Topics in Industrial Organization
Lightning Round SessionSunday, Jan. 5, 2025 1:00 PM - 3:00 PM (PST)
- Chair: Yanyou Chen, University of Toronto
Booms, Busts, and Endogeneous Rigidities: Evidence from Containerships
Abstract
This paper investigates how endogenous rigidities inhibit efficient physical capital reallocation. We focus on the role of contract duration - a classic example of an adjustment rigidity. We argue that when agents choose to sign longer contracts in booms when asset markets are thin, they generate a contracting externality which further reduces available capacity and amplifies market thinness. This causes equilibrium contracts to be inefficiently long in booms and inhibits the adjustment of these markets to productivity shocks. We show evidence for these mechanisms in the market for containership leasing contracts. We provide a framework that captures the details of the market and illustrates the tradeoffs conceptually. Overall, the results have implications for policies in this industry like shipping subsidies, as well as the fragility of the supply-chain to shocks.Competing on Information in Selection Markets: Evidence from Auto Insurance
Abstract
This paper develops a novel method to empirically analyze imperfect competition in selection markets when firms offer differentiated products while having different cost structures and information precision. We develop a static model of price competition, where consumers have private information about their risks. Each firm draws a private signal about the consumer’s riskiness type; the dispersion of the signal distribution measures firm’s information precision. Our paper provides novel econometric techniques to identify and estimate demand parameters, heterogeneous information technology, cost structures, and pricing strategies across competing firms.We apply the method to study a representative sample of Italian auto insurance contracts and associated claims from 2013 to 2021. We find substantial differences in the precision of risk rating and cost structures across insurers. Companies with less accurate risk rating algorithms tend to have more efficient cost structures and attract more high-risk consumers.
If all insurers were to counterfactually adopt the least advanced information technology (for example, under more stringent privacy regulation), average consumer surplus would increase by 4.5%, and the gain primarily comes from high-risk drivers. Allowing all firms to share the best risk rating technology (i.e., policies requiring data/algorithm sharing) improves the efficiency of the insurer-insuree match. Insurers more efficient at processing claims now strategize to attract more high-risk consumers; overall, the cost to insure consumers in this market decreases by 4 euros per contract. We also find that information policies that aim at protecting consumer privacy or promoting competition may disproportionately benefit low-technology firms, which in our data include insurers with large market shares, and hence eventually create anti-competitive effects.
Do Rural Roads Promote Inclusive Entrepreneurship?
Abstract
Entrepreneurship is an important engine of growth. However, attaining inclusivity in entrepreneurship has been elusive. We investigate the impact of a national road construction program in India that brought access to previously unconnected villages on entrepreneurship across social groups categories utilizing the universe of firms in India that contains details on the owner's caste. Results show that construction of new feeder roads to a village increases the number of new firms across all caste categories in services sector, including the lower-caste groups. The increase in manufacturing entrepreneurship is only among the upper caste groups. The division of the entrepreneurial pie among caste groups remain unchanged in services sector, but tilts more towards the upper castes in manufacturing. In both services and manufacturing, the effects are concentrated on small, single-employee owner operated, and unregistered firms without power availability. The positive entrepreneurship effects among lower-caste groups are primarily in villages where bank-credit activity is prevalent suggesting that the formal financing channel is important for lower caste groups where network capital is absent unlike among upper caste groups.Flavorants and Addiction: An Empirical Analysis of Cigarette Bans and Taxation
Abstract
Menthol cigarettes and other flavored tobacco products have sparked considerable debate among policymakers and the media. Despite this attention, there remains a dearth of empirical research on the impacts of flavorant bans. In this study, we address this gap by examining the potential consequences of the FDA's proposed menthol cigarette ban, utilizing both aggregate-level retail data and micro-level household data within a random coefficient nested logit framework.Our analysis reveals evidence of heterogeneous consumption patterns and addictive tendencies among consumers. Notably, we focus on the Black American community, known for its high prevalence of menthol consumption, as well as on low-income households. By integrating addiction and consumer heterogeneity into our model, we estimate demand while considering how demographic characteristics and preferences impact product choice.
Using our model's demand estimates, we then evaluate the impact of the menthol ban on consumption and product substitution. Our findings indicate that the removal of mentholated cigarettes results in a 13% reduction in overall cigarette usage and a 35% decrease in smoking rates among Black Americans. Additionally, we observe a 4.9% increase in demand for e-cigarettes and a 1.7% rise in demand for cessation products.
We compare these findings with the effects of a national cigarette tax and a ban on all flavored nicotine products on consumption and consumer surplus. For instance, we find that implementing a 10.2% cigarette sales tax, on average, yields comparable outcomes to the proposed menthol ban, and results in a smaller reduction in consumer surplus.
Finally, given the recent acquisitions of e-cigarette companies by cigarette manufactures, we reconsider our counterfactual results under a merger between these producers. This comprehensive analysis provides valuable insights into the potential impacts of regulatory interventions on tobacco consumption and public health.
Partisanship in Entrepreunerial Financing
Abstract
Affective polarization has risen in the United States in the last decade. Venture capitalists play an active role in their portfolio companies and interact frequently with the management teams. Yet we have little evidence of how the alignment in political orientation between the venture capitalists and CEOs affects VC’s investment decisions. We find no evidence that their political ideologies determine the matching of VCs and entrepreneurs in the earlier part of our sample. However, we show that VC’s investments in politically divergent startups became less common over time. Furthermore, we find that firms with misaligned CEOs are less likely to receive subsequent financing rounds, have lower odds of going public/being acquired, and are more likely to file for bankruptcy. We find no relationship between VC-CEO political misalignment and CEO turnover. These results suggest that VCs prefer to divert resources away from startups with misaligned CEOs rather than replace the CEO.Polarized Supply Chains
Abstract
Affective polarization, or the extent to which citizens feel more negatively toward other political parties than their own, has risen substantially in the US in recent decades (Iyengar et al., 2019, Boxell, et al., 2020), affecting social relationships, consumption, hiring, beliefs about economic conditions, financial news, and investors. We study whether polarization leads to partisan matching along the supply chain. Our results show that U.S. firms' supply chains are increasingly politically polarized.We use CEO campaign contributions to identify corporate political alignment and show that customers are more likely to match with suppliers with similar political views. Using the US-China trade war as a shock to supply chain relationships, we find evidence of partisan matching in new customer-supplier relationships. Partisan matching is not explained by industry, location, and product characteristics, but it is more common in industries with higher information asymmetry and hold-up problems. We show that customers match with politically aligned suppliers with higher mark-ups, suggesting that polarization can be inefficient.
Strategic Complementarity in NGO Advocacy: Evidence from the European Commission
Abstract
This article analyzes the advocacy strategies of environmental non-governmental organizations (ENGOs). I develop a model in which ENGOs can engage in costly advocacy activities to foster pro-environmental policy changes on different dimensions. The model gives insights on their optimal advocacy strategies, and their reaction functions to lobbying from other actors. Combining data on meetings with European Commission members and textual analysis to measure lobbying efforts on different topics, I find support for strategic complementarity of efforts. ENGOs also seem to benefit from lobbying of the business sector on the same topics: it makes their effort more efficient as it contributes to bringing these topics up and helps them get meetings with time-limited attention policymakers.Trust Building Dynamics in Cartel Formation: A Structural Analysis
Abstract
This article empirically investigates a price-fixing cartel in Chile’s pharmaceutical sector. A dynamic game model is developed to explain the challenges of initiating collusion and addressing incentive and coordination problems.Firms started colluding in select markets, expanding over time. Trust is built as firms learn from initial collusive outcomes, easing further collusion. The study evaluates counterfactual antitrust policies, assessing their effectiveness against cartels. It highlights the significance of considering coordination in policy predictions.
JEL Classifications
- L1 - Market Structure, Firm Strategy, and Market Performance