC dumping and/or subsidy investigations. Change in unfairly traded import price was typically not the most important cause of injury to the domestic industry.
The Value of a Second Bite at the Apple: The Effect of Patent Dispute Settlements on Entry and Consumer Welfare, (Working Paper No. 281)
Joel Schrag, January 2006

Abstract: I analyze the effect on consumer welfare of settlements of patent infringement lawsuits that consist of a royalty-free license for delayed entry by a potentially infringing horizontal competitor of the incumbent patent-holder. Settlements that split the remaining patent life in a way that reflects the expected outcome of the trial do not in general improve consumer welfare compared to the litigation alternative. This result arises because such settlements can undermine potential entrants’ incentives to challenge the incumbent’s monopoly. If settlements of patent infringement lawsuits cause a reduction in the investment in development of competing products, consumers may prefer that the parties to such disputes litigate rather than settle.
Dynamics and Equilibrium in a Structural Model of Wide-Body Commercial Aircraft Markets, (Working Paper No. 280)
Loren Smith, December 2005

Abstract: This paper develops and estimates a dynamic equilibrium model of the market for commercial aircraft. Airline choices are modeled as the solution to a discrete time dynamic programming problem, where in each period, each airline chooses one or more of various models of new and used aircraft. In equilibrium aircraft prices are such that no airline would benefit from buying, selling, trading or scrapping aircraft. The parameters of the model are estimated by maximum simulated likelihood using a new dataset that contains all aircraft transactions made in the twenty-year period 1978-1997. The transaction data is merged with a dataset containing aircraft prices. The estimated model is used to show that a 10 percent investment tax credit on the purchase of new aircraft has only a small effect on airline behavior and that the demand for new durable goods is more elastic than previous studies have shown. In addition, forcing the modernization of older aircraft causes U.S. airlines to reduce the number of older aircraft they operate by approximately 4 percent, and it is shown that the new aircraft are the poorest substitute for older aircraft.
Identity Theft: Does the Risk Vary With Demographics?, (Working Paper No. 279)
Keith Anderson, August 2005

Abstract: This paper examines whether the likelihood that an individual will experience identity theft varies with the individual’s demographic characteristics, using data from the Federal Trade Commission’s 2003 survey on identity theft. The likelihood that a person will be a victim of identity theft does appear to vary with the person’s demographics. Consumers with higher levels of income are more likely to be victims of ID theft - particularly ID theft that only involves placing unauthorized charges on the victim’s existing credit cards. Similarly, those with more education may be somewhat more likely to be victims. On the other hand, older people may face a somewhat reduced risk. Here the reduction appears to be mainly in the risk of experiencing more than just unauthorized charges on existing credit cards, including the risk that new accounts will be opened or other frauds committed using the victim’s personal information. Women are more likely to be victims than men. The risk of ID theft also appears to be related to household composition: One is more likely to be a victim if he or she is the only adult who lives in the household. Having more children in the household is also associated with an increased likelihood of becoming a victim of identity theft. Finally, ID theft appears to be more likely if consumers live in some regions of the country than if they live in other regions.
Michigan Gasoline Pricing and the Marathon - Ashland and Ultramar Diamond Shamrock Transaction, (Working Paper No. 278)
John Simpson and Christopher T. Taylor, July 2005

Abstract: Marathon-Ashland Petroleum’s (MAP) 1999 acquisition of the Michigan assets of Ultramar Diamond Shamrock (UDS) increased MAP’s share of terminal storage in Michigan from about 16 percent to about 25 percent and increased the share of gasoline stations bearing a MAP brand from about 16 percent to about 24 percent. In this paper, we examine whether this acquisition affected the retail price of gasoline. We use a difference-in-differences model to compare price movements in six Michigan cities affected by the acquisition with price movements in two nearby cities unaffected by the acquisition. Using this model, we find no evidence that this acquisition led to higher prices for consumers.
Consumer Perceptions of Qualified Health Claims in Advertising, (Working Paper No. 277)
R. Dennis Murphy, July 2005

Abstract: This working paper presents the findings of copy test research on consumer perceptions of food and dietary supplement print advertisements containing qualified health claims for diet-disease relationships that lack a high level of scientific support. The research was motivated by court decisions that struck down the Food and Drug Administration’s outright ban on such claims in labeling. The decisions effectively have placed the burden on the government to allow qualified claims for these diet-disease relationships unless it can demonstrate that consumers are unable to understand qualifications characterizing the true level of certainty in the relevant scientific evidence. My findings indicate that qualified language can have a significant impact on consumer evaluation of scientific certainty. My research also suggests, however, that it will be a difficult task to craft qualifications in advertising that communicate a low level of scientific certainty. None of the tested disclaimers, whether appearing in real advertisements for real products or in fictitious advertisements, communicated serious limitations in scientific evidence (i.e. science that FDA would rate at a “D” level). In addition, consumers interpreted all of the tested advertisements in widely disparate fashion. For example, although consumers seeing an ad for a fictitious antioxidant vitamin supplement on average rated the degree of scientific evidence correctly at a “C” level of support, approximately two-thirds of the consumers either overestimated or underestimated the certainty of the science.
Quantity Discounts from Risk Averse Sellers, (Working Paper No. 276)
Patrick J. Degraba, April 2005

Abstract: It is widely believed that larger customers in a market can secure lower prices than smaller customers. This paper presents conditions under which risk averse sellers, who can distinguish larger customers from smaller customers, but who cannot observe customers’ valuations, have an incentive to offer lower prices to larger customers. The intuition is that a single customer that demands a specific quantity represents a riskier profit source than multiple customers with independent valuations whose demands sum to that same quantity. Sellers respond to the riskier profit source by offering a lower price to reduce some of the risk.
The paper suggests the existence of a “pure customer size effect” that would always create an incentive for sellers to offer larger customers lower prices. It also suggests two other effects, one due to a change in the size of the market and the other based on the mix of large and small customers. These effects may either reinforce or counteract the pure customer size effect, depending on the nature of the seller’s utility function.
A Variance Screen For Collusion (Working Paper 275)
Rosa M. Abrantes-Metz, Luke M. Froeb, John F. Geweke, Christopher T. Taylor, March 2005

Abstract: In this paper, we examine price movements over time around the collapse of a bid-rigging conspiracy. While the mean decreased by sixteen percent, the standard deviation increased by over two hundred percent. We hypothesize that conspiracies in other industries would exhibit similar characteristics and search for “pockets” of low price variation as indicators of collusion in the retail gasoline industry in Louisville. We observe no such areas around Louisville in 1996-2002.
Pharmaceutical Development Phases: A Duration Analysis (Working Paper 274)
Rosa M. Abrantes-Metz, Christopher P. Adams, and Albert Metz, October 2004

Abstract: This paper estimates a duration model of late stage drug development in the pharmaceutical industry using publicly available data. The paper presents descriptive results on the estimated relationship between a particular drug's characteristics such as therapy category, route of administration and originator's size, and that drug's pathway through the three stages of human clinical trials and regulatory review. The results suggest that drugs with longer durations are less likely to succeed, drugs from larger firms are more likely to succeed and faster in the later phases of development, and that durations fell between 1995 and 2002.
Can Ranking Hospitals on the Basis of Patients’ Travel Distances Improve Quality of Care? (Working Paper 273)
Daniel P. Kessler. June 2004
Abstract: Conventional outcomes report cards-- public disclosure of information about the patient-background-adjusted health outcomes of individual hospitals and physicians – may help improve quality, but they may also encourage providers to “game” the system by avoiding sick and/or seeking healthy patients. In this paper, I propose an alternative approach: ranking hospitals on the basis of travel distances of their Medicare patients. At least in theory, a distance report card could dominate conventional outcomes report cards: a distance report card might measure quality of care at least as well but suffer less from selection problems. I use data on elderly Medicare beneficiaries with heart attack and stroke from 1994 to 1999 to show that a distance report card world be both valid – that is, correlated with true quality – and able to distinguish confidently among hospitals- that is, able to reject at conventional significance levels the hypothesis that the true quality of a low ranked hospital was the same as the quality of the average hospital. The hypothetical distance report card I propose compares favorably to (although does not necessarily dominate) the California AMI outcomes report card.
Identifying Demand in EBay Auctions (Working Paper 272)
Christopher P. Adams. June 2004
Abstract: This paper presents assumptions and identification results for eBay type auctions. These results are for private value auctions covering three major issues; censoring bias, auction heterogeneity and dynamic bidding. The first section of the paper presents two identification results for second price open call auctions with private values and unobserved participation (eBay type auctions). The second section presents identification results for eBay type auctions that have either observed bidder heterogeneity, observed and unobserved item heterogeneity or unobserved auction heterogeneity. In particular it is shown that a traditional demand estimation model is identified. The third section presents identification results when bidders face an infinite sequence of eBay type auctions for a single item.
The Economics of Price Zones and Territorial Restrictions in Gasoline Marketing (Working Paper 271)
David W. Meyer, Jeffrey H. Fischer. March 2004
Abstract: We review explanations for two controversial vertical restraints commonly used in gasoline marketing: price zones and territorial restrictions. After a discussion of the relevant empirical and theoretical economics literature, we consider procompetitive and anticompetitive theories behind the practices. Price zones may be one part of a complicated relationship between gasoline marketers and retailers that facilitates efficient risk-sharing, provides optimal incentives for marketers and retailers, and allows marketers to react more quickly to changes in localized retail competition. Alternatively, if gasoline marketers have substantial market power, price zones may facilitate coordination or help deter entry. Territorial restrictions may prevent inefficiencies in distribution and reduce free-riding on investments marketers make in developing networks of retail stations. At the same time, territorial restrictions help marketers maintain price zones (with the same welfare implications), and may, if marketers have substantial market power, facilitate coordination.
The Economic Effects of the Marathon - Ashland Joint Venture: The Importance of Industry Supply Shocks and Vertical Market Structure (Working Paper 270)
Christopher T. Taylor, Daniel S. Hosken, March 17, 2004

Abstract: This study measures the retail and wholesale price effects in Louisville, Kentucky resulting from the Marathon/Ashland (MAP) joint venture. MAP was an early transaction in the recent era of petroleum mergers and it caused sizeable changes in concentration. We find no evidence of increased retail prices resulting from MAP. Wholesale (rack) prices increased significantly approximately 15 months following the transaction. This wholesale price (rack) increase, however, was probably caused by a regional supply shock rather than the transaction. These results suggest in this case that a significant petroleum merger in a moderately concentrated market did not raise consumer prices.
The Union Pacific/Southern Pacific Rail Merger: A Retrospective on Merger Benefits (Working Paper 269)
Denis A. Breen, March 11, 2004

Abstract: This paper presents a retrospective case study of merger efficiencies in the context of the merger of the Union Pacific Railroad Co. and the Southern Pacific Transportation Co., as approved by the Surface Transportation Board in 1996. There is sufficient information on the public record to permit some evaluation of merging parties’ pre-merger efficiency claims, and to weigh these claims against regulatory and antitrust standards. The author also had access to public and certain normally non-public sources of information sufficient to permit at least a preliminary assessment of the extent to which claimed efficiencies were actually realized post-merger. Contrary to skepticism expressed about merger efficiency claims, both generally and with respect to this particular rail merger, a variety of available evidence suggests that a number of the claimed efficiencies were plausibly merger-specific and were actually realized post-merger.
Is It Always Optimal to “Sell the Firm” to a Risk-Neutral Agent? (Working Paper 268)
Christopher P. Adams, February 2004

Abstract: The paper shows that the answer is no. Holmstrom (1979) and Shavell (1979) show that the sellthe firm contract does not achieve the first best when the principal and the agent have different preferences over risk. This paper shows that the sell the firm contract does not achieve the
first best when the principal and the agent have different preferences over time. In a dynamic decision making problem under uncertainty, if the agent's discount factor is less than the principal's, the agent will choose actions with relatively higher current payoffs and relatively lower continuation payoffs than the principal would prefer, even when the agent is sold the firm. When current and future payoffs are correlated, the principal can do better by offering the agent a contract that is even higher powered than the “sell the firm” contract. The paper shows that the principal can align the agent's incentives over time by offering the agent stock options. At their exercise date stock options are a liquid asset that pay the agent in the current period for the future value of his actions. [PDF 202KB]
Quantifying Antitrust Regimes (Working Paper 267)
Michael W Nicholson, February 2004

Abstract: This paper introduces means of quantifying global trend of proliferation in antitrust laws, and introduces measures to assess the presence of such laws across a large set of countries. In particular, the Antitrust Law Index maps the presence of “laws on the book” into a numerical measure of competition regimes by assigning binomial scores for the presence of particular laws in a jurisdiction, and then summing the individual components to yield a total score. The countries with the highest index values do not necessarily represent the strongest antitrust laws. The results do suggest that the impetus for adopting antitrust laws appears related to the imposed guidelines of supranational bodies, in particular the requirements of the European Union. [PDF 280KB]
Bargaining, Bundling, and Clout: The Portfolio Effects of Horizontal Mergers (Working Paper 266)
Daniel P. O'Brien and Greg Shaffer, December 2003
Abstract: This paper examines the output and profit effects of horizontal mergers between upstream firms in intermediate goods markets. We consider market settings in which the upstream firms sell differentiated products to, and negotiate nonlinear supply contracts with, a downstream retail monopolist. If the merging firms can bundle their products, transfer pricing is efficient before and after the merger. Absent cost savings, consumer and total welfare do not change, but the merging firms extract more surplus. If the merging firms cannot bundle their products, the effects of the merger depend on the merged firm's bargaining power. If the merged firm's bargaining power is low, the welfare effects are the same as with bundling; if its bargaining power is high, and there are no offsetting cost savings, the merger typically reduces welfare. We evaluate the profit effects of mergers on rival firms and the retailer for the case of two part tariff contracts. In this setting, a merger that harms rival firms and the retailer may still reduce final goods prices. [PDF 278KB]
Reconciling the Off -Net Cost Pricing Principle with Efficient Network Utilization (Working Paper 265)
Patrick DeGraba, October 2003
Abstract: The off-net-cost pricing principle argues that under a broad range of environments a positive “access” charge paid by originating networks to interconnected terminating networks would cause networks to set on-net usage charges equal to off-net rates, and that these charges would fully reflect the access charge. However, other results in the literature provide reasonable conditions under which on-net usage charges will not reflect access charges, but would be set to induce the social surplus maximizing level of on-net usage. This paper harmonizes these two apparently opposing results by showing that retail usage charges depend on two effects. One is a rent seeking effect on the part of networks and the other is an efficient utilization effect. In models in which the rent seeking effect is more important, on-net usage charges will tend to equal their off-net usage charges and incorporate the access charge. In models in which the efficient utilization effect matters more, off-net usage charges will reflect access charges, while on-net usage charges will not be affected by the level of access charges, but instead will tend to be set at the levels that promote efficient on-net utilization. [PDF 150KB]
Estimating Promotional Effects with Retailer-Level Scanner Data (Working Paper 264)
Steven Tenn, September 2003
Abstract: Estimating cross-brand promotional effects with aggregate data requires knowledge of the joint distribution of each brand’s promotions. While such information is available in store-level scanner data, it is not included in more aggregated scanner datasets. This paper presents a technique for overcoming this difficulty and develops a retailer-level model that incorporates both own- and cross-brand promotions. Promotional activity is integrated into the specification in a manner consistent with the way store-level models control for promotions, thereby avoiding the problem of aggregation bias. The proposed methodology extends the usefulness of retailer-level scanner data by allowing it to answer important questions regarding how the promotions of competing products interact. [PDF 198KB]
Experimental Gasoline Markets (Working Paper 263)
Cary A. Deck and Bart J. Wilson, August 2003

Abstract: Zone pricing in wholesale gasoline markets is a contentious topic in the public policy debate. Refiners contend that they use zone pricing to be competitive with local rivals. Critics claim that zone pricing benefits the oil industry and harms consumers. With a controlled experiment, we investigate the competitive effects of zone pricing on consumers, retail stations, and refiners vis-à-vis the proposed policy prescription of uniform wholesale pricing to retailers. We also examine the issue of divorcement and the “rockets and feathers” phenomenon. The former is the legal restriction that refiners and retailers cannot be vertically integrated, and the latter is the perception that retail gasoline prices rise faster than they fall in response to random walk movements in the world price for oil. [PDF 393KB]
New Drug Development: Estimating Entry from Human Clinical Trials (Working Paper 262)
Christopher P. Adams & Van V. Brantner, July 2003

Abstract: This paper analyses a detailed data set on drugs in human clinical trials around the world between 1989 and 2002. The data provides information on the probabilities with which drugs successfully complete the different phases of the trials and the durations of successful completions. The paper shows that success rates and durations can vary substantially across observable characteristics of the drugs, including primary indication, originating company, route of administration and chemistry. It suggests that analysis of this type of data can help us to answer questions such as: Do AIDS drugs get to market faster? Do Biotech drugs have higher probabilities of getting to market? This paper provides some general statistics for analyzing these
questions. [PDF 68KB]
Resource Allocation Contests: Experimental Evidence (Working Paper 261)
David Schmidt, Robert Shupp, James Walker, July 2003
Abstract: Across many forms of rent seeking contests, the impact of risk aversion on
equilibrium play is indeterminate. We design an experiment to compare individuals’ decisions across three contests which are isomorphic under risk-neutrality, but are typically not isomorphic under other risk preferences. The pattern of individual play across our contests is not consistent with a Bayes-Nash equilibrium for any distribution of risk preferences. We show that replacing the Bayes-Nash equilibrium concept with the quantal response equilibrium, along with heterogeneous risk preferences can produce equilibrium patterns of play that are very similar to the patterns we observe. [PDF 190KB]
Volume Discounts, Loss Leaders, and Competition for More Profitable Customers (Working Paper 260)
Patrick DeGraba, February 2003
Abstract: When some customers are more profitable to serve than others, one might expect sellers to compete more vigorously for the more profitable customers. One way sellers might do this is to sell goods that are purchased primarily by the most profitable customers using a lower mark-up than on other goods. This allows the firms to give discounts to more profitable customers without offering them to less profitable customers.

This paper presents a model in which competing multi-product firms facing customers that purchase different quantities of goods, set prices in this manner. This model suggests a theory of multi-product pricing in which the markup on any particular product is inversely related to the average profitability of the customer that purchases the good.

One interesting implication of this paper is that loss leader pricing might be viewed as a way for firms to compete more vigorously for more profitable customers. Such an explanation offers another characteristic of products that should be used as loss leaders. This explanation provides potentially testable implications about the types of goods that can (or ought to) be used as loss leaders and can explain why grocery stores sell turkeys as loss leaders at Thanksgiving and lower the price of eggs at Easter, but not flowers on Mother's Day, or candy on Valentines Day. [PDF 53KB]
Moral Hazard and Renegotiation: Multi-Period Robustness (Working Paper 259)
Abraham L. Wickelgren, April 2003
Abstract: Is the second best outcome of static agency models renegotiation proof? In models with one period of renegotiation, Fudenberg and Tirole (1990) answer no when the principal makes the offer, while Ma (1994) and Matthews (1995) answer yes when the agent makes the offer. This paper analyzes the robustness of these two claims when there are more periods of renegotiation. With a known number of periods, if the principal makes at least one o.er, even if the agent makes the offer in every other period, the equilibrium is identical to Fudenberg and Tirole equilibrium. With an uncertain number of periods, the agency problem is even more severe than in the Fudenberg and Tirole model. [PDF 249KB]
How Many Bottles Makes a Case Against Prohibition? Online Wine and Virginia's Direct Shipment Ban (Working Paper 258) Alan Wiseman and Jerry Ellig, March 2003
Abstract: This study investigates the effects of the Commonwealth of Virginia’s ban on direct wine shipments from out-of-state sellers on wine prices and variety available to consumers in the greater McLean, Virginia area. Our results indicate that Virginia’s direct shipment ban reduces the varieties of wine available to consumers and prevents consumers from purchasing some premium wines at lower prices online. Using a sample of 83 wines judged to be "highly popular" in Wine and Spirits magazine’s annual restaurant poll, we find that 15 percent of wines available online were not available from retail wine stores within 10 miles of McLean during the month the data were collected. The fact that local wine stores may not carry certain wines may result, in part, from other Virginia regula tions that affect the structure of the wholesale market. We also find that the lowest quoted online price offered significant cost savings over the lowest local retail price in our survey for many types of wine during the month the data were collected. The extent of any cost savings depends on the price per bottle, the quantity of wine ordered, and the shipping method chosen. For wines costing $20/bottle or more, online purchase of a 12-bottle case could save, on average, 13 percent if shipped via ground. Average savings of up to 21 percent are available on a 12-bottle case of wines costing more than $40/bottle, and purchasers of these wines can save money regardless of the shipping method. Such savings, however, are not consistent for all types of wine; for bottles costing less than $20, consumers would pay an additional 8-83 percent per bottle online. In addition, some individual wines priced below $40 were less expensive in local retail stores. [PDF 122KB]
Have Lazear-Style Implicit Contracts Disappeared? (Working Paper 256)
David J. Balan, January 2003.
Abstract: A well-known theory (Lazear, 1979) argues that wage patterns in which younger workers are underpaid relative to marginal revenue product and older workers are overpaid relative to marginal revenue product can be understood as an implicit contract designed to combat principal-agent problems in environments where worker monitoring is costly. In this paper I argue that a number of recent developments (most notably the legal ban on mandatory retirement) have caused the formation of these implicit contracts between firms and young workers to decline (or cease). I derive testable implications of this hypothesis and test it using a Panel Study of Income Dynamics sample of prime-age, full-time, private sector, non-union male workers who are not self-employed. This is the group that, according to Lazear’s theory, is most likely to be party to these implicit contracts. The results are consistent with the hypothesis. In order to explore the question of whether the results from the main sample have some cause other than the hypothesized one, I perform the following exercise: I identify other groups in the data (both sub-groups of the main (male) sample and a separate female sample); determine what the hypothesis predicts for those groups; and then perform tests similar to those performed on the main sample to see how well the hypothesis holds up. The results from the male sub-groups do not support the hypothesis, but do not strongly refute it. This lack of support may indicate that the hypothesis is false, but it also may be due to the crudeness of the method for assigning workers to the different sub-groups. The results from the female sample support the hypothesis, but the strength of this support depends on the regression specification used. [PDF 402KB]
Agent Discretion, Adverse Selection and the Risk-Incentive Trade-Off (Working Paper 255)
Christopher P. Adams, December 2002.
Abstract: A basic tenet of incentive theory states that there is a trade-off between risk and incentives. By implication, greater variation in firm profits leads to a reduction in the use of profit sharing. Surprisingly, there is little empirical evidence for this relationship. This paper reexamines the difference between the theoretical prediction and the empirical evidence, and shows that the key is agent discretion over task choice. A theoretical model represents agent discretion as an adverse selection problem. This model guides the empirical analysis of contracts given to employees in British manufacturing firms. For employees without discretion over the tasks they perform, there is a negative relationship between variation in firm profits and the use of profit sharing. For employees with discretion, there is a positive relationship. [PDF 199KB]
A Critical Analysis of Critical Loss Analysis (Working Paper 254)
Daniel P. O’Brien and Abraham L. Wickelgren, January 2003.
Abstract: Critical loss analysis is often used to argue that firms with large margins have more to lose from a reduction in sales and hence are less likely to increase prices. This argument ignores the fact that profit-maximizing competitors who do not coordinate their pricing only have large margins if their customers are not very price sensitive. In this paper, we explore the implications of critical loss analysis using an internally consistent model of oligopoly. We show that, under the assumptions made in the standard critical loss analysis, firms with larger pre-merger margins are more likely to raise prices than are firms with smaller margins, other things equal. This reinforces the traditional view that mergers are more likely to harm consumers when the merging firms have greater market power, as measured by their margins. We also derive internally consistent formulas for evaluating the profitability of price increases when defining markets and evaluating unilateral competitive effects. [PDF 187KB]
Competition Among Hospitals (Working Paper 253)
Martin Gaynor and William Vogt, January 2003.
Abstract: Our objective is to determine the effect of ownership type (for-profit, not-for-profit, government) on firm conduct in hospital markets. Secondary objectives include estimating hospital demand systems useful for market definition and merger simulation. To this end, we estimate a structural model of demand and pricing in the short term hospital industry in California, and then use the estimates to simulate the effect of a merger. Demand is modeled at the level of individual consumers using discrete choice techniques and micro data on individuals. Price in the demand equation is endogenous, and we use recently developed instrumental variables techniques to correct for this. We allow the behavior of for-profit and not-for-profit firms to differ, modeling these differences structurally following the relevant theory literature. We find that California hospitals in 1995 faced a downward-sloping demand for their products, with an average price elasticity of demand of -5.67. Not-for-profit hospitals face less elastic demand and act as if they have lower marginal costs. Their prices are lower, but markups are higher than those of for-profits. We simulate the effects of the 1997 merger of two hospital chains. In relatively unconcentrated markets such as Los Angeles and San Diego, the merger has virtually no effect on prices. However, in San Luis Obispo County, where the merger creates a near monopoly, prices rise by up to 58%, and the predicted price increase would not be substantially smaller were the chains to be not-for-profit. [PDF 314KB]
Does Size Really Matter? Empirical Evidence on Group Incentives (Working Paper 252)
Christopher P. Adams, October 2002.
Abstract: The paper empirically analyzes the economic theory and intuition that the "free rider" problem will overwhelm firm-wide incentives in large firms. Kandel and Lazear (1992) claim that in a simple model of an equitable partnership, Nash equilibrium effort levels fall with the number of partners - the 1/N problem. The paper shows that this result is crucially dependent on a unstated assumption on the production function. In particular, if worker effort levels are complementary, effort levels can increase with the number of partners. This difference may explain the empirical finding that the 1/N problem is substantial in medical and legal practices (where effort levels are independent), but less important in manufacturing (where effort levels are complementary). The empirical results suggest that the use of firm-wide incentives increases with firms size, at least for smaller firms. The results do not support the claim that the use of other human resource practices, like self-managed work teams, allows the firm to mitigate the 1/N problem. [PDF 183K]
Efficient Inter-Carrier Compensation for Competing Networks When Customers Share the Value of a Call (Working Paper 251)
Patrick DeGraba, September 2002.
Abstract: With competition in telecommunications markets a carrier relies on competing networks to complete inter-network calls originated by its customers. Regulators typically require the calling party’s network to pay a termination fee to the called party’s network equal to the terminating network’s "incremental cost" of completing the call. The payments for such "termination services" could affect retail prices and therefore consumption of telecommunications services. I show that when both parties to a call benefit from it, they should bear the costs of the call in proportion to the value that they receive from the call. This implies that requiring two networks to exchange traffic at specific points on a bill and keep basis can generate more efficient network utilization than imposing all costs on the calling party’s network. This occurs even with unbalanced traffic between the two networks. Thus, regulators may be able to improve the efficiency of telecommunications markets by establishing inter-carrier compensation rules that cause the calling party and the called party to share the cost of a call. [PDF 205KB]
Intellectual Property Rights, Internalization and Technology Transfer (Working Paper 250)
Michael W. Nicholson, July 2002.
Abstract: Intellectual property protection affects the manner in which multinational enterprises facilitate technology transfer from the innovating North to the developing South. Firms with products that are complex or technologically sophisticated will tend to internalize production through foreign direct investment. Firms that face a lower risk of imitation, or are less technically advanced, will tend to license production to non-affiliated Southern firms. Changes in intellectual property protection affect the level and the composition of technology transfer, depending on the value of the firm’s proprietary asset. [PDF 226KB]
Price and Quality Relationships in Local Service Industries (Working Paper 249)
R. Dennis Murphy, June 2002.
Abstract: This working paper presents the findings of research on the relationship between price and quality in consumer service industries in the Washington, D.C. area. The study relies primarily upon consumer ratings of service provider quality and other data published in Washington Consumer’s Checkbook Magazine. The data base includes nineteen service industries and, in virtually all cases, time series information for price and quality ratings over several ratings periods since the magazine’s inception in 1976. The results provide interesting and frequently surprising information on basic price-quality relationships in this sector, and on the reliability of several non-price "signals" that consumers might use to gauge a service provider’s probable performance. Specifically, only three of the nineteen industries report consistently significant positive price-quality correlations, and industries specializing in repair services frequently display significant negative correlations between price and quality. Further, possible signaling mechanisms, such as the size of a firm’s Yellow Pages advertisement, or a firm’s status as a member of a nationwide chain, do not function as indicators of higher quality in this data set. [PDF 251KB]
Generic Drug Industry Dynamics (Working Paper 248)
David Reiffen and Michael R. Ward, February 2002.
Abstract: Because of its unique institutional and regulatory features, the generic drug industry provides a useful laboratory for understanding how competition evolves within a market. We exploit these features to estimate certain structural relationships in this industry, including the relationship between price and the number of competitors, and between drug characteristics and the entry process. Our methodology yields a number of findings regarding industry dynamic effects. We find that generic drug prices fall with the number of competitors, but remain above long-run marginal cost until there are 8 or more competitors. We also find that more firms enter, and enter more quickly in markets with greater expected rents. The size and time paths of generic revenues, rents and the number of firms are greatly affected by measures reflecting the expected market size. Finally, we demonstrate how these structural estimates can be used to evaluate recent policy changes toward the pharmaceutical industry. [PDF 355KB]
Selection of "High Performance Work Systems" in U.S. Manufacturing (Working Paper 247)
Christopher P. Adams, March 2002.
Abstract: This paper analyzes the use of two important human resource practices (self-managed work teams and formal training programs) in U.S. manufacturing. These practices are often used in conjunction with each other and their use is associated with improved firm performance, thus the term "high performance work systems." The results of this paper raise concerns about the interpretation of studies that show a relationship between the use of particular systems of practices and higher performance but do not account for selection of practices by the firm. The paper uses a theoretical model to analyze the mechanism via which these practices improve firm performance. The results of the theoretical model are tested using an empirical model that allows practices to be chosen simultaneously, allows for the choice of practices to interact, and allows for this interaction to vary based on observable characteristics of the firm. The paper shows that the value of individual practices to a firm depends on characteristics of the firm’s product market, and on the choice of other practices by the firm. [PDF 212KB]
Demand System Estimation and its Application To Horizontal Merger Analysis (Working Paper 246)
Daniel Hosken, Daniel O’Brien, David Scheffman, and Michael Vita, April 2002.
Abstract: The past decade has witnessed remarkable developments in the quantitative analysis of horizontal mergers. Increases in computing power and the quantity and quality of data available have substantially reduced the costs of estimating demand systems using econometric methods. Good estimates of retail demand elasticities can make an important contribution to assessing the potential effects of a manufacturer merger on consumer prices. While estimates of demand relationships can make substantial contributions to merger analysis, it is much like every other area of empirical economics, in that practitioners invariably are forced to confront and resolve a series of difficult econometric and conceptual issues. The purpose of this paper is to identify a number of these issues that we believe researchers and practitioners should address, with the ultimate goal of improving the quality of antitrust analysis. [PDF 521KB]
The Welfare Effects of Third Degree Price Discrimination In Intermediate Good Markets: The Case of Bargaining (Working Paper 245)
Daniel P. O'Brien, January 2002.
Abstract: This paper examines the welfare effects of third degree price discrimination by an intermediate good monopolist selling to downstream firms with bargaining power. One of the downstream firms (the "chain store") may have a greater ability than rivals to integrate backward into the supply of the input. In addition to this outside option, the firms' relative bargaining powers depend on their disagreement profits, bargaining weights, and concession costs. If the chain's integration threat is not a credible outside option, and if downstream firms cannot coordinate their bargaining strategies, then price discrimination reduces input prices to all downstream firms. [PDF 273KB]
The Effect of Offer Verifiability on the Relationship Between Auctions and Multilateral Negotiations (Working Paper 244)
Charles J. Thomas and Bart J. Wilson, November 2001.
Abstract: We use the experimental method to compare second-price auctions to "verifiable" multilateral negotiations in which the sole buyer can credibly reveal to sellers the best price offer it currently holds. We find that transaction prices are lower in verifiable multilateral negotiations than in second-price auctions, despite the two institutions’ seeming equivalence. The difference occurs because low-cost sellers in the negotiations tend to submit initial offers that are less than the second-lowest cost. We also compare the two institutions to previously studied first-price auctions and multilateral negotiations with nonverifiable offers. Second-price auctions yield the highest prices, followed in order by verifiable negotiations, nonverifiable negotiations, and firstprice auctions. [PDF 300KB]
Evidence on Mergers and Acquisitions (Working Paper 243)
Paul A. Pautler, September 2001.
Abstract: This paper provides a broad brush treatment of the empirical economics literature regarding the effects of mergers and acquisitions. Much of the literature has direct or indirect implications for competition policy. Of most direct interest to those concerned with merger-related antitrust issues are three types of empirical studies: stock market event studies, large-scale accounting data studies, and case studies that use either interview methods or more objective, data-intensive, pre-merger and post-merger performance approaches to study individual mergers. In recent years, researchers have begun to merge the stock market study approach and the accounting/finance approach in the hopes of providing a more robust analysis. Sections III through VI discuss briefly the strengths and weaknesses of each type of study as well as discussing specific studies in each category. [PDF 5.2MB]
BI (Working Paper 242)
Charles J. Thomas, July 2001.
Abstract: Previous research on collusion in procurement markets uses static mechanism design theory to address the limitations on collusive activity imposed by asymmetric information, but in most instances it does not address how to enforce the proposed mechanisms. This paper uses repeated game theory to examine the sustainability of two commonly reported collusive schemes that have been identified as optimal static mechanisms. If a buyer does not select its reserve price strategically, or if its value is large relative to the sellers' costs, then collusion may be sustainable for a wide range of plausible discount factors. However, even mildly sophisticated reserve price selection can dramatically shrink the set of discount factors for which collusion can be sustained. These findings provide a rationale for existing arguments that buyers are vulnerable to collusion, but suggest that buyers possess tools that may profitably induce sellers to act competitively. The analysis also reveals that collusion tends to be more easily sustained if the sellers' costs have a low mean or a high variance, or, in some instances, if the number of sellers increases. [PDF 486KB]
The Use of Exclusive Contracts to Deter Entry (Working Paper 241)
John Simpson and Abraham Wickelgren, June 2001.
Abstract: This paper shows that an upstream monopolist that sells to competing downstream firms can profitably use exclusive contracts to deter entry even where scale economies are absent. By offering downstream firms a discount if they sign an exclusive contract covering later periods, the incumbent monopolist can often place each downstream firm in a prisoner’s dilemma. Because a downstream firm that refuses to sign the exclusive contract loses profit to downstream firms that sign the exclusive contract, downstream firms will sign exclusive contracts even when, over the long-term, they would obtain the upstream good at a lower price if they all refused to sign. [PDF 52KB]
The Economic Effects of Withdrawn Antidumping Investigations: Is There Evidence of Collusive Settlements (Working Paper 240)
Christopher T. Taylor, August 2001.
Abstract: This paper analyzes the effects of antidumping and countervailing duty cases initiated from 1990 to 1997 that ended in withdrawn petitions without a suspension agreement or voluntary export restraint. Monthly import data are used to estimate the price and quantity effects of the withdrawn cases. The effects of the petition being withdrawn do not support the accepted wisdom that withdrawn petitions are a signal of collusion. However, a few of the cases show changes in price and quantities consistent with collusion. This is an important issue, since out-of-court settlements of unfair trade cases which restrict quantities or increase prices are not only welfare reducing but are also actionable under the antitrust laws; they are not exempt under the Noerr-Pennington doctrine. [PDF 57KB]
Moral Hazard, Mergers, and Market Power (Working Paper 239)
Abraham L. Wickelgren, June 2001.
Abstract: Most analysis of market power assumes that managers act as perfect agents for the shareholders. This paper relaxes this assumption. When managers of a multiproduct firm must exert unobservalbe effort to improve product quality, there will be a tension between the optimal incentive scheme for eliminating price competition between the products and creating optimal effort incentives. This makes some intra-firm price competition inevitable. When quality improving effort generates positive spillovers, the optimal amount of price competition can be as great or greater than when the products are under separate ownership. Even when this is not the case, intra-firm price competition can be severe enough that quality adjusted price is lower when the products are under common ownership. [PDF 750KB]
Targeted Consumer Information and Prices: The Private and Social Gains to Matching Consumers with Products (Working Paper 238)
David Reiffen, April 2001.
Abstract: It is well known that product differentiation increases both prices and profits, other things equal. What is less well understood is how the distribution of consumer preferences affects firms’ incentives to differentiate their products. This paper focuses on the incentive of firms to reveal truthful information about product attributes. Because consumers’ preferences differ, the revelation of this information differentiates products. The profitability of inducing this differentiation is shown to be related to three aspects of the information; the size of the "targeted" group (i.e., the group who finds these attributes desirable), the magnitude of the perceived change in attributes induced by the information, and whether the information is "symmetric." In particular, I show that the profits associated with information increase more than proportionately with the size of the targeted group. This implies that information will tend to be provided for large groups, even if there are no economies of scale in producing that information. The analysis also shows that in some circumstances, the revelation of asymmetric information can actually reduce the firm’s profit. [PDF 228KB]
Geographic Markets in Hospital Mergers: A Case Study (Working Paper 237)
John Simpson, January 2001.
Abstract: In three recent hospital merger cases, the courts concluded that the merged hospital would be unable to increase price profitably because of competition from distant hospitals. In reaching this conclusion, the courts found the following: hospitals earn high margins on the last patients that they serve; given these high margins, a small price increase would be unprofitable if even a relatively small percentage of patients switched to other hospitals; many of the merging hospitals’ patients live in "contestable" zip codes, where a large percentage of patients already use other hospitals; a price increase at the merging hospitals would prompt a large number of these patients to switch to other hospitals; and this amount of switching would make the price increase unprofitable. This paper argues that the courts in these cases erred in accepting the defendants’ argument that switching by patients living in "contestable" zip codes would make a price increase at the merging hospitals unprofitable. Specifically, this paper examines the behavior of patients following a merger similar to those analyzed by these courts and finds that a large price increase prompted little switching by patients living in "contestable" zip codes. [PDF 77KB]
Publicity and the Optimal Punitive Damage Multiplier (Working Paper 236)
John M. Yun, January 2001.
Abstract: When punitive damage awards create publicity, this could affect the behavior of uncompensated victims, which has implications for the optimal punitive damage multiplier. A new adjusted multiplier is derived that incorporates publicity into the analytical framework. Assuming that all victims receive uniform punitive awards, the result is a lower punitive multiplier relative to the standard result. The extent of the adjustment will depend on the likelihood of publicity, the strength of the publicity, and the number of victims. Finally, under certain litigation cost conditions, if courts allow heterogeneous punitive awards, then efficiency is improved relative to uniform awards. [PDF 104KB]
The Effect of Exit on Entry Deterrence (Working Paper 235)
Abraham L. Wickelgren, December 2000.
Abstract: Recent analyses of entry deterrence strategies have required an incumbent's post-entry output or pricing strategy to be profit maximizing. However, most papers have continued to assume that either an incumbent can commit not to exit after entry or that exit is never optimal. When there are avoidable fixed costs of operating in any period, however, exit can be the optimal strategy. In this situation, entry deterrence strategies operate very differently than when exit is never optimal. In fact, the possibility of exit can make some, previously effective, strategies completely ineffective while improving the effectiveness of others. [PDF 102KB]
Optimal Agency Relationships in Search Markets (Working Paper 234)
Christopher Curran and Joel Schrag, October 2000.
Abstract: We compare a seller's agency regime, in which agents give sellers information about buyers' willingness to pay, with a buyer's agency regime, in which agents keep buyers' information confidential. Aggregate gains from trade can be higher under either agency regime. Aggregate gains from trade are higher under buyer's agency if traders expect to spend less time in the market under buyer's agency. Equivalently, aggregate gains from trade are higher under seller's agency only if traders expect to spend less time in the market under seller's agency. We use our theoretical results to interpret empirical findings on the effects of different agency regimes. [PDF 148KB]
Innovation, Market Structure and the Holdup Problem: Investment Incentives and Coordination (Working Paper 233)
Abraham L. Wickelgren, August 2000.
Abstract: I analyze the innovation incentives under monopoly and duopoly provision of horizontally differentiated products purchased via bilateral negotiations, integrating the market structure and innovation literature with the holdup literature. I show that competition can improve local incentives for non-contractible investment. Because innovation levels are generally strategic substitutes, however, there can be multiple duopoly equilibria. In some circumstances, monopoly can provide a coordination device that can lead to greater expected welfare despite inferior local innovation incentives. The conditions for this to be the case, however, are quite restrictive. [PDF 190KB]
Import Competition and Market Power: Canadian Evidence (Working Paper 232)
Aileen J. Thompson, July 2000.
Abstract: This paper estimates price-marginal cost mark-ups for Canadian manufacturing industries during the 1970s in order to assess the impact of import competition on domestic market power. The results are mixed. Based on the analysis, there is no consistent evidence that imports had a beneficial impact on competition in the Canadian market during that period. One possible explanation for this finding is that trade may have differential impacts among firms within industries. Detailed firm-level analysis may therefore provide a more complete understanding of the impact of imports on competition. [PDF 107KB]
A Comparison of Auctions and Multilateral Negotiations (Working Paper 231)
Charles J. Thomas and Bart J. Wilson, July 2000.
Abstract: We compare the well-known first-price auction with a common but previously unexamined exchange process that we term "multilateral negotiations." In multilateral negotiations, a buyer solicits price offers for a homogeneous product from sellers with heterogeneous costs, and then plays the sellers off one another to obtain additional price concessions. Using experimental methods, we find that transaction prices are statistically indistinguishable in the two institutions with a sufficiently large number of sellers, but that prices are higher in multilateral negotiations than in first-price auctions as the number of sellers decreases. With fewer sellers, the institutions are equally efficient, but with more sellers, there is some evidence that multilateral negotiations are slightly more efficient. [PDF 330KB]
How Do Retailers Adjust Prices?: Evidence from Store-Level Data (Working Paper 230)
Daniel Hosken, David Matsa, and David Reiffen, January 2000.
Abstract: Recent theoretical work on retail pricing dynamics suggests that retailers frequently change prices of specific items, even when their costs are unchanged. We extend this theory to explain which particular retail items will be subject to periodic temporary reductions. We then make use of a BLS data set on retail prices to document the frequency of sales and the specific products chosen for these temporary reductions across a wide range of goods and geographic areas. The results suggest that a number of pricing regularities exist for all 20 categories of goods we examine. First, retailers seem to have a "regular" price, and most deviations from that price are downward. Second, there is considerable heterogeneity in sale behavior across goods in a category (e.g. cereal); within each category of goods, the same items are regularly put on sale, while other items are rarely, if ever, put on sale. Third, the probability of a sale on an item appears to be greater when demand for that item is highest. Fourth, for the limited number of items for which we know category market shares, there is a statistically significant positive relationship between the likelihood a product is on sale, and its market share. [PDF 112KB]
Compliments Integration and Leverage: The Case of the Middleman (Working Paper 229)
Christopher Garmon, December 1999.
Abstract: In some cases, complementary products are sold to different sets of agents to aid in transactions between them. In the context of a simplified model, this paper shows that a monopolist has an incentive to integrate into and foreclose other sellers of a complementary product used in fixed proportions with the monopolized product, but which is sold to different consumers. While these latter consumers are made worse off by integration and leverage, output is expanded and the monopolist's original consumers are made better-off. The effect of integration and leverage on overall welfare is uncertain. I illustrate this model with an example involving trucking fleet cards (sold to trucking companies) and fuel desk point-of-sale systems (sold to truck stops) that are used in conjunction when diesel fuel is purchased. [PDF 49KB]
The Effect of Asymmetric Entry Costs on Bertrand Competition (Working Paper 228)
Charles J. Thomas, October 1999.
Abstract: By permitting firms to have different entry costs, I generalize two previously studied models of two-stage entry and pricing amongst Bertrand competitors. I find that the existing results depend critically on the symmetry assumption. For example, if firms' entry decisions are observed before price-setting occurs, then total welfare can increase following the introduction of a potential entrant, in contrast to the unambiguous welfare reduction found in the symmetric setting. If firms' entry decisions are unobserved before pricing-setting occurs, then the expected price typically decreases or remains unchanged following the introduction of a potential entrant, in contrast to the unambiguous price increase found in the symmetric setting. In both price-setting environments, competition increases following the introduction of potential entrants with sufficiently low entry costs, a finding that is obscured by focusing on the symmetric models. [PDF 1.6MB]
Regulatory Restrictions on Vertical Integration and Control: The Competitive Impact of Gasoline Divorcement Policies (Working Paper 227)
Michael G. Vita, July 1999.
Abstract: Gasoline "divorcement" regulations restrict the integration of gasoline refiners and retailers. Theoretically, vertical integration can harm competition, making it possible that divorcement policies could increase welfare; alternatively, these policies may reduce welfare by sacrificing efficiencies. This paper attempts to differentiate between these possibilities by estimating a reduced form equation for the real retail price of unleaded regular gasoline. I find that divorcement regulations raise the price of gasoline by about 2.7¢ per gallon, reducing consumers' surplus by over $100 million annually. This finding suggests that current proposals to further separate gasoline retailing from refining will be harmful to gasoline consumers. [PDF 60KB]
The Competitive Effects of Not-for-Profit Hospital Mergers: A Case Study (Working Paper 226)
Michael G. Vita and Seth Sacher, May 1999.
Abstract: Applying conventional horizontal merger enforcement rules to mergers of nonprofit hospitals is controversial. Critics contend that the different objective function of not-for-profits entities should mitigate, and possibly eliminate, competitive concerns about mergers involving nonprofit hospitals. We provide evidence relevant to this debate by analyzing ex post a horizontal merger in a concentrated hospital market. Here, the transaction reduced the number of competitors (both nonprofit) in the alleged relevant market from three to two. We find that the transaction resulted in significant price increases; we reject the hypothesis that these price increases reflect higher post-merger quality. This study should help policymakers assess the validity of current merger enforcement rules, especially as they apply to not-for-profit enterprises. [PDF 88KB]
Pricing Behavior of Multi-Product Retailers (Working Paper 225)
Daniel Hosken and David Reiffen, March 1999 (Revised, June 2007).
Abstract: While retail sales are an important economic phenomenon, previous research has not explored how the multiproduct nature of consumers’ purchasing decisions affects the pricing dynamics of multiproduct retailers. In this paper, we first document the extent to which "sales", defined as temporary discounts in retail price, are a pervasive aspect of retailing and an important source of retail price variation. Using a large data set for 20 categories of grocery products across 30 U.S. metropolitan areas, we find that the majority of price changes and 25%-50% of retail price variation is the result of retail sales. We then develop a model describing the pricing dynamics of multiproduct retailers that is consistent with these empirical pricing regularities. Specifically, because consumers prefer to buy a bundle of goods from the same retailer, a given discount on any one good in the bundle will have a similar effect on consumers’ likelihood of visiting that retailer. This implies that discounts on goods sold by a single retailer are substitutes instruments for retailers, and factors that influence one good’s price will affect the pricing of other goods. Hence, if intertemporal price changes are a means of price discriminating (as suggested in the literature), the impact of these changes will be reflected in the prices of many goods, including even those for which discrimination is not feasible. [PDF 4.27MB]
Multimarket Contact and Imperfect Information (Working Paper 224)
Charles J. Thomas, January 1999.
Abstract: With perfect information about relevant strategic variables, economic theory predicts that firms engaged in competition across several markets sometimes can use their multimarket contact to blunt competitive forces. In practice, perfect information likely is not available, and it is well known that the existence of imperfect information can impede firms' collusive efforts. I extend a standard oligopoly supergame to examine simultaneously the effects of imperfect information and multimarket contact on the degree of cooperation that firms can sustain, and I reach the following conclusions. First, linkage of one market with perfect information and another with imperfect information may not increase profits, despite the slack in incentive constraints exploited in perfect information models. Second, multimarket contact does not increase profits if each market has too little uncertainty. Third, profits can be increased in a market in which some collusion initially is sustainable by linking it with a market in which no collusion initially is sustainable. The central theme of these results is that a market must generate sufficiently noisy signals for it to benefit another market through strategic linkage. This contrasts with the finding in individual markets that collusion decreases as the level of noise increases. [PDF 2.5MB]
Price Competition and Advertising Signals (Working Paper 223)
Mark N. Hertzendorf and Per Baltzer Overgaard, January 1999.
Abstract: Can price and advertising be used by vertically differentiated duopolists to signal qualities to consumers? We show that pure price separation is impossible if the vertical differentiation is small, while adding dissipative advertising ensures existence of separating equilibria. Two simple, but non-standard, equilibrium refinements are introduced to deal with the multi-sender nature of the game, and they are shown to produce a unique separating and a unique pooling profile. Pooling results in a zero-profit Bertrand outcome. Separation gives strictly positive duopoly profits, and dissipative advertising is used by the high-quality firm when products are sufficiently close substitutes. Finally, depending on the differentiation, the separating prices of both firms may be distorted upwards or downwards compared to the complete information benchmark. [PDF 258KB]
R&D Activity and Acquisitions in High Technology Industries: Evidence from the U.S. Electronic and Electrical Equipment Industries (Working Paper 222)
Bruce A. Blonigen and Christopher T. Taylor, May 2001.
Abstract: Theory argues that R&D intensity and acquisition activity may be either directly or inversely related. However, empirically we know relatively little about which firms are responsible for acquisition activity in high-technology industries. Using a panel of 217 U.S. electronic and electrical equipment firms from 1985-93 and limited dependent variable estimation techniques, we find relatively low R&D-intensity firms are more likely to acquire. This result is true both when looking at between and within estimators, indicating that acquisitions may be used as a short term or long term strategy. These results are robust to a number of sensitivity test. [PDF 70KB]
Market Power and the Cross-Industry Behavior of Prices Around a Business Cycle Trough (Working Paper 221)
Jonathan B. Baker and Peter A. Woodward, December 1998.
Abstract: Our paper examines the behavior of prices in a large number of highly-disaggregated industries around the trough of the business cycle. We conclude that the degree to which prices are pro- or counter- cyclical differs between business cycle peaks and business cycle troughs, and that the cyclical behavior of prices varies substantially across industries. We also observe a tendency for industry prices to rise immediately following a business cycle trough. In general, we accept a market power explanation for that observation: either oligopolists pricing above marginal cost take advantage of a cyclical tendency for demand functions to grow more inelastic in the early stages of a boom or else interfirm coordination becomes more effective after a trough. From the behavior of prices as a recession ends and a boom begins, our paper also identifies a set of industries likely on average to be exercising market power. [PDF 3.1MB]
The Competitive Effects of Mergers Between Asymmetric Firms (Working Paper 220)
Charles J. Thomas, August 1998.
Abstract: The 1992 Horizontal Merger Guidelines suggest that the merger of two relatively weak competitors may result in a strong competitor and may lead to lower prices, despite the resulting increase in concentration. This paper introduces incomplete information into a simple model of repeated competition among firms that are asymmetric in their likely degree of efficiency at each stage of competition. In such a setting there do exist profitable yet price-reducing mergers among weaker firms. This model reasonably describes mergers between asymmetric firms that participate in auction or procurement settings and strengthens insights from the literature on asymmetric auctions regarding postmerger incentives for aggressive pricing. Finally, this model illustrates that the efficiencies described in the typical modeling of mergers in the asymmetric auction literature have private but not social benefits, and thus should not be permitted as a justification for merger. [PDF 2.5MB]
Price Movements over the Business Cycle in U.S. Manufacturing Industries (Working Paper 219)
Bart J. Wilson and Stanley S. Reynolds, June 1998.
Abstract: This paper develops and tests implications of an oligopoly pricing model. The model involves capacity investments that are made before demand is revealed and pricing decisions that are made after demand is known. The model predicts that during a demand expansion the short run competitive price is a pure strategy Nash equilibrium, but in a recession firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set during expansionary periods, because firms use mixed strategies for prices in recessions. This model is confronted with data from U.S. manufacturing industries. The empirical analysis utilizes a time series switching regime filter to test the unique predictions of the model, namely that (1) price changes are more variable in recessions than in expansions and (2) the form of the distribution of price changes differs between recessionary and expansionary regimes. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly pricing model. The data is also analyzed to compare the predictions of this model with those of an optimal collusion model. [PDF 3.8MB]
Physicians Networks, Integration and Efficiency (Working Paper 218)
Seth Sacher and Louis Silvia, April 1998.
Abstract: The creation of physician networks has been an important part of the managed care revolution. while the anticompetitive dangers of physician-controlled networks are clear, there has been little theoretical or empirical work on why physician control might be efficient relative to other control alternatives. This paper offers a theory, based on asset specificity in the face of the contractual incompleteness, explaining why physician control might be efficient. Our analysis implies that harsh antitrust treatment of physician controlled networks, based on an observation that networks may be organized without physician control, in not appropriate. Recent revisions in antitrust policy are consistent with a more expansive view of the efficiency potential of physician-controlled networks. [PDF 52KB]
Identifying the Firm-Specific Cost Pass-Through Rate (Working Paper 217)
Orley Ashenfelter, David Ashmore, Jonathan B. Baker and Signe-Mary McKernan, January 1998.
Abstract: A merger that permits the combined company to reduce the marginal cost of producing a product creates an incentive for it to lower price. Accordingly, the rate at which cost changes are passed through to prices matters to the evaluation of the likely competitive effects of an acquisition. In this paper, we describe our empirical methodology for estimating the cost pass-through rate facing an individual firm, and for distinguishing that rate from the rate at which a firm passes through cost changes common to all firms in an industry. We apply this methodology to determine the firm-specific pass-through rate for Staples, an office superstore chain, and find that this firm historically passed-through firm-specific cost changes at a rate of 15% (i.e. it lowered price on average by 0.15% in response to a 1% decrease in marginal cost). [PDF 44KB]
Are Retailing Mergers Anticompetitive? An Event Study Analysis (Working Paper 216)
John David Simpson and Daniel Hosken, January 1998.
Abstract: We examine the abnormal returns of rival firms to determine whether four retailing mergers that occurred during the late 1980s reduced competition. We use the stock returns of retailers in geographic markets unaffected by the merger to control for the efficiency-signaling effect of the merger. Using this methodology, we find that rival firms experienced positive abnormal returns from May Company's 1986 acquisition of Associated Dry Goods and American Stores' 1988 acquisition of Lucky Stores. These results offer some evidence that retailing mergers that lead to large increases in concentration in already concentrated markets may lessen competition and lead to higher product market prices. [PDF 63KB]
Discriminatory Dealing with Downstream Competitors: Evidence from the Cellular Industry (Working Paper 215)
David Reiffen, Laurence Schumann, and Michael R. Ward, August 1997.
Abstract: Concern over regulated monopolies entering unregulated vertically-related markets is grounded in the incentives for such firms to cross-subsidize their unregulated enterprises or discriminate against competitors in the unregulated market. However, a prohibition against regulated monopolies offering related goods may forfeit the benefits of production by the most efficient provider. We take advantage of cross-sectional variation across geographic cellular markets to examine the empirical importance of these discrimination and efficiency effects. This cross-sectional variation takes three forms; differences in the percentage of interconnection facilities in a cellular market owned by each phone company, in the percentage of wireline end customers served by each local phone company, and in the percentage of the cellular companies' equity owned by each local telephone company. Consistent with the discrimination hypothesis, greater ownership of interconnection facilities is associated with lower quality and lower and output of cellular phone service. However, consistent with the efficiency hypothesis, a greater fraction of customers served is associated with higher cellular quality and greater output. The estimated magnitudes of these effects imply that discrimination and efficiency effects of greater integration tend to be offsetting. Higher equity ownership in the cellular company by the phone company leads to higher prices (which is consistent with either hypothesis) and no discernable effect on quality or quantity. [PDF 143KB]
Do Nonprofit Hospitals Exercise Market Power? (Working Paper 214)
John Simpson and Richard Shin, November 1996.
Abstract: Several theories of nonprofit hospital behavior predict that nonprofit hospitals behave in the consumer interest and thus do not exercise market power. If these theories are correct, then antitrust enforcement of hospital mergers should be restricted only to those markets in which a nonprofit hospital cannot offset anticompetitive behavior by for-profit hospitals. In this paper, we measure a hospital's market power using two alternative measures. The first is the HHI for a county; the second is the distance from a hospital to its closest competitor. For both measures, we find that nonprofit hospitals set higher prices when they have more market power. [PDF 46KB]
Market Structure and the Flow of Information in Repeated Auctions (Working Paper 213)
Charles J. Thomas, December 1996.
Abstract: There is an ongoing public policy debate regarding vertical integration and its concomitant information flows. Of particular concern is that the information derived by an auctioneer (such as a distributor) will be shared with its integrated bidder (such as a manufacturer), leading to a reduction in competition between the bidders. Similar competitive concerns arise regarding bid revelation policies, such as those used in public sector procurement. Modeling such situations as the repeated auctions introduced in Thomas [1996a], this paper examines the transmission of private information via the auction outcomes, and shows how that transmission is affected by the changes in market structure described above. These concerns are not present in the existing auction literature, because such information transmission is irrelevant both in series of independent auctions and in sequential auctions in which participants desire only a single item. However, when bidders desire multiple items, and when the values of those items to a bidder are correlated, the incentive to learn about opponents' values and to obscure one's own drive equilibria to depart systematically from those in standard models. I examine structural information transmission, created through various policies for conducting auctions, and its effect on strategic information transmission, which arises as an optimal response to given structural policies. I initially model information acquisition in situations where bidders do not see rival bids and learn only the identify of the winner. I then extend this model to show how the desire to conceal information about oneself affects behavior by examining repeated auctions with publicly announced bids. The auctioneers prefer a policy of revealing all bids to revealing only the winner's bid and to revealing no bid information. Finally, I show that a vertical merger between a buyer and a seller can be procompetitive due to both structural and strategic information transmission. [PDF 2.5MB]
Entry Policy and Entry Subsidies (Working Paper 212)
James D. Reitzes and Oliver R. Grawe, April 1996.
Abstract: This paper provides a theory that explains why government allow free entry and selectively promote entry under certain conditions and deter entry under other conditions. The analysis also identifies conditions under which optimal policy requires that large-scale entry is freely permitted and small-scale entry is deterred. In our model, policymakers use entry policy to strategically shift rents away from foreign producers toward domestic producers and consumers. Since it may be socially beneficial to subsidize entry by both domestic and foreign firms, we explore the optimal means of promoting entry under complete and incomplete information concerning the entrant's marginal and fixed costs. Under complete information, welfare can be maximized by a two-part subsidy mechanism consisting of a per-unit output subsidy in combination with a lump-sum subsidy or tax. Under incomplete information, the policymaker has incentive to treat domestic and foreign entry differently in setting an optimal entry subsidy. With respect to domestic entry, the policymaker can eliminate any potential welfare losses due to incomplete information if the entrant can be induced to act as a Stackelberg leader. Otherwise, the policymaker may undersubsidize domestic entrants with high marginal costs and oversubsidize entrants with low marginal costs. In the case of foreign entry, the presence of incomplete information implies that entry is undersubsidized. [PDF 2.3MB]
A Game Theory Model of Celebrity Endorsements (Working Paper 211)
Mark N. Hertzendorf, February 1996.
Abstract: Since Milgrom and Roberts (1986) game theorists studying advertising have generally assumed that aggregate advertising expenditures are perfectly observed by consumers. In the real world, however, consumers see only a small fraction of the commercials aired by a given firm and typically do not view the firm's total advertising expenditure. This gives the firm an incentive to make sure that each commercial has as much impact as possible. The impact of a commercial may be enhanced through extravagant production costs, or by purchasing a celebrity endorsement. Using a signalling game this paper shows how a monopolist may attempt to balance the cost of production against the cost of air time to send a credible signal to consumers at the minimum possible cost. Several examples illustrate the extent to which extravagant production costs (or expensive celebrity endorsements) can substitute for additional spending on air time. Paradoxically, although it is the existence of signal loss (i.e. consumers viewing fewer commercials than were actually purchased) that makes a multifaceted advertising signal attractive, greater signal loss does not necessarily lead to greater production or endorsement expenditures. Rather as signal loss increases, the monopolist has a tendency to substitute expenditures on air time for expenditures on production or celebrity endorsements. [PDF 3.6MB]
The Political Economy of Federal Trade Commission Administrative Decision Making in Merger Enforcement (Working Paper 210)
Malcolm B. Coate and Andrew N. Kleit, November 1995
Abstract: Firms seeking to merge face antitrust scrutiny from either the Department of Justice (DOJ) or the Federal Trade Commission (FTC). Unlike the DOJ, the FTC litigates its cases in front of its own administrative law judges (ALJ), and then hears the appeal itself, rather than using the federal district courts. This study focuses on the formal decisions made by the FTC after an ALJ has conducted a full trial on the merits. We find that while the "merits" of a matter, as implied by the caselaw, affect the FTC’s decision, institutional factors also have an impact.
When Does New Entry Deter Collusion (Working Paper 209)
John Simpson, December 1994
Abstract: The U.S. Department of Justice and Federal Trade Commission Merger Guidelines assume that entry that is likely and sufficient will ultimately correct any anticompetitive harm resulting from a merger. If this anticompetitive harm takes the form of collusion, then such entry will ultimately end the collusive agreement. If there are few opportunities to observe and to punish defection from the collusive agreement before this entry is expected to occur, then the prospect of this entry may deter collusion completely. Thus, entry that takes more than two years, if it is both likely and sufficient, may deter collusion in markets where the time required to observe and to punish cheating is lengthy. On the other hand, entry that takes less than two years may not deter collusion in industries where cheating can be quickly detected.
Did Depreciation of the Dollar Render the Steel VRA's Nonbinding? (Working Paper 208)
Oliver Grawe, Dolly Howarth, and Morris Morkre, December 1994.
Abstract: One of the puzzles about the recent steel VRAs is whether they limited imports toward the end of the 1980s. The 36 percent depreciation of the dollar between 1984 and 1989 is believed to have rendered the VRAs ineffective by 1989. This paper estimates the effect of the dollar depreciation on the steel VRAs using a computable, partial equilibrium model. We find that depreciation alone was not sufficient to render the VRAs ineffective. This result is due to the following.

First, only part of the changes in exchange rates were passed through to domestic prices. We believe that for steel partial pass through is explained by globalization of markets for the major inputs (e.g., iron ore) consumed by steel firms worldwide. Second, steel is an intermediate product widely used by tradables industries. A dollar depreciation causes domestic steel-using industries to expand. What happens to steel imports is unclear a priori.
Merger Analysis in the Courts (Working Paper 207)
Malcolm B. Coate, August 1994 (Published in Managerial and Decision Economics, Vol. 16, 1995)
Abstract: This paper presents an analysis of the merger decisions between 1982-1992. The survey of cases suggests that the plaintiffs win roughly half the time. Plaintiffs were no more likely to win if a case was heard by a judicial panel dominated by Republican than Democratic appointees. In addition, the plaintiffs were no more likely to win in the second half of the decade than in the first half of the period. Further analysis suggests that barriers to entry and various competitive factors supplement the Herfindahl statistic in predicting the outcome of the case. Additional models link barrier and competitive conditions findings to exogenous factors such as the DOJ as a plaintiff and the filing for a preliminary injunction.
Reversing Roles: Stackelberg Incentive Contract Equilibrium (Working Paper 206)
Richard E. Ludwick, Jr., July 1994.
Abstract: This analysis derives the optimal incentive contracts owners offer managers who engage in Stackelberg-quantity competition. In contrast to the Coumot case, the owner of the leading firm motivates his manager to strictly maximize profits and thereby gives no incentives for increased production. This results in a reversal of the usual Stackelberg outcome; output and profits for the leading firm are less than those of the follower's. In another reversal of the standard Stackelberg result, the leader's output and profits are lower compared to when outputs are chosen simultaneously whereas the follower's are greater. While the owner of the leading firm then wants his manager to engage in simultaneous quantity competition, the manager always chooses to be a leader irrespective of his incentive contracts.
Disentangling Regulatory Policy: The Effects of State Regulations on Trucking Rates (Working Paper 205)
Timothy P. Daniel and Andrew N. Kleit, July 1994. (Published in Journal of Regulatory Economics, Vol. 8, 1995).
Abstract: This paper combines state-level data on trucking rates with information on state-level regulations to estimate the independent effect on rates from three different types of motor carrier regulations: rate regulation; entry regulation; and the provision of antitrust immunity for decisions made jointly by motor carrier rate bureaus. The empirical results indicate that state-level motor carrier regulations generally increase trucking rates, with entry regulation having the largest effect in the LTL (less-than-truckload) sector and rate regulation having the largest effect in the TL (truckload) sector. The study also examines interaction effects among the three types of regulations, and concludes that the combination of strict entry requirements and antitrust immunity leads to significant increases in trucking rates
Vertical Contracts as Strategic Commitments (Working Paper 204)
Cindy R. Alexander and David Reiffen, December 1993. (Published in Journal of Economics and Management Strategy, Vol. 4, 1995).
Abstract: Recent literature has shown that when retailers cannot observe contracts between a manufacturer and their rivals, the manufacturer will be unable to obtain the vertically integrated profit using two-part tariff contracts alone. It has been suggested that vertical restraints, such as RPM and exclusive territories, are observable and thus permit the manufacturer to obtain profits closer to the vertically integrated level. Observability, however, is not sufficient. To serve as a strategic commitment mechanism, a vertical contract must be enforceable as well. We show that the vertical contracts that have been the focus of the recent literature are not self-enforcing but must be externally enforced. We find that in practice the enforceability condition has not been met. This suggests that models which rest on the premise that vertical restraints are strategic commitments do not provide general explanations of these practices.
The Antitrust Implications of Entry by Small-Scale Hospitals (Working Paper 203)
John Simpson, October 1993. (Published as "A Note on Entry by Small Hospitals" in Journal of Health Economics, Vol. 14, 1995).
Abstract: Analyses of general acute care hospital mergers have traditionally defined the relevant product market as inpatient medical and surgical acute care and have generally assumed that economies of scale exist at least up to 100 beds. However, an examination of recent entry into California suggests that antitrust authorities should reconsider these two positions. First, twenty-one of the thirty-five general acute care hospitals that have recently opened or plan to open soon have fewer than 100 beds. Some of these hospitals are entering urban and suburban areas in which they must compete with larger hospitals. Entry by these hospitals suggests that sub-100 bed hospitals can efficiently provide at least some inpatient acute care services. Second, some of the sub-100 bed entrants are an outgrowth of outpatient surgery centers and provide only a subset of the services provided by full-service general acute care hospitals. The emergence of this type of hospital suggests that competitive conditions and entry conditions may now vary substantially across the range of inpatient acute care. If this is the case, then grouping separate acute care services into a broad cluster market may no longer be a useful means of simplifying the analysis of hospital mergers.
Antitrust: Results from the Laboratory (Working Paper 202)
Charissa P. Wellford, October 1993.
Abstract: Industrial organization issues that are relevant to antitrust have been studied in the laboratory for over three decades, and the results of this research offer useful insights for applied work in antitrust. Experimental methods provide a means for enhancing our understanding of markets. Those who advocate the relevance (or policy application) of a particular theory bear the burden of showing why the theory is appropriate. When a theory fails to predict well in a simple laboratory setting under conditions the theory itself suggests, it is difficult to believe that it would predict better in a more complex market in the naturally-occurring economy. This paper summarizes how a market is created in the laboratory, discusses the applicability of laboratory methods (relative to traditional empirical/econometric methods) to various antitrust issues, and presents a brief survey of laboratory results that have implications for antitrust analysis.
Product Variety and Consumer Search (Working Paper 201)
Jeffrey H. Fischer, February 1993.
Abstract: Previous work on consumer search has shown that consumers facing positive search costs do not sample more than one firm; that is, no search occurs in equilibrium. This result, as well as the price charged, are independent of the magnitude of search costs. I develop a model in which consumers search for a most-preferred variety of a heterogeneous product. If products are sufficiently differentiated, consumers will sample additional firms and, consequently, search costs affect both the price charged and the probability of search.
Fight, Fold or Settle?: Modeling the Reaction to FTC Merger Challenges (Working Paper 200)
Malcolm Coate, Andrew Kleit, and Rene Bustamante, February 1993.
Abstract: This paper models the reaction of firms to Federal Trade Commission (FTC) decisions to seek to block proposed horizontal mergers. Finns' responses to the FTC are shown to depend on a number of factors, including the structural merits of the FTC challenge, the efficiencies potentially arising from the transaction, and the cost to the firms of fighting the FTC in court. For a large number of the FTC's merger challenges, we find that firms have strong incentives to settle with the Commission, regardless of the cases' competitive merits. Therefore, in these matters the Commission appears to have powers more like a regulatory agency than a prosecutor.
Telecommunications Bypass and the "Brandon Effect" (Working Paper 199)
Steven G. Parsons and Michael R. Ward, February 1993.
Abstract: The creation of a charge for long distance companies to access the local telephone companies' switched network created the incentive to bypass the local switched network in order to avoid access charges that were substantially above cost. This paper explores the implications of a federal regulatory policy of a target total dollar switched access revenue requirement. In particular, the paper focuses on the so called "Brandon Effect" in which bypass incentives are attenuated when there is a target total dollar switched access revenue. Empirical analysis confirms the "Brandon Effect" on bypass decisions.
Auctions Under Increasing Costs: Coordination Problems and the Existence of an Asymmetric Equilibrium (Working Paper 198)
David Reiffen, August 1992.
Abstract: This paper models procurement auctions when suppliers face increasing costs. It is shown than an asymmetric equilibrium exists whereby one bidder bids different prices on each project in a series of simultaneous auctions, while its competitor bids the same price on each project. This existence of such an equilibrium may provide an explanation for observed bidding behavior in industries plausibly - characterized by increasing costs. Further, it is shown that the price paid in simultaneously-held auctions will be less than the prices paid in sequentially-held auctions. Hence, the existence of an asymmetric equilibria may explain the prominence of simultaneous auctions for certain products.
The Minimum Optimal Steel Plant and the Survivor Technique of Cost Estimation (Working Paper 197)
Robert P. Rogers, August 1992.
Abstract: The survivor technique is used to examine economies of scale in the steel industry, and the results are compared to an earlier engineering approach study by Tarr. Specifically the paper focuses on the conventional integrated steel mill of over 1 million tons a year. The results are consistent with Tarr's estimate of a steel mill Minimum Optimal Scale of 6 million tons a year.
Advertising Restrictions as Rent Increasing Costs (Working Paper 195)
John R. Morris and James A. Langenfeld, May 1992.
Abstract: The Sherman Antitrust Act is over a century old, yet debate continues about its original goal. Previous authors, focusing on the substance of the 1890 debate, have reached various conclusions about this goal. Instead of concentrating on the congressional debates, this paper examines the structural context of the Act. The paper argues that the Act is best viewed as a modest statutory extension of the common law. The goals of the common law are then discussed from the viewpoint of the "Law and Economics" school, and the congressional debates on the Sherman Act are also analyzed from this perspective. Using public choice theory, the paper also reviews the political support for the Act and the manner in which Congress chose to have the Act administered. The common law origins of antitrust, the support for, and implementation of the Act all support the conclusion that the Act's goal was economic efficiency.
Market-Share Quotas, James D. Reitzes and Oliver R. Grawe, (Working Paper 194 )
April 1992. (Published in Journal of International Economics, Vol. 36, 1993).
Abstract: Anecdotal evidence reveals that an import quota is not always filled when the quota is specified in terms of a market-share limit instead of a quantity limit. In a simple Cournot duopoly, we provide a theoretical rationale for this outcome. Imposing a market-share quota eliminates pure strategy equilibria. Instead, a mixed-strategy equilibrium arises where only the domestic firm mixes choices. The quota is binding under one of the two equilibrium domestic strategies, but it is not binding under the other. Compared to a tariff that restrains the foreign market share to an equivalent level, domestic profits are always higher and consumer surplus is always lower under the market-share quota. Social welfare is lower under the market-share quota when the domestic firm uses its "constrained" strategy, but this outcome may be reversed when the domestic firm uses its "unconstrained" strategy. These results may continue to hold when the foreign firm can move output costlessly between markets.
Efficiencies Without Economists: The Early Years of Resale Price Maintenance, (Working Paper 193 )
Andrew N. Kleit, April 1992. (Published in Southern Economic Journal, Vol. 59, 1993).

Abstract: Resale price maintenance (RPM) continues to be a contentious topic, both in economics and in antitrust. During the 1980s economists derived new efficiency motivations for RPM while the Supreme Court reaffirmed the per se ban on its use and Congress threatened to extend that ban. While economists have proposed a number of different efficiency explanations for RPM, such theorizing has been performed largely without the help of businesses that actually use RPM. This paper seeks to find out why businesses may believe they benefit from RPM by examining which efficiency rationales were advanced by firms during a critical time for RPM in the U.S., 1915 to 1917. This study finds that the efficiency explanations for RPM generated by modem economists are not new. Indeed, all of the prominent theories are replicated in various forms. While today's theories may appear unlikely to their critics, they were certainly real enough to businessmen over 70 years ago.
Antidumping Policy, (Working Paper 192)
James D. Reitzes, July 1991. (Published in International Economic Review, Vol. 34, 1993).
Abstract: We examine antidumping policy in a model where a foreign firm is a monopolist in the foreign market, but competes with a native firm in the home market. An antidumping policy changes strategic behavior by giving firms an incentive to manipulate the price differential between home and foreign markets. Under quantity-setting behavior, an antidumping policy often improves the home country's welfare. The welfare of the foreign country may also improve. Under price setting behavior, an antidumping policy worsens the home country's welfare unless the foreign firm has a large cost advantage [or unless entry occurs]. The foreign country often suffers a welfare loss, although this result may be reversed when firms produce imperfect substitutes.
Bondholder Reaction to Increases in Leverage, (Working Paper 191)
John Simpson, June 1991. (Published in Research in Finance, Vol. 12, 1995).
Abstract: This paper finds that firms that have substantially increased leverage are more likely to issue convertible debt than firms that have increased leverage only slightly. Also, firms that have substantially decreased leverage are more likely to issue convertible debt than firms that have decreased leverage only slightly. Since only firms that had been highly leveraged in the past can substantially decrease leverage, this second result suggests that bondholders also demand greater protection from firms that either increased leverage in the past or began highly leveraged. Together, these results suggest that a firm's past behavior is important to bondholders.
Are Judges Smarter than Economists? Sunk Costs, The Threat of Entry and The Competitive Process, (Working Paper 190)
Andrew N. Kleit and Malcolm Coate, June 1991. (Published in Southern Economic Journal, Vol. 60, 1993).

Abstract: Several recent antitrust cases indicate that courts believe the threat of entry can serve as an effective deterrent to an anticompetitive price increase. Yet there does not exist in the economic literature a general model that explains how entry can be such a threat, given the presence of small but positive sunk costs. This paper presents such a model, using concepts of buyer strategies and uncertainty. The applicability of such a model is then discussed using recent court decisions.
Merger and Regulatory Incentives, (Working Paper 189)
Mark D. Williams, May 1991.
Abstract: This paper examines the incentives for two-product price-regulated firms to cross-subsidize when there are no economies or diseconomies of scope. If the two products are Substitutes and each product faces a separate regulatory constraint, after merger the product with the looser initial constraint is favored relative to a regulated, single-product firm. Under a joint constraint, the more tightly regulated product is emphasized. This paper takes as an example a merger between two firms featuring Averch-Johnson behavior. While, in general, merger encourages reductions in joint output, with separate regulatory constraints, the merged firm produces relatively more of the good with a smaller initial degree of overcapitalization.
Does North American Labor Demand Adjustment Differ from that in Britain?, (Working Paper 188)
Richard Fry, May 1991.
Abstract: This paper examines the degree of employment and hours per worker adjustment among comparable British, Canadian, and U.S. manufacturing industries. The standard adjustment cost model of dynamic labour demand, assuming nonmyopic firm expectations of the forcing variables, serves as the empirical framework. The results indicate that the estimated speeds of employment adjustment and average hours worked adjustment among British manufacturing industries resemble those of North American manufacturing industries. In addition to the analysis of comparative adjustment behavior, empirical results are also presented regarding the effect of the real wage rate on short-run labour demand.
Movements in the Earnings-Schooling Relationship, (Working Paper 187 )
1940-1988, Mary T. Coleman, March 1991.
Abstract: This study estimates the earnings differential between college and high school graduates, denoted as the college earnings premium, from 1940 to 1988. The average measured premium exhibits a decline in the 1940s, gradual increases in the 1950s and 1960s, a decline in the 1970s and a rise in the 1980s for younger male workers and most female workers. Overall the results indicate that this differential has remained relatively high during this period, even given the concurrent increase in the supply of college graduates. As a result, estimates in the expected trend in the college earnings premium based on relatively short time periods are likely to be misleading. Although the data is not well suited to explaining the observed fluctuations in the college earnings premium, some support is given to the hypotheses that cohort size and the business cycle can influence it.
Some Antitrust Concerns of Partial Equity Acquisitions, (Working Paper 186)
A. E. Rodriguez, March 1991.

Abstract: If a firm acquires stock in a competitor, further price competition may impose a penalty in the form of devalued holdings. The purchase, by penalizing price cuts, may help to support tacit collusion between firms. This paper establishes how the partial acquisition of outstanding common shares enables firms to accomplish this objective without formal coordination. However, this price-cutting disincentive is shown to be insignificant when the competitive overlaps between firms occur in markets that generate some fraction of total corporate profits.
Do Employees Regard Wage Cuts and Layoffs as Opportunistic?, (Working Paper 185)
John David Simpson, January 1991.

Abstract: This paper examines whether workers are less willing to accept defined benefit pension plans (a type of implicit contract) from firms that have reduced either worker compensation or employment. Worker reluctance to accept defined benefit pension plans from these firms suggests that workers view reductions in compensation and reductions in employment as a breach of an implicit contract. Therefore, a switch from a defined benefit (DB) to a defined contribution (DC) plan or to no pension plan can be viewed as a proxy for worker distrust of the firm. This paper finds that both reductions in employment and reductions in wages significantly increase the probability of a DB-DC or DB-no plan switch. This suggests that workers view layoffs and wage reductions as a breach of an implicit contract.
Housing Demand and Property Tax Incidence in a Life-Cycle Framework, (Working Paper 184)
Seth B. Sacher, January 1991. (Published in Public Finance Quarterly, Vol. 21, 1993).

Abstract: Studies of tax incidence usually present estimates based on annual data and then simply note that estimates based on lifetime information would be preferable, but are precluded by data limitations. This paper presents estimates of property tax incidence in both an annual and life-cycle framework. If full forward shifting is assumed, the property tax appears much less regressive in a lifetime sense than an annual one. If less than full forward shifting is assumed, the property tax appears to be a flat tax in lifetime terms, which is quite distinct from the annual results.
Quality Choice, Trade Policy, and Firm Incentives,(Working Paper 183)
James D. Reitzes, January 1991. (Published in International Economic Review, Vol. 33, 1992).

Abstract: We examine quality choice in a duopoly model with one foreign and one domestic firm. where consumers show similar preferences for quality but different preferences for brands. Firms set quality prior to choosing price; and. the interaction between firms and policymakers assumes several forms. Our conclusions differ depending on whether firms face "set-up" costs in establishing higher quality levels. When these costs are absent, both domestic and foreign firms typically set quality at socially optimal levels. When these costs are present. the foreign firm [and often the domestic firm] sets quality below the socially optimal level. These results change when firms use their quality choices to signal cost information to policymakers or rivals.
Rent Increasing Costs: The Antitrust Implications from a Paradox in Value Theory, (Working Paper 182)
James A. Langenfeld and John R. Morris, November 1990. (Published in The Antitrust Bulletin, Vol. 36, 1991).
Abstract: This paper explains the anticompetitive consequences of horizontal restraints by analyzing how restrictions affect the cost conditions faced by individual members of the group. Our analysis assumes that the firms cannot collude to directly restrict output or raise price . A group of firms. however, may agree on restrictions that affect the costs of individual firms. By accepting restraints which raise the incremental costs of each firm, competitors can raise their profits. If the group has the ability to force entrants to join. then entry drives profits to zero but price is not reduced . If the group cannot force entrants to join the group, then entry forces price to minimum average cost for nonmembers . The analysis also demonstrates how advertising restrictions can act as a cost increasing device that raises profits of competing firms. The analysis produces new insights suggesting which kinds of horizontal restraints are likely to harm consumers and which are likely to produce efficiencies.
Estimating Producer Welfare When Input and Output Prices Change Simultaneously, (Working Paper 181)
Michael R. Metzger, November 1990.

Abstract: This paper develops a measure for the change in producer welfare when both factor and product prices are changed simultaneously. Such a measure is useful when performing economic analysis of proposed policy changes affecting two vertically-related industries. For example, in previous examinations of the social benefits to rescinding tariff and quota protection of domestic textile and apparel industries, one common approach has been to employ a comparative static analysis of the gains to trade liberalization in the two industries separately. Simply adding the gains calculated separately for trade liberalization in the two vertically related industries involves a potentially significant overestimation error. The more appropriate approach would be to analyze the gains to trade liberalization when trade restraints are removed from both industries. This necessitates estimating the net gain/loss to downstream producers as the prices of their input and product both fall as a direct result of trade liberalization.
The Effect of Subsidized Imports on Domestic Industries: A Comparison of Market Structures, (Working Paper 180)
Morris E. Morkre, October 1990. (Published in Journal of Policy Modelling, Vol. 15, 1993).

Abstract: Does the extent of injury suffered by a domestic industry from unfair imports depend on the type of competition that exists between domestic and foreign firms? Is injury more severe when domestic and foreign firms are perfect competitors or when they are oligopoly rivals? These questions have important implications for such issues as the administration of U.S. countervailing duty (CVD) law. This paper attempts to shed light on these issues by comparing the injury caused by subsidized imports under five different market structures, perfect competition and four types of oligopolies.

One of our principal results is that, other things remaining the same, subsidized exports cause relatively more harm under perfect competition than under oligopoly. Harm is measured by the percent change in domestic industry revenue caused by a one percent increase in the subsidy granted to foreign firms. The factor that drives this result is the extent to which price of foreign product is affected by the subsidy, the "pass-through" issue. Under perfect competition (and with constant marginal costs) the full amount of the foreign subsidy is passed through to the price of the foreign product in the domestic market. However, under oligopoly there is a wedge between price and marginal cost (i.e., price exceeds marginal revenue) so that price of the foreign product in the domestic market does not fall by the full amount of the unit subsidy. As a consequence, the adverse effect of the subsidy on domestic industry is smaller under oligopoly. This result suggests that using the competitive market assumption to estimate injury yields upper bound estimates when the true market structure is oligopoly.
Our second principal result is that we find that competitive industries are more sensitive to subsidies than oligopolies. In particular, a perfectly competitive industry is at least three times more sensitive to subsidies than even a Bertrand oligopoly. Moreover, as the degree of rivalry in oligopoly decreases, domestic industries are less sensitive to subsidies
Exclusion, Collusion, and Confusion: The Limits of Raising Rivals' Cost, (Working Paper 179)
Malcolm Coate and Andrew N. Kleit, October 1990. (Published in Research in Law and Economics, Vol. 16, 1994).

Abstract: The 1980's saw the evolution of a vertical antitrust theory often referred to as "Raising Rivals' Costs." Our analysis examines this theory and its robustness with respect to a number of assumptions. In addition, the applicability of the theory to two well known cases is evaluated. In these cases, the facts are shown to be inconsistent with the requirements of the theory. It appears that while "Raising Rivals' Costs" is a theoretically valid method of achieving an anticompetitive effect on price, its practical uses are extremely limited.
Merger and Free Riders in Spatial Markets, (Working Paper 178)
James D. Reitzes and David T. Levy, May 1990. (Published in Journal of Regional Science, Vol. 33, 1993).

Abstract: Prior analyses have found little incentive for merger in the absence of efficiency gains. Either merger is unprofitable, or outside firms earn higher profits than the merged parties. We examine merger in a model with differentiated consumers, and find that mergers are profitable. Moreover, the free-rider problem is largely eliminated under uniform pricing; it is completely eliminated under discriminatory pricing.
Merger in the Round: Anticompetitive Effects of Mergers in Markets with Localized Competition, (Working Paper 177)
David T. Levy and James D. Reitzes, November 1989. (Published in Journal of Law, Economics & Organization, Vol. 8, 1992).

Abstract: This paper examines the incentives for merger and collusion in a market where firms offer differentiated products and serve specific customer segments. The nature of interaction among firms largely determines the choice of a partner for merger, and Bertrand, Stackelberg, and collusive cases are investigated. In comparison to other types of markets (i. e., those characterized by homogeneous products or homogeneous consumers), this paper shows that collusion may be relatively easier to achieve in markets with spatial competition. These findings are related to the approach recommend in the Merger Guidelines of the Department of Justice.
An Analysis of Vertical Relationships Among Railroads: Why Competitive Access Should Not Be an Antitrust Concern, (Working Paper 176)
Andrew N. Kleit, October 1989. (Published in Logistics and Transportation Review, Vol. 26, 1990).

Abstract: Competitive access has been an important antitrust issue for the ICC since the Staggers Act of 1980 largely deregulated the railroad industry. This paper looks at the reasons why competitive access should and should not be an antitrust issue. Given the economics of vertical relationships and contracting, it would appear that 18 the vast majority of cases, if it is efficient for competitive access to be granted, it will be without government action. If competitive access is to remain an antitrust Question, then several conditions should be met before intervention occurs.
Antitrust Policy for Declining Industries, Malcolm Coate and Andrew N. Kleit, (Working Paper 175)
October 1989. (Published in Journal of Institutional and Theoretical Economics, Vol. 147, 1991).

Abstract: In the 1980s, the antitrust enforcement agencies have rejected the idea that mergers in declining industries should receive special consideration. This paper develops reasons why declining industry mergers should not be subject to a high degree of antitrust scrutiny. It argues that the gains to consumers through such interventions suggested by the "price test" are illusionary. Further, recent game-theoretic literature implies that important efficiencies are available through merger in declining industries. The paper presents a method for determining which type of industry structures are likely to be subject to these efficiencies.
A Recalculation of Cline's Estimates of the Gains to Trade Liberalization in the Textile and Apparel Industries, (Working Paper 174)
Michael R. Metzger, May 1989.

Abstract: In a recent book, Cline estimated that current trade restrictions on textiles generate a net efficiency loss of $811 million annually, while those on apparel involve a loss of $7.3 billion. This paper, within the framework of Cline's analysis of textile and apparel trade restriction, develops a more theoretically sound methodology of welfare analysis of social surplus. Specifically, it focuses on three methodological issues: the measurement of changes in consumer surplus when two or more prices change simultaneously, the appropriate characterization of policy-induced changes in social welfare, and the inter-relationship of the economic surplus' of two vertically related industries. Second, upon modifying the analysis so as to address two of these methodological issues, this paper recalculates Cline's estimates of the gains to trade liberalization in the U.S. textile and apparel industries. This recalculation strengthens Cline's depiction of the relatively high cost of protection.
Regulation, Market Structure, and Hospital Costs: A Comment on the Work of Mayo and McFarland, (Working Paper 173)
Keith B. Anderson, May 1989. (Published in Southern Economic Journal, Vol. 58, 1991).

Abstract: This paper provides a critique of a recent paper in the Southern Economic Journal concerning the effectiveness of Certificate of Need (CON) regulation in controlling hospital costs. ("Regulation, Market Structure, and Hospital Costs," January 1989) The major problem with the paper is that CON only affects costs through the number of beds a hospital operates. In addition, the measure of CON stringency suffers from endogeneity problems and the analysis is restricted to a single state where all CON decisions are made by the same agency governed by the same law.

When we reestimate the model using a dataset where variation in CON stringency can be observed and correcting for the other problems in their analysis, we find that CON regulation has not been effective in reducing hospital costs.

We also examine CON effectiveness in reducing the amount of short run excess capacity in hospitals. We find no evidence that CON is effective in achieving this goal.
Terminal Railroad Revisited: Foreclosure of an Essential Facility or Simple Horizontal Monopoly , (Working Paper 172)
David Reiffen and Andrew Kleit, April 1989. (Published in The Journal of Law and Economics, Vol. 33, 1990).

Abstract: St. Louis Terminal Railroad (1912) has been cited by a number of authors as a case of vertical foreclosure by competitive rivals. The alleged foreclosure has been used as a basis for the "Essential Facility Doctrine," an antitrust theory that has attracted a large degree of interest since Aspen Ski (1985). This paper examines the factual basis for the claims of foreclosure. We find that a close examination of Terminal Railroad reveals that, consistent with the economic theory of vertical integration, no foreclosure occurred. Instead, Terminal Railroad was simply a case of horizontal monopoly. Our findings suggest that to the extent the Essential Facilities Doctrine is based upon this case, the doctrine should be reexamined.
Predation, Entry and the Diversified Firm, (Working Paper 171)
David Levy, January 1989. (Published in Journal of Industrial Economics, Vol. 38, 1989).

Abstract: This study examines the relationship between diversification and predation. Unlike previous analyses, the focus is placed on the role of the firm's investments in sunk cost assets. Unlike the single product firm, the diversified firm may use certain firm-specific assets that are not sunk to the product. The ability to transfer these assets among uses or locations may lower the cost and thereby encourage predation by the diversified firm. The "long-purse" and "multimarket-reputation" arguments about predation by diversified firms can be viewed as special cases of this phenomenon. Diversification may also affect the likelihood that a firm will be a target of predation. The ability of a diversified firm to transfer assets back into an industry when the predator raises price may discourage predation.
The Impact of Tariffs and Quotas on Strategic R & D Behavior, (Working Paper 170)
James Reitzes, January 1989. (Published in International Economic Review, Vol. 32, 1991).

Abstract: Tariffs and quotas are compared to assess their effects on firm behavior in a two-stage Cournot duopoly game, where R&D (or capital) is chosen initially and output is selected subsequently. In this quantity-setting game, the imposition of a quota may remove the possibility of a pure strategy equilibrium, leaving only a mixed strategy equilibrium. Under either potential equilibria, a quota leads to higher domestic profits than those obtained under a comparably restrictive tariff. However, both domestic R&D and output are relatively lower in a pure-strategy, cum-quota equilibrium. Two potential pure-strategy equilibria may result under apparently nonbinding quotas.
Do Government-Imposed Ownership Restrictions Inhibit Efficiency? FCC's Duopoly Rule, (Working Paper 169)
Keith Anderson and John Woodbury, December 1988.

Abstract: The Federal Communications Commission limits the common ownership of multiple broadcast outlets in the same local market. This paper examines whether there are efficiencies from common ownership that might be realized by relaxing these restrictions. We focus primarily on a comparison of prices paid for AM-FM combinations and for stations that are sold and operated as independent stations (i.e., "stand-alones"). We find that stations that were sold as combinations have higher predicted prices as combinations than as stand-alones, thus providing evidence of efficiencies. Increases in the number of combinations over time provides additional evidence of economies from joint operation.
The Relationship Between Industrial Sales Prices and Concentration of Interstate Natural Gas Pipelines, (Working Paper 168)
John R. Morris, November 1988.

Abstract: Many economic studies find market concentration positively related to profits. The findings may be explained either by oligopoly behavior or by greater efficiency of firms with large market shares. Although both explanations imply that concentration and profits will be positively related, they differ in their implications for the relationship between concentration and price. This paper presents observable implications from a standard oligopoly model. Data from natural gas pipelines are consistent with the implications including the implication that industrial sales prices of interstate natural gas pipelines are positively related to market concentration.
A Theory of Minimum Quality Standards: Quacks, Lemons & Licensing Revisited, (Working Paper 167)
Michael R. Metzger, November 1988.

Abstract: An analytical model is employed to investigate competitive markets characterized by asymmetric consumer information as to product quality. Support is found for Leland's conclusion [1979] that a "lemons market" is a general phenomenon for such markets, as well as the conclusion that a minimum quality standard mayor may not be socially desirable. These results rebut the use of a "lemons market" rationale as a single criteria for minimum quality standards and occupational licensing. Under the assumption of decreasing opportunity costs for suppliers, the analysis refutes Leland's conclusions that quality will be generally under-supplied, that output always will be over-supplied, and that licensing will always be desirable. Minimum quality standards (or licensing) self-imposed by a profession is also investigated. Finally, it is shown that minimum quality standards applied to quality-enhancing activities, such as education, mayor may not be socially desirable, even when the activity permits screening of suppliers as to innate ability.
Deregulation by Vertical Integration, (Working Paper 166)
John R. Morris, October 1988. (Published in Journal of Regulatory Economics, Vol. 4, 1992).

Abstract: Regulators often confront the question of whether they should allow a regulated firm to vertically integrate. The relevant policy concerns are whether the downstream price will rise from the vertical integration and what, if any, additional constraints must be placed on the integrated firms to prevent a potential price increase. The extant literature does not have much to offer the regulators in the analysis. This paper fills the gap by providing an analysis. of the effects of upstream vertical integratio9 by a regulated firm. The analysis considers integration into the production of an intermediate input whose costs are automatically transferred to the downstream customers. The analysis indicates that, absent additional constraints, vertical integration effectively "deregulates" the firm. The analysis also suggests which additional constraints are necessary to make regulation effective. Given errors in regulation, however, a firm can vertically integrate, increase profits, and increase the downstream price.
Vertical Integration as Strategic Behavior in a Spatial Setting: Reducing Rival's Revenues, (Working Paper 165)
David Levy and David Reiffen, June 1988.

Abstract: This paper provides a formal treatment of how vertical integration may deter entry "by reducing rivals' revenues". We examine a spatial market with the locations of firms fixed due to location-specific (sunk cost) investments at both the upstream and downstream level. We show that vertical integration restricts the potential entrant from selling to its most desirable customers, and thereby enables the upstream firm to expand its market and increase profits without attracting entry. Further, we show that integration is particularly beneficial in a growing and uncertain market, where the ability to integrate enables a firm to wait until future events unfold before any action is taken to deter entry.
The Costs of Railroad Regulation: A Further Analysis, (Working Paper 164)
Christopher C. Barnekov and Andrew N. Kleit, May 1988. (Published in International Journal of Transport Economics, Vol. 17, 1990).

Abstract: The Staggers Act of 1980 largely ended almost a century of government regulation of railroads. This paper presents evidence that deregulation has had a positive impact on the economy. Specifically, deregulation has generated billions of dollars worth of efficiency gains, contrary to the relatively modest gains estimated by Boyer (I987). In performing the analysis the paper examines several aspects of railroad deregulation, and uses a reduced form econometric model to measure the effect of deregulation on rail rates.
State Regulation of Takeovers and Shareholder Wealth: The Case of New York's 1985 Takeover Statutes, (Working Paper 163)
Laurence Schumann, April 1988. (Published in RAND Journal of Economics, Vol. 19, 1988).

Abstract: Past studies of takeover regulations have found that they increase the premiums paid to the shareholders of successfully acquired targets. Jarrell and Bradley argue that these higher premiums harm shareholders by discouraging takeover activity and protecting inefficient managers. Bebchuk argues that the higher premiums do not significantly reduce the number of takeovers so that shareholders benefit, on average, from the higher premiums paid in successful acquisitions. This paper uses the "event study" method to measure the net effect of two takeover statutes passed by New York State in 1985. The results support the conclusion of Jarrell and Bradley that, despite the higher premiums paid to successfully acquired target shareholders ex post, these laws, on average, harm shareholders ex ante.
Strategic Business Behavior and Antitrust, (Working Paper 162)
Charles A. Holt and David T. Scheffman, April 1988. (Published in Economics and Antitrust Policy, Quorum Books, R. Larner, J. Meehan (eds.) 39 (1989)).

Abstract: N/A
Enforcing Time Inconsistent Government Regulations, (Working Paper 161)
Andrew N. Kleit, March 1988. (Published in Economic Inquiry, Vol. 30, 1992).

Abstract: Certain government regulations require a good deal of investment by firms before the regulations actually go into effect. In these cases, if a firm does not engage in the desired level of investment, it can be quite costly to society to actually enforce the regulation. This paper derives a game theoretic model of how such regulation could be enforced by examining the bureaucratic incentives of the various governmental parties involved in overseeing a regulatory program.
The Impact of Automobile Fuel Economy Standards, (Working Paper 160)
Andrew N. Kleit, February 1988. (Published in Journal of Regulatory Economics, Vol. 2, 1990).

Abstract: N/A
The Impact of Alternative Forms of State Regulation of AT&T on Direct Dial Long Distance Telephone Rates, (Working Paper 159)
Alan D. Mathios and Robert P. Rogers, December 1987. (Published in RAND Journal of Economics, Vol. 20, 1989).

Abstract: N/A
Costs of the Voluntary Restraint Agreements on Steel: Reply, (Working Paper 158)
David G. Tarr, November 1987.

Abstract: N/A
The Analysis of Causality in Escape Clause Cases, (Working Paper 157)
Kenneth Kelly, November 1987. (Published in The Journal of Industrial Economics, Vol. 37, 1988).

Abstract: Under Section 201 of the Trade Act of 1974, the so-called escape clause, a domestic industry that is seriously injured can obtain temporary relief if imports are the substantial cause of such injury. 'This paper develops a methodology that can be used to determine the change in a domestic industry's production as a result of changes in import supply, demand or domestic supply and so determine whether or not an industry is entitled to relief under Section 201. This methodology is illustrated by application to two recent Section 201 investigations.
Capital-Goods Market Definition, (Working Paper 156)
Richard S. Higgins, September 1987.

Abstract: N/A
Price Leadership with Incomplete Information, (Working Paper 155)
Richard S. Higgins, William F. Shugart II, and Robert D. Tollison, September 1987. (Published in Journal of Economic Behavior and Organization, Vol. 11, 1989).

Abstract: N/A
Buyers and Entry Barriers, (Working Paper 154)
David T. Scheffman and Pablo T. Spiller, August 1987.

Abstract: This paper develops an analysis of markets in which sellers have significant sunk investments; it takes considerable time to enter; and buyers can make credible commitments to obtain alternative sources of supply. We show that in markets with these characteristics the market power of sellers is more attenuated than models with unsophisticated buyers would predict. In particular, current prices are critical to the decision whether or not to "enter," so that limit pricing is a likely form of equilibrium pricing, even in the presence of full information. The limit price is predicted to increase with the amount of time it takes to enter, the number of buyers, and with the level of buyers' switching costs, but to fall with the level of sunk investments. Thus, in such markets, sunk costs restrain. rather than increase, the ability of sellers to exert market power, and hence do not constitute entry barriers. Entry lags and switching costs. however, do enhance the ability of sellers to exert market power. This paper, then, questions the standard prediction of an inverse relationship between market performance and sunk investments.
A Note on Obtaining Estimates of Cross-Elasticities of Demand, (Working Paper 153)
David G. Tarr, May 1987. (Published in Eastern Economic Journal, Vol. 16, 1990).

Abstract: Based on the concept of weakly separable utility (which applied empirical work implicitly or explicitly assumes), this paper develops a theoretical condition that a set of own and cross-elasticity of demand estimates must satisfy. The paper shows how the condition may be used to evaluate or calculate estimates of cross-elasticities of demand. The condition is illustrated for the constant elasticity of substitution utility function. Finally, it is applied to the problem of estimating the effects of the US and EC extensive system of voluntary export restraints on world steel trade. Through its use, perverse results are avoided.
A Note on Joint Ventures in Which Firms Contribute Complementary Inputs, (Working Paper 152)
Louis Silvia, May 1987.

Abstract: This note compares the efficiency of a joint venture with supply, output royalty and lump sum arrangements in the context of firms contributing complementary inputs to some project. In a world of certainty and no transactions costs, input complementarities would not be a sufficient condition for firms to prefer a joint venture over other kinds of contracts. Under these conditions, lump sum agreements are always as efficient as a joint venture, and depending on the production function, sales or output royalty agreements may also be as efficient. This analysis suggests that all efficiency-driven joint ventures are a response to some underlying transactional cost problem.
An Empirical Conjectural Variation Model of Oligopoly, (Working Paper 151)
J. Nellie Liang, February 1987.

Abstract: Price conjectural variations are estimated to measure the degree of price competition in a product differentiated oligopoly. The empirical model is a simultaneous equation system of product demand and price reaction functions in which own and cross price elasticities of demand are estimated in conjunction with price conjectural variations. Specifically, the price conjectural variations are estimated directly in the reaction functions, rather than deduced indirectly from profit data. The empirical model is applied to pairs of ready-to-eat breakfast cereal products, using brand data collected during the course of the antitrust case brought by the Federal Trade Commission in the 1970s against Kellogg, General Mills, and General Foods. The empirical results reject competitive brand pricing behavior in favor of independent or interdependent pricing. Further, the hypothesis of a unique consistent conjecture is rejected.
Free Trading or Free Riding: An Examination of the Theories and Available Empirical Evidence on Gray Market Imports, (Working Paper 150)
John C. Hilke, February 1987. (Published in World Competition, Vol. 32, 1988).

Abstract: N/A
Why Price Correlations Do Not Define Antitrust Markets: On Econometric Algorithms for Market Definition, (Working Paper 149)
Jonathan B. Baker, January 1987.

Abstract: This paper compares two econometric methods that have been proposed for market definition: price correlations and residual demand curve estimation. Econometric theory is used to demonstrate that price correlations among firms will likely contain little or no information relevant to defining antitrust markets, under the assumption that a hypothetical cartel facing a downward sloping residual demand curve constitutes an antitrust market (defined according to the DOJ Guidelines). Hence price correlation analyses are likely to have little value for antitrust market definition. In terms of the literature on empirical techniques for market definition, this paper shows that if the econometric market definition algorithm based on residual demand curve estimation of Scheffman and Spiller (1985) is correct, then the econometric market definition algorithms based on price correlations of Stigler and Sherwin (1985) and Horowitz (1982) will not be valuable for antitrust enforcement. In the process of establishing these results, the paper clarifies the significance for antitrust market definition of reduced form price equations for single firms.

Federal Trade Commission Protecting America's Consumers

Economic Resources: Abstracts of Working Papers