Three essays in empirical industrial organization

Creators: Shum, Matthew

Abstract

This thesis consists of three empirical essays on topics in industrial organization. Chapter 1 introduces the three essays and describes their main results. In chapter 2, I measure the effects of advertising on households' choices among competing brands of differentiated products when households are habit persistent. In markets characterized by habit persistent consumers, an important role for advertising may be to encourage consumers to "switch" to newer, less familiar brands. This potentially enhances competition between competing brands by reducing household-level differentiation between brands that a household is and is not experienced with, contrary to the traditional Bainian arguments that advertising reinforces market power via product differentiation. Estimates from my household-level brand choice models for the breakfast cereals market imply that advertising not only promotes competition among existing brands by reducing the degree of product differentiation which arises due to experience, but also facilitates entry of new brands. Therefore Bain's argument that advertising is a "product differentiation barrier to entry" seems appropriate only in the presence of production or marketing economies of scope. In chapter 3, which draws upon joint work with Andrea Coscelli, we empirically verify the existence of and quantify the extent of informational barriers to entry into the anti-ulcer drug market. Using an Italian dataset of complete prescription histories for 350 doctors in the Rome metropolitan area, we study the diffusion process of omeprazole, an anti-ulcer molecule which entered the market in 1990. Our estimates ascribe the gradual growth in prescriptions of omeprazole over the sample period is due largely to doctors' initial pessimism about omeprazole's quality. Strikingly, we find that this uncertainty is resolved by first-hand experience (actual prescriptions) rather than through marketing activities and other potential sources of information: this despite including a complete set of dummies for all the months in our sample in order to soak up aggregate effects. In chapter 4, based on joint work with Han Hong, we derive an econometric model of a multi-round ascending (or English) auction. Our work differs from the previous literature in two aspects: (1) we present the first equilibrium econometric model of an ascending auction with both private and common value components that we are aware of; and (2) we allow for bidders' valuations for an object to be non-identically distributed--ours is a model of an asymmetric auction. While the aim of this chapter is mostly methodological, we estimate our model using data from the spectrum auctions run by the U.S. Federal Communications Commission (FCC).

Additional Information

I feel particularly indebted to Frank Wolak, my principal advisor. He was a knowledgeable source of advice on all aspects -- economical, statistical, and computational -- of my research. As most graduate students realize, however, often the most important component of success is willpower; for that reason I am especially grateful to Frank for his constant encouragement and support. I could not have asked for a more patient or understanding advisor. On repeated occasions, Peter Reiss prodded and pushed me towards coherence and clarity in making my economic arguments. He taught me how to write a paper. Tim Bresnahan taught me the playfulness of research: about gaining insights and developing economic intuition by allowing even antithetical ideas to combine and collide. Andrea Coscelli provided extensive comments on many drafts of chapter 2, and was a co-author of chapter 3. Furthermore, Andrea was a person who "got things done", and luckily some of it rubbed off on me. Han Hong's impressive knowledge of statistics and auction theory informed many aspects of chapter 4, of which he was a co-author. Finally, I have benefited from John Pencavel's advice since the beginning of my graduate school career, when he convinced me to pursue empirical research. I gratefully acknowledge financial support from the Alfred P. Sloan Foundation. This dissertation would simply not have been possible without my fellow graduate students and their valuable advice, feedback and encouragement. I especially thank my comrades-in-arms Kalus Desmet, Luid-Fernanco Medina, and Fabiano Schivardi for their friendship. Over twenty years ago, my grandfather taught me the Tang dynasty poem which begins (and I trasnlate): Gentlemen, don't you see -- The waters of the Yellow River -- out from Heaven -- how they rush out to the sea, never returning? This thesis is dedicated to his memory.

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