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Spring 2006

Christian Rojas
GR 2.614; phone: 4982
crojas@utdallas.edu

ECO 7331 501: EMPIRICAL INDUSTRIAL ORGANIZATION

This is a graduate level course on empirical topics in Industrial Organization (IO). This course will cover
the main areas of empirical research in industrial organization and it is mainly designed to expose the
student to the application of various estimation techniques to a variety of theoretical scenarios. You are
required to have some background on microeconomic/industrial organization theory but I will try to cover
enough theoretical aspects so that the empirical part makes sense. The best references on IO theory are
Tirole (1988) and Vives (1999). You are not required to buy any books as lectures will be based on either
journal articles or book chapters that can be downloaded from the internet and my own notes.

The course will have a “hands-on” approach in that the students will be given data to estimate various
models and sometimes reproduce results from previously published articles. It is my hope that this course
will help you get started on your research for your dissertation. Some of the problem sets require
programming which I expect you to do in Matlab; however you are welcome to use other packages
(Gauss, SAS, etc.). For those of you who are not familiar with Matlab, I will give a couple of lab sessions
to get you started for the homework assignments. Some homework assignments can be done in Stata and
if you need to get started on this statistical package, I recommend you take Dr. Wim Vijverberg’s 1 credit
Stata course.

Lectures: Tuesday 7:00 – 9:45 pm, GR 3.206

Course Web Page: http://www.utdallas.edu/~cxr057000/7331.htm

References:

Reference Texts for Theory:


J. Tirole, The Theory of Industrial Organization, MIT, 1988. (Tirole).
X. Vives, Oligopoly Pricing, MIT, 1999 (Vives)

Reference Texts for Empirical and Public Policy issues:


R. Schmalensee and R. Willig, eds., Handbook of Industrial Organization, North-Holland, 1989.
(HIO).
D. Carlton and J. Perloff, Modern Industrial Organization, 3rd ed., Addison-Wesley, 1999.
F.M. Scherer and D. Ross, Industrial Market Structure and Economic Performance, 3rd ed.,
Houghton Mifflin, 1990.
K. Viscusi, J. Vernon and J. Harrington, Economics of Regulation and Antitrust, 3rd ed., MIT,
2000.

Reference Book Chapters (downloadable):


________ _______________________ _____! "_$#&%____('*)+ ,_. - /__0213_____ __4_65

Ackerberg, D., L. Benkard, S. Berry and A. Pakes, “Econometric Tools for Analyzing Market
Outcomes,” prepared for the Handbook of Econometrics (ed. by J. Heckman) available at:
http://post.economics.harvard.edu/faculty/pakes/papers/tools_6-7-05.pdf
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Reiss, P. and F. Wolak, “Structural Econometric Modeling: Rationale and Examples from
Industrial Organization,” prepared for the Handbook of Econometrics, Vol 6. Available at:
http://www.stanford.edu/~preiss/makeit.pdf
Grading will be based on several problem sets and a project proposal. The grade on the project proposal
has two parts: 1) a 40 min. presentation of one paper that is closely related to the project, and 2) the
written proposal.
The project proposal should contain a literature review (at most 5-8 articles, if you have more than this
your empirical question is too broad) of the specific topic and a summary of the proposed research that
addresses the following questions:
1. What is the research question?
2. What are goals of the paper? (developing a method, answer a policy question, test a model,
measure and effect?)
3. Why should other people care about this paper?
4. What is the theoretical foundation for the empirical work?
5. What empirical method will you use? Why is this method more sound than other methods?
6. Where do you plan to obtain the data? What is the dependent variable, which are the explanatory
variables, which instruments –if needed- are you planning to use?
It is ok to extend someone else’s previous work. In fact most famous contributions were not written from
scratch. Regardless of what you are interested in, it is more likely than not that many people have done a
lot of the hard work needed to address your question. The most important part of the research proposal is
to have a clear idea of the research question and why should people care about it. You are free to choose
the format of your proposal; for example you can have an introduction section where you survey the
literature, describe your research question and your goals and a second “methods” section where you talk
about the data, the econometric model and its relationship to theory. Another format would be three
sections: introduction, literature review and methods. Format is not so relevant, however, as I will grade
you on how successful you are on addressing the questions listed above.
The next part lists the topics that we will cover and the journal articles associated with them. The papers
that have a star are particularly important for that topic and I encourage you to take a look at them. I will
not cover all of the papers on the reading list but I expect you to read all of the papers we discuss in
detail in class. This list is likely to be updated throughout the semester.
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The following abbreviations are used for journal titles:


AER American Economic Review
BJE Bell Journal of Economics
EMA Econometrica
EJ Economic Journal
IJIO International Journal of Industrial Organization
JE Journal of Econometrics
JEH Journal of Economic History
JEL Journal of Economic Literature
JEMS Journal of Economics & Management Strategy
JET Journal of Economic Theory
JIE Journal of Industrial Economics
JLE Journal of Law and Economics
JPE Journal of Political Economy
IER International Economic Review
QJE Quarterly Journal of Economics
RJE Rand Journal of Economics
ReStat Review of Economics and Statistics
ReStud Review of Economic Studies

1. Introduction

* Notes (I will make these available on my webpage)

F. Fisher, “Games Economists Play: A Noncooperative View,” RJE, Spring 1989, 113-24. J

R. Schmalensee, “Industrial Organization: An Overview,” EJ, September 1988, 643-81. J

2. Pricing in Homogeneous products markets: price taking, Cournot and Bertrand

i. Static Models

a. Theory

Tirole, chap. 5, Section 2.1 (pp. 96–100); Sections 7.1, 7.2, 7.5 (pp. 279–88, 296–300).

b. Evidence

O. Ashenfelter and D. Sullivan, “Nonparametric Tests of Market Structure: An Application to


the Cigarette Industry,” JIE, June 1987, 483-98. J

J. Baker and T. Bresnahan, “Estimating the Residual Demand Curve Facing a Single Firm,”
IJIO, September 1988, 283-300.

S. Borenstein, J. Bushnell and F. Wolak, “Measuring Market Inefficiencies in California’s


ECO 7331 Page 4

Restructured Wholesale Electricity Market,” AER, December 2002, 1396-405.

* T. Bresnahan, “The Oligopoly Solution is Identified,” Economics Letters, 1980, 10, 87-92.

* T. Bresnahan, “Empirical Studies of Industries with Market Power,” Handbook of IO, Vol. 2,
Chapter 17.

K. Corts, “Conduct Parameters and the Measurement of Market Power,” JE, November 1998,
227-50.

D. Genesove and W. Mullin, “Testing Static Oligopoly Models: Conduct and Cost in the Sugar
Industry, 1890-1914,” RJE, Summer 1998, 355-77.

C. Holt, “Industrial Organization: A Survey of Laboratory Research,” in J. Kagel and A. Roth


(eds.), The Handbook of Experimental Economics, Princeton, 1995, 349-443.

J. Panzar and J. Rosse, “Testing for 'Monopoly' Equilibrium,” JIE, June 1987, 443-56. J

M. Salinger, “The Concentration-Margin Relationship Reconsidered,” Brookings Papers on


Economic Activity Micro, 1990, 287-335.

R. Schmalensee, “Inter-industry Studies of Structure and Performance,” Handbook of


Industrial Organization, Vol. 2, Chapter 16.

C. Wolfram, “Measuring Duopoly Power in the British Electricity Spot Market,” AER
September 1999, 805-26.

ii. Repeated Interaction

a. Theory

Tirole, Chapter 6.

Rotemberg, J. and G. Saloner, “A Supergame-Theoretic Model of Price Wars During Booms,”


AER, June 1986, 390–407. J

Green, E. and R. Porter, “Non-cooperative Collusion Under Imperfect Price Information,”


EMA, January 1984, 87–100. J

b. Evidence

V. Aguirregabiria, “The Dynamics of Markups and Inventories in Retail Firms,” ReStud, April
1999, 275-308. J

S. Borenstein and A. Shepard, “Dynamic Pricing in Retail Gasoline Markets,” RJE, Autumn
1996, 429-51. J
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* G. Ellison, “Theories of Cartel Stability and the Joint Executive Committee,” RJE, Spring
1994, 37-57. J

* R. Porter, “A Study of Cartel Stability: The Joint Executive Committee, 1880-1886,” BJE,
Autumn 1983, 301-14. J

Evans, W. and I. Kessides, “Living by the 'Golden Rule': Multimarket Contact in the U.S.
Airline Industry,” QJE, May 1994, 341–66. J

Phillips, O. and C. Mason, “Mutual Forbearance in Experimental Conglomerate Markets,”


RJE, Autumn 1992, 395–414. J

3. Pricing in Differentiated Products Markets

a. Theory

S. Anderson, A. dePalma and J. Thisse. Discrete Choice Theory of Product Differentiation,


1992, Cambridge and London, MIT Press.

Shaked, A. and J. Sutton, “Relaxing Price Competition through Product Differentiation,”


ReStud, January 1982, 3–14. J

b. Evidence

* Reiss, P. and F. Wolak, “Structural Econometric Modeling: Rationale and Examples from
Industrial Organization,” prepared for the Handbook of Econometrics, Vol 6.

* T. Bresnahan, “Competition and Collusion in the American Automobile Market: The 1955
Price War,” JIE, June 1982, 457-482. J

F. Gasmi, J. Laffont, and Q. Vuong,“Econometric Analysis of Collusive Behavior in a Soft-


Drink Market ,” JEMS, 1992, 277-311. J

J. Baker and T. Bresnahan, “Estimating the Residual Demand Curve Facing a Single Firm,”
IJIO, 1988, 283-300.

J. Hausman, G. Leonard, and J. Zona, “Competitive Analysis with Differentiated Products,”


Annales D'Economie et de Statistique April/June 1994, 159-80.

D. McFadden, “Econometric Analysis of Qualitative Response Models,” in Griliches and


Intilligator (eds.), Handbook of Econometrics, Volume III, 1984 Amsterdam: North-Holland.

* S. Berry, 1994, "Estimating Discrete-Choice Models of Product Differentiation," RJE Summer


1994, 242-262.
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A. Nevo, Aviv, “A Practitioner’s Guide to Estimation of Random Coefficients Logit Models of


Demand,” JEMS, 2000, 513-548.

* S. Berry, J. Levinsohn, and A. Pakes, “Automobile Prices in Market Equilibrium,” EMA, July
1995, 841-990.

* A. Nevo, “Measuring Market Power in the Ready-to-Eat Cereal Industry,” EMA, March 2001,
307-342,.

P. Goldberg, "Product Differentiation and Oligopoly in International Markets: The Case of the
U.S. Automobile Industry," EMA, July 1995, 891-951.

I. Hendel, “Estimating Multiple Discrete Choice Models: An Application to Computerization


Returns,” ReStud, 1999, 66(2), 423-446.

S. Berry, J. Levinsohn and A. Pakes, “Differentiated Products Demand Systems from a


Combination of Micro and Macro Data: The new Car Market,” JPE, 2004, 68-105.

S. Berry, and A. Pakes, “Estimating the Pure Hedonic Discrete Choice Model with Application
to Price Indices,” 2001, mimeo, Yale.

Pinkse, J. M. Slade and Brett, “Spatial Price Competition: A Semi-parametric Approach,”


EMA, 70, 1111-1155.

Slade, M. “Market Power and Joint Dominance in UK Brewing,” JIE, 52, 133-163.

Deaton and Muelbauer (1980), “An Almost Ideal Demand System,” AER, 70, 312-326.

4. Other Topics on Pricing

i. Price Discrimination

a. Theory

Tirole, chap. 3

b. Evidence

E. Blackstone, “Restrictive Practices in the Marketing of Electrofax Copying Machines: The


SCM Corporation Case,” JIE, March 1975, 189–202.

S. Borenstein, “Selling Costs and Switching Costs: Explaining Retail Gasoline Markets,” RJE,
Autumn 1991, 354–69.

S. Borenstein and N. Rose, “Competition and Price Dispersion in the U.S. Airline Industry,” JPE,
August 1994, 653–83.
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A. Cohen, “Package Size and Price Discrimination: Evidence from Paper Towels,” mimeo,
Virginia, 2001.

P. Goldberg, “Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer
Expenditure Survey,” JPE, June 1996, 622-54.

P. Leslie, “Price Discrimination in Broadway Theater,” RJE, Autumn 2004, 520-41.

A. Nevo and C. Wolfram, “Why Do Manufacturers Issue Coupons? An Empirical Analysis of


Breakfast Cereals,” RJE, 2002, 33(2), 319-339,

* A. Shepard, “Price Discrimination and Retail Configuration,” JPE, February 1991, 30–53. J

Ivaldi, M. and D. Martimort, “Competition under Nonlinear Pricing,” Annales d’Economie et de


Statistique (34), 1994, 71-114.

McManus, Brian. 2001. “Nonlinear Pricing in an Oligopoly Market: the Case of Specialty
Coffee.” Washington University Olin School of Business. Mimeo. A

ii. Price Dispersion

a. Theory

Varian, H., “A Model of Sales,” AER, 1980, 651-58.

Stahl, D., “Oligopolistic Pricing with Heterogeneous Consumer Search,” IJIO, April 1996, 243-
68.

McAfee, R.P., “Multiproduct Equilibrium Price Dispersion,” JET, October 1995, 83-105.

Baye, M. and J. Morgan, “Information Gatekeepers on the Internet and the Competitiveness of
Homogeneous Product Markets,” AER, June 2001, 454-74.

b. Evidence

Sorenson, A., “Equilibrium Price Dispersion in Retail Markets for Prescription Drugs,” JPE,
August 2000, 833-50.

Ellison, G. and S. Ellison, Search, Obfuscation, and Price Elasticities on the Internet,” mimeo.
http://econ-www.mit.edu/faculty/download_pdf.php?id=942

Sorenson, A., “An Empirical Model of Heterogeneous Consumer Search for Retail Prescription
Drugs,” mimeo. http://www.stanford.edu/~asorense/papers/search.pdf

Hortascu, A. and C. Syverson, “Product Differentiation, Search Costs and Competition in the
Mutual Fund Industry,” QJE, 2004, 403-56.
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5. Vertical Control and Contractual Arrangements

a. Theory

Rey, P. and Tirole, J. (1986), “The Logic of Vertical Restraints,” AER, Vol. 76, pp. 921-39.

Whinston, M. (1990), “Tying, Foreclosure, and Exclusion,” AER, Vol. 80, no. 4, pp. 837-59

b. Evidence

Ackerberg, D. and M. Botticini (1999): “Endogenous Matching and the Empirical


Determinants of Contractual Form,” forthcoming JPE.

Asker, J. (2003) Exclusive Dealing in the Chicago Beer Market, available at his NYU, Stern
website

Lafontaine, F. (1992), “Agency Theory and Franchising: Some Empirical Results,” RJE, Vol 45,
No. 1, pp. 1-25.

* Lafontaine, F. and M. Slade (2005), “Exclusive Contracts and Vertical Restraints:


Empirical Evidence and Public Policy” available at Margaret Slade’s website in Warwick.

Mortimer, J. (2004): “Vertical Contracts in the Video Rental Industry,” Harvard University
working paper.

Slade, M. (1996), “Multitask Agency and Contract Choice: An Empirical Assessment,” IER, Vol.
37, No. 2, pp. 465-86.

* Villas-Boas, S (2003), working paper, see her Berkeley Ag Econ website.

6. Advertising

L. Benham, “The Effects of Advertising on the Price of Eyeglasses,” JLE, October 1972, 337–52.

P. Ippolito and A. Mathios, “Information, Advertising and Health: A Study of the Cereal
Market,” RJE, Autumn 1990, 459–80.

J. Kwoka, “Advertising and the Price and Quality of Optometric Services,” AER, March 1984,
211–16.

* J. Milyo and J. Waldfogel, “The Effect of Price Advertising on Prices: Evidence in the Wake of
44 Liquormart,” AER, December 1999, 1081–96.

J. Rizzo and R. Zeckhauser, “Advertising and Entry: The Case of Physician Services,” JPE, June
1990, 476–500.
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R. Sauer and K. Leffler, “Did the Federal Trade Commission's Advertising Substantiation
Program Promote More Credible Advertising?” AER, March 1990, 191–203.

Ackerberg, D. A., “Advertising, Learning, and Consumer Choice in Experience Good Markets: A
Structural Empirical Examination,” International Economic Review 44, 2003, 1007-1040

7. Entry and Market Structure

a. Theory

Anderson, S., A. de Palma, and Y. Nesterov, “Oligopolistic Competition and the Optimal
Provision of Products,” EMA 63, November 1995, 1281-1302.

Baumol, W.K., J.C. Panzar, and R.D. Willig, “On the Theory of Perfectly Contestable
Markets,” in J.E. Stiglitz and G.F. Mathewson (Eds.), New Developments in the Analysis
of Market Structure, MIT Press, 1986.

Bresnahan, T., “Sutton's Sunk Costs and Market Structure: Price Competition,
Advertising, and the Evolution of Concentration: Review Article,” RJE 23, Spring 1992, 137-52.

Mankiw, N. G., and M. D. Whinston, “Free Entry and Social Inefficiency,” RJE, 17, Spring 1986,
48-58.

Sutton, J. Sunk Costs and Market Structure, MIT Press, 1991, Chapters 1-2.

Tirole, Chapters 8.1-8.2.

b. Empirical Applications

* Berry, S., “Estimation of a Model of Entry in the Airline Industry,” EMA 60, July 1992, 889-918.

Berry, S. and E. Tamer, “Empirical Models of Entry,” Econometric Society World Congress,
2005.

Berry, S., and J. Waldfogel, “Free Entry and Social Inefficiency in Radio Broadcasting,”
RJE 30, Autumn 1999, 397-420.

* Bresnahan, T., and P. Reiss, “Entry in Monopoly Markets,” ReStud 57, 1990, 531-53.

Bresnahan, T., and P. Reiss, “Entry and Competition in Concentrated Markets,” JPE 99, October
1991, 977-1009.

Comments on Bresnahan and Reiss, Brookings Papers on Economic Activity: Special Issue on
Microeconomics 3, 1987, 872-882.
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Mazzeo, M. J., “Product Choice and Oligopoly Market Structure,” RJE 33, Summer 2002, 221-
42.

Seim, K., “An Empirical Model of Firm Entry with Endogenous Product-Type Choices,” mimeo,
Stanford University, 2004.

Ciliberto, F., and E. Tamer, “Market Structure and Multiple Equilibria in Airline Markets,”
mimeo, Northwestern University.

Toivannen, O., and M. Waterson, “Market Structure and Entry: Where's the Beef?” RJE,
forthcoming.