Economics 854: Empirical Industrial Organization (a.k.a. Industrial Organization II) Fall 2012, Professor Julie Holland Mortimer Course Summary In this course, we study imperfect competition among firms, with an emphasis on empirical work. We learn how to implement empirical methods commonly used in Industrial Organization (IO), and how to read, and ultimately write, papers in empirical IO. Topics covered include demand estimation, auctions, price discrimination, bundling, asymmetric information and adverse selection, vertical control and contractual arrangements, and others as time allows. Each topic will be organized around recent empirical work. Throughout, we will consider the importance of identification in empirical studies. There will almost certainly be some important topics (e.g., estimating dynamic models) that we will not have time to cover in detail. I will introduce these topics through the course readings, and will provide lectures notes to students who are interested in pushing further on these topics. There is no required text. However, you should obtain a copy of The Theory of Industrial Organization by Jean Tirole as a reference for any models that are not familiar to you. Course Requirements 1. A large portion of the class is discussion-based. You must read the papers announced before each class meeting and participate in the discussion of these papers. 2. One referee report will be assigned. You will need to complete the referee report along with a cover letter to the editor summarizing your analysis. One goal of the course is to teach you how to read papers for the purpose of providing constructive criticism. Thus, this assignment is usually completed after you have had a chance to read and discuss several papers. I will provide the paper and announce a due date for the report later in the course. 3. There will be two problem sets assigned. You should expect to spend a lot of time on them and to become proficient at coding in Matlab or a similar language. 4. Each student will lead one in-class discussion of an empirical paper from the syllabus. Starred papers are eligible for presentation, and you may sort yourselves among papers using any mechanism of your choosing. A complete reading list follows the course outline. Papers for which you are expected to prepare discussion questions are listed separately in the course outline. The current list is my best expectation of the papers we will cover from the more extensive reading list that follows, but they may change as we go along.

1

Course Outline Sept 5: Introduction to Graduate Empirical IO Lecture Notes Sept 10: Demand Estimation I Lecture Notes (Early Approaches; Vertically-Differentiated Models of Demand) Sept 12: Application of a Vertically-Differentiated Demand Model Mortimer (2007) Sept 17: Demand Estimation II Lecture Notes (Logit and Nested-Logit Models of Demand, and Review of GMM) Sept 19: Application of a Nested-Logit Demand Model Goldberg (1995) Sept 24: Demand Estimation III Lecture Notes (Random Coefficients Models of Demand) Sept 26: Applications of the Random-Coefficient Logit Demand Model Conlon and Mortimer (2012), Lecture Notes Oct 1: (NO MEETING) Oct 3: (NO MEETING) Friday, Oct 5: First Problem Set Due, 5.00pm Oct 8: Columbus Day - Extra meeting? Oct 10: Entry Models as Static Comparisons of Industry Structure Lecture Notes Oct 15: Entry Models as Discrete Games

2

Lecture Notes Oct 17: Moment Inequalities Lecture Notes Oct 22: Single-Agent Dynamic Optimization Models Lecture Notes on Rust (1987) Oct 24: Dynamic Demand Models Conlon (2010)* or Ackerberg (1998 or 2001)* Oct 29: Estimation of Dynamic Demand Models Gowrisankaran and Rysman (2012), Visiting lecture, Marc Rysman, BU Oct 31: Retailing and Inventories I Aguirregabiria (1999)* Nov 5: Retailing and Inventories II Hendel and Nevo (2006b)* (Ecta, not Rand) Nov 7: Retailing and Inventories III: Experimental Methods in IO Conlon and Mortimer “Effects of Product Availability: Experimental Evidence” Nov 12: Introduction to Auctions Hendricks and Paarsch (1995), Hendricks and Porter (1988), Lecture Notes. Nov 14: Private Value Auctions I Haile and Tamer (2003), Lecture Notes Nov 19: Private Value Auctions II (Collusion) Asker (2008)* Nov 21: Network Externalities

3

Ackerberg and Gowrisankaran (2006)* Nov 26: Vertical Contracts (Mortimer (2008), plus Lecture Notes.) Nov 28: Vertical Bundling Ho, Ho and Mortimer (2011) Dec 3: Health Economics I Ho (2009)* Dec 5: Health Economics II Grennen (2012)* Important Topics we are missing: Asymmetric Information: Cohen & Einav (2007), Chiappori & Salanie (2000) Search Costs, Disclosure: Jin and Leslie (2001) and Sorensen (2000) Boundaries of the Firm: Baker and Hubbard (2003) Horizontal Bundling: Crawford and Yurukoglu (2012) Adverse Selection: Handel (2012)

4

Reference List Auctions Asker, J. (2008) “A Study of the Internal Organization of a Bidding Cartel,” mimeo, New York University. (See http://pages.stern.nyu.edu/ jasker/stamps070628.pdf.) Asker, J. and Cantillon, E. (2006), ”Properties of Scoring Auctions”, forthcoming in Rand Journal of Economics Athey, S. and J. Levin, ”Information and Competition in U.S. Forest Service Timber Auctions,” Journal of Political Economy, 109 (2), April 2001: 375-417. Athey, S. and P. Haile, ”Identification in Standard Auction Models,” Mimeo, Stanford, 2001. P. Bajari, ”Econometrics of the First Price Auction with Asymmetric Bidders,” mimeo. Bajari, P. and L. Ye, ”Competition Versus Collusion in Procurement Auctions: Identification and Testing,” Mimeo, Stanford, 2001. Bajari, P. and L. Ye, ”Deciding Between Competition and Collusion,” Mimeo, Stanford, 2001. Bajari, P. and A. Horta¸csu, ”Winner’s Curse, Reserve Prices, and Endogenous Entry: Empirical Insights from Ebay Auctions,” Mimeo, Stanford University, 2001. Baldwin, L., R. Marshall, and J. Richard (1997). “Bidder Collusion at Forest Service Timber Sales,” Journal of Political Economy, 105, 657-699. Cantillon, E. and M. Pesendorfer (2006). “Combination Bidding in Multi-Unit Auctions,” working paper, ECARES and LSE. Guerre, E., I. Perrigne, and Q. Vuong, ”Optimal Nonparametric Estimation of First-Price Auctions,” Econometrica 68 (3), May 2000, 525-74. Haile, P., ”Auctions with Resale Markets: An Application to U.S. Forest Service Timber Sales,” American Economic Review, 92 (3), June 2001, 399-427. Haile, P. and E. Tamer (2003). “Inference with an Incomplete Model of English Auctions,” forthcoming, Journal of Political Economy. Haile, P., Han Hong, and Matthew Shum (2000). “Nonparametric Tests for Common Values in First-Price Auctions,” working paper, University of Wisconsin. 5

Hendricks, K. and Paarsch (1995), “A survey of recent empirical work concerning auctions,” Canadian Journal of Economics, 28(2), pp 403-436. Hendricks, K., J. Pinkse and R. Porter (2003): “Empirical Implications of Equilibrium Bid- ding in First-Price, Symmetric, Common Value Auctions,” Review of Economic Studies, Vol 70(1) No. 242, pp. 115-146. Hendricks, K. and R. Porter (1988), ”An Empirical Study of an Auction with Asymmetric Information,” American Economic Review, December 1988, pp. 865-83. Hendricks, K. and R. Porter (2006), ”A Survey of Empirical Work in Auctions”, forthcoming in Handbook of Industrial Organization, Vol III (see Ken’s UT webpage) Horta¸csu, A. (2010) and D. McAdams. “Mechanism Choice and Strategic Bidding in Divisible Goods Auctions: An Empirical Analysis of the Turkish Treasury Auction Market,” Journal of Political Economy, 118(5), pp. 833-865. Kagel, J., R. Harstad and D. Levin, ”Information Impact and Allocation Rules in Auctions with Affiliated Private Values: A Laboratory Study, Econometrica, 55 (1987), pp. 1275-1304. Kagel, J. ”Auctions: A Survey of Experimental Research,” in J. Kagel and A. Roth, eds, The Handbook of Experimental Economics. Kastl, J. (2007) ”Discrete Bids and Empirical Inference in Divisible Good Auctions”, working paper, Stanford Krasnokutskaya, Elena. (2003),“Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity” working paper, U. Penn Klemperer, P. (2002), What Really Matters in Auction Design, Journal of Economic Perspectives, 16(1), 169-189 Laffont, J.J. (1997), “Game Theory and Empirical Economics: The Case of Auction Data,” European Economic Review, 41, 1-35. Laffont, J.-J., H. Ossard, and Q. Vuong, ”Econometrics of First Price Auctions,” Econometrica, July 1995, pp. 953-80. Li, T., I. Perrigne and Q. Vuong, ”Conditionally Independent Private Information in OCS Wildcat Auctions,” Journal of Econometrics 98 (1), September 2000, 129-61.

6

Li,T. I. Perrigne, and Q. Vuong (1999). “Semiparametric Estimation of the Optimal Reserve Price in First-Price Auctions,” working paper, USC. Li,T. I. Perrigne, and Q. Vuong (2000). “Structural Estimation of the Affiliated Private Values Model with an Application to OCS Auctions,” working paper, USC. McAdams, D. (2007). ”Partial Identification and Testable Restrictions in MultiUnit Auctions”, working paper, MIT Sloan McAfee, P. and J. McMillan, ”Auctions and Bidding,” Journal of Economic Literature, June 1987, pp. 699-738. (theory paper) Milgrom, P., ”Auctions and Bidding: A Primer,” Journal of Economic Perspectives, Summer 1989, pp 3-22. (theory paper) Milgrom, P. (2004), ”Putting Auction Theory to Work,” Cambridge University Press, New York Milgrom, P. and R. Weber, ”A Theory of Auctions and Competitive Bidding,” Econometrica, 50 (5), September 1982, 1089-1122. (theory paper) Paarsch, H. (1992). “Deciding Between the Common and Private Value Paradigms in Empir- ical Models of Auctions,” Journal of Econometrics, 12, 191.215. Paarsch, H. (1992). “Empirical Models of Auctions and an Application to British Columbian Timber Sales,” working paper, Univ. of Western Ontario. Pesendorfer, M. and M. Jofre-Benet, ”Bidding Behavior in a Repeated Procurement Auction,” Mimeo, Yale, 2000. http://aida.econ.yale.edu/ martinpe/highway78-00b1.pdf Porter, R., ”The Role of Information in U.S. Offshore Oil and Gas Lease Auctions,” Econometrica, 63 (January 1995), pp. 1-27. Porter, R. and D. Zona, ”Detection of Bid Rigging in Procurement Auctions,” Journal of Political Economy, June 1993, pp. 518-38. Shneyerov, A. (2001). “Applying Auction Theory to Municipal Bond Auctions: Market Power and the Winner’s Curse,” working paper, Northwestern University. Wolak, F. (2001). “Identification and Estimation of Cost Functions Using Observed Bid Data: An Application to Competitive Electricity Markets,” working paper, Stanford University. Wolfram, C. (1998) “Strategic Bidding in a Multi-Unit Auction: An Empirical Analysis of Bids to Supply Electricity in England and Wales,” Rand Journal of Eco7

nomics, 29, 703-725. Bundling Byzalov, Dmitri (2010) “Unbundling Cable Television: An Empirical Investigation,” under revision, RAND Journal of Economics. (See http://astro.temple.edu/ dbyzalov/cable.pdf.) Chu, S., P. Leslie, and A. Sorensen (2011) “Bundle-Size Pricing as an Approximation to Mixed Bundling,” American Economic Review, Vol. 101(1), pp. 263-303. Crawford, G., and A. Yurukoglu (2012) “The Welfare Effects of Bundling in MultiChannel Television Markets,” American Economic Review, Vol. 102(2), pp. 6xx-685. Ho, J., K. Ho, and J. Mortimer (2012), ”The Use of Full-line Forcing Contracts in the Video Rental Industry,” American Economic Review, Vol. 102(2), pp. 686-719. Price Discrimination Leslie, P. (2004), “Price Discrimination in Broadway Theater,” RAND Journal of Economics, V. 35(3), pp 520-41. (See also http://www.stanford.edu/ pleslie/broadway.pdf to download.) Mortimer, J. (2007), “Price Discrimination and Copyright Law: Evidence from the Introduction of DVDs,” Quarterly Journal of Economics, Vol. 122(3), pp. 1307-1350. Borenstein, S. and N. Rose, “Competition and Price Dispersion in the U.S. Airline Industry,”Journal of Political Economy, 102 (August 1994), 653-683. Busse, M. and M. Rysman, (2005) “Competition and Price Discrimination in Yellow Pages Advertising,” RAND Journal of Economics, Vol. 36, pp. 378-90. Clerides, Sofronis (hard- and soft-cover books). Crawford, G., “The Discriminatory Incentives to Bundle,” Mimeo, Duke University, 2001. ftp://ftp.econ.duke.edu/pub/gsc/bundling.pdf Goldberg, P., (1996), “Dealer Price Discrimination in New Car Purchases: Evidence from the CES,” JPE, 104(3), 622-54. McManus, B., “Nonlinear Pricing in Specialty Coffee,” Washington University, 2003. Miravete, Eugenio, “Choosing the Wrong Calling Plan? Ignorance, Learning, and Risk Aversion,” CEPR Discussion Paper No. 2562, 2000. http://www.ssc.upenn.edu/ mi8

ravete/Papers/CEPR2562.pdf Miravete, Eugenio, “Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans,” Mimeo, University of Pennsylvania, 2001. http://www.ssc.upenn.edu/ miravete/Papers/penn01c.pdf Shepard, A., (1991) “Price Discrimination and Retail Configuration,” Journal of Political Economy, 99(1), pp. 30-53. Networks and Network Externalities Ackerberg, D. and G. Gowrisankaran (2006), “Quantifying Equilibrium Network Externalities in the ACH Banking Industry,” Rand Journal of Economics, Vol 37, No. 3, pp. 738-61. Capps, Dranove and Satterthwaite, (2003) “Competition and Market Power in Option Demand Markets” Vol. 34, pp. 737-63. Gandal, N (1994) “Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities,” RAND 25(1), 160-170. Gandal, Kende and Rob, (2000) “The Dynamics of Technologicla Adoption in Hardware/Software Systems: The Case of CD Players,” RAND 31(1), 43-61. Hendel, I., A. Nevo and F. Ortalo-Magn´e (2009) “The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com,” American Economic Review, Vol. 99, No. 5, pp. 1878-1898. Ho, K. (2009) “Insurer-Provider Networks in the Medical Care Market,” American Economic Review, Vol. 99, No. 1 pp 393-430. Rysman (2004) “Competition Between Networks: A Study of the Market for Yellow Pages” Review of Economics Studies, Vol. 71, pp. 483-512. Moral Hazard, Asymmetric Information in Insurance Markets Chiappori, P.A., J. Heckman and J. Pinquet (2000): “Testing for Moral Hazard on Dynamic Insurance Data,” mimeo, Chicago University. Chiappori, P.-A. and B. Salanie, (2000a), ”Testing for Asymmetric Information in Insurance Markets,” Journal of Political Economy 108 (1), February 2000, 56-78. Chiappori, P.-A. and B. Salanie, (2000b), ”Testing Contract Theory: A Survey of Recent Work,” Mimeo, University of Chicago, 2000. http://www.src.uchicago.edu/ pach/seattle4.PDF

9

Cohen A. and L. Einav (2007). “Estimating Risk Preferences from Deductible Choice,” American Economic Review. Handel, B. (2009) “Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts”, working paper. Hendel I. and A. Lizzeri (2003). “The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance,’ Quarterly Journal of Economics. Boundaries of the Firm Hubbard, T., (2000), “The Demand for Monitoring Technologies: The Case of Trucking,” Quarterly Journal of Economics, May 2000. Hubbard, T. (2001) “Information, Decisions and Productivity,” mimeo, University of Chicago. http://gsbwww.uchicago.edu/fac/thomas.hubbard/research/papers/prod13.pdf Baker, G., and Hubbard, T., (2003), “Make vs. Buy in Trucking: Asset Ownership, Job Design and Information,” American Economic Review, No. 3, pp. 551-572. Vertical Control and Contractual Arrangements Ackerberg, D. and M. Botticini (1999): “Endogenous Matching and the Empirical Determinants of Contractual Form,” forthcoming Journal of Political Economy. Asker (2004) “Measuring Advantages from Exclusive Dealing,” working paper. (See his NYU website.) Lafontaine, F. (1992), “Agency Theory and Franchising: Some Empirical Results,” RAND Journal of Economics, Vol 45, No. 1, pp. 1-25. Mortimer, J. (2008): “Vertical Contracts in the Video Rental Industry,” Review of Economic Studies, Vol. 75, pp. 165-199. Rey, P. and Tirole, J. (1986), “The Logic of Vertical Restraints,” American Economic Review, Vol. 76, pp. 921-39. Slade, M. (1996), “Multitask Agency and Contract Choice: An Empirical Assessment,” International Economic Review, Vol. 37, No. 2, pp. 465-86. Villas-Boas, S (2007), “Vertical Relationships Between Manufacturers and Retails: Inference with Limited Data,” Review of Economic Studies,Vol. 74, pp. 625-652. Whinston, M. (1990), “Tying, Foreclosure, and Exclusion,” American Economic Review, Vol. 80, no. 4, pp. 837-59. 10

Retailing and Inventories Aguirregabiria (1999) “The Dynamics of Markups and Inventories in Retailing Firms” REStud, Vol 66(2), pg. 275-308. Conlon and Mortimer (2009), “Demand Estimation Under Incomplete Product Availability,” mimeo, Harvard University. See NBER working paper No. 14315 or the link at http://mortimer.fas.harvard.edu. Conlon and Mortimer (2011), “Effects of Product Availability: Experimental Evidence,” mimeo, Harvard University. See NBER working paper No. 16506 or the link at http://mortimer.fas.harvard.edu. Erdem, Imai and Keane (2003), “Brand and Quantity Choice Dynamics Under Price Uncertainty,” Quantitative Marketing and Economics V 1, pp 5-64. Hendel and Nevo, (2006a) “Sales and Consumer Inventory” RAND Journal of Economics, Vol 37(3), pp. 543-61. Hendel and Nevo, (2006b) “Measuring the Implications of Sales and Consumer Stockpiling Behavior” Econometrica, Vol 74(6), pp. 1637-73. Advertising, Information Disclosure, Provision and Search Ackerberg, D. (2001): “Empirically Distinguishing Informative and Prestige Effects of Advertising,” Rand Journal of Economics, 32(2), 316-33. Ackerberg, D. (1998): “Advertising, Learning and Consumer Choice in Experience Goods Markets: A Structural Empirical Examination,” International Economic Review. Dranove, D., Kessler, D., McClellan, M., & Satterthwaite, M. (2003), “Is More Information Better? The Effects of ‘Report Cards’ on Health Care Providers,” Journal of Political Economy, 113(3), 555-587 Genesove D., “Adverse Selection in the Wholesale Used Car Market,” Journal of Political Economy, 101 (August 1993), 644-665. Hubbard, T., “Consumer Beliefs and Buyer and Seller Behavior in the Vehicle Inspection Market,” Rand Journal of Economics, 29(2), 406-426. Jin, G. and P. Leslie (2003): “The Effect of Information on Quality: Evidence from Restaurant Hygiene Grade Cards,” Quarterly Journal of Economics.

11

Lewis, G. (2007): “Asymmetric Information, Adverse Selection and Seller Disclosure: The Case of eBay Motors”, working paper, Harvard University Sorensen, A. (2000): “Equilibrium Price Dispersion in Retail Markets for Prescription Drugs,” Journal of Political Economy, 108(4), 833-50.

12

Discussion Questions for All Papers 1. What is the research question? 2. What are the goals of the paper? (Does the paper aim to develop methods, answer a policy question, test models, or measure an effect?) 3. Why is the paper important according to the author? Is the author right? 4. If the objective is a methodological advance, what is the problem that the author addresses? Why are existing techniques inadequate? How successful is the author’s approach? Could we use the approach elsewhere? 5. What is the theoretical foundation for the empirical work? How appropriate is the model for the applications? How tight is the relationship between the theoretical and empirical models? 6. For papers using structural empirical models: • Why does the author use a structural empirical model? Could any of the questions the author asks be addressed with other approaches? What is the source of identification? Could the model be generalized in any obvious ways? • Does the structural model seem to capture the key features of the market? What elements are missing from the model that might be important? Is it clear what the implications of ignoring these elements are for the estimate the author obtains? • Are there overidentifying restrictions of the model that could be tested? Can you think of alternative models of behavior for the market? 7. For papers not using structural empirical models: • Why does the author choose this particular model? • Does the author evaluate the model specification? • Are the interpretations of the estimates and/or hypothesis tests clear? • Are there parameters or distributions of interest that one could identify and estimate by imposing more structure from economic theory? 8. What are the data? 9. What are the key variables in the empirical model?

13

10. What is assumed to be exogenous and endogenous? How is the endogeneity addressed? Do you believe the solutions? 11. What variation in the data does the author rely on for identification of each element of the empirical model? What assumptions must be true about this variation for the author’s interpretation of the results to be correct? Are you worried about any of the assumptions? 12. Does the author make distributional assumptions? If so, are they important for identification? Does the author evaluate the robustness of the results to the assumption? 13. What are the conclusions of the author? 14. What alternative interpretations are plausible? Does the author test against any plausible alternatives, or provide any practical reason why they are less likely?

14