Prof. Seung-Hyun Hong 112 David Kinley Hall Tel. 217.333.4557 hyunhong@illinois.

edu

Spring 2012 Oce hours: Friday 9-11AM or by appointment

Syllabus Economics 582: Empirical Industrial Organization

222 David Kinley Hall, Tuesday 3:30PM-6:20PM
Course web site: https://netles.uiuc.edu/hyunhong/www/econ582.htm

The objective of this course is to prepare graduate students to be a specialist in empirical Industrial Organization. By the end of this course, you are expected to: rst, have solid and critical understanding of the major literature; second, start your own empirical research on IO topics or other related topics; and third, be able to communicate with the academic community. To this end, we will read and discuss leading papers in empirical IO eld topics include (but not limited to) detection of anticompetitive rm behavior; demand estimation, particularly for dierentiated products; market structure and rm entry; estimation of dynamic model. You should read all the required papers as well as related papers, and are strongly encouraged to actively participate in class discussion. Because relying on my lecture alone could lead to inactive class discussion, however, you are also required to present some of papers in class. Additionally, you need to submit referee reports and work on computational exercises designed to help you learn empirical tools. Finally, you are required to submit your research proposal, which is intended to help you start your own research. You are expected to discuss your potential research idea with me during the second half of this semester. Empirical research normally requires combining several inputs together: economic theory; specic examples and institutional background; datasets and data coding; econometric tools and computation. We will study how previous researchers have combined these inputs together in their projects. Despite the emphasis on both theory and econometrics, however, this course will not review microeconomic theory or econometrics in detail, unless it is critical to understand a particular paper. Note that graduate microeconomics and econometrics are prerequisites for this course. Some level of computer programming (e.g. Stata, SAS, Matlab, etc.) will be required as well. If you are not comfortable with computer programming, you should learn it on your own or from your friends. Learning from others is often an important learning process, and so I encourage you to work with your classmates for your empirical exercises.

I. Evaluation
Your grade will be determined based on the distribution of total scores of all students, and your total score will be a weighted average of the followings. Class presentation (15%+15%): You must present at least two papers in class. Each presentation will account for 15%. You should use slides for either an overhead projector or a video projector. Your slides should include the following parts. (i) What are the research questions (and/or the goal) of the paper? What are the contributions (related to literature review and background)? (ii) What are the parameters of interest (e.g. correlations between key variables, demand elasticity, consumer welfare, treatment eect, etc.), related to economic theories? (iii) How to identify the parameters? data (description and key variables), econometric model, and identication strategy. (iv) Discussion of the main ndings and their implications. Two students will be assigned to one paper. Both students should work together to make slides, but each student is expected to present a half of the slides. For example, one student may present (i)-(ii), and the other student may present (iii)-(iv). Your slides should be sent to me before your presentation. More specically, try to email me your slides by 12:30pm on Tuesday (about 3 hours before class). Every student is required to present at least once before spring break. If a slot is available, you may present one more paper in addition to two required presentations, in which case you will receive extra 15%. Class participation (10%): The class consists of my lecture and your presentations, but an important part of the class is your participation. Even if you do not present the paper, you should read all the required papers (obviously!) and are expected to participate in the discussion of the paper in class. Problem sets (15%+15%): There will be two empirical problem sets. You will work with both fake data and the actual data to implement empirical tools. Problem set 1 is due on March 13, Tuesday, and problem set 2 is due on April 10, Tuesday. Referee report (10%): You will be asked to write one referee report on some of papers in the reading list. Your referee report should be detailed and precise. In addition to the summary of the paper (basically, (i)-(iv) above), you should provide your critical assessment on the paper and further suggest potential improvement and extensions. I 2

will try to assign a paper to each student based on her/his research interest (so at some point, you might as well talk to me about your research interest). In any case, submit your report by May 14, Monday. Proposal (20%): Though starting your own project would be the ultimate goal, most of this course is focused on studying the previous work. This is because in most cases, you can see far by standing on the shoulders of giants. Ideally, your proposal should include research questions, related literature review, institutional background, data description, and empirical approach to answer your questions. At the minimum, however, a critical review on related literature is also acceptable. Submit your proposal by May 14, Monday.

II. Schedule and Readings

Note: denotes required readings. This schedule is subject to minor change.

1. Basics in Empirical IO: Measuring Market Power

Jan 24: Bresnahan (1989), Porter (1983). Jan 31: Bresnahan (1987) presented by Blake and Rachel. Borenstein, Bushnell, and Wolak (2002) presented by German and Luiz.
Bresnahan, T. Empirical Studies of Industries with Market Power. in Schmalensee and Willig (Eds.), Handbook of Industrial Organization, Vol. 2, Ch. 17, pp. 1011-58. 1989. Porter, R. A Study of Cartel Stability: The Joint Executive Committee, 1880-1886. Bell Journal of Economics, 1983, 14, pp. 301-14. Bresnahan, T. Competition and Collusion in the American Automobile Industry: the 1955 Price War. Journal of Industrial Economics, 1987, 35, pp. 457-82. Borenstein, S., Bushnell, J., and Wolak, F. Measuring Market Ineciencies in Californias Wholesale Electricity Industry . American Economic Review, 2002, 92(5), pp. 1376-1405. Reiss, P. and Wolak, F. Structural Econometric Modeling: Rationales and Examples from Industrial Organization. Forthcoming in Handbook of Econometrics, Vol. 6. Green, E. and Porter, R. Noncooperative Collusion under Imperfect Price Information. Econometrica, 1984, Econometrica, pp. 87-100. Rotemberg, J. and Saloner, G. A Supergame-Theoretic Model of Price Wars during Booms. American Economic Review, 1986, 76, pp. 390-407. Ellison, G. Theories of Cartel Stability and the Joint Executive Committee. RAND Journal of Economics, 1994, 25, pp. 35-57. Corts, K. Conduct Parameters and the Measurement of Market Power. Journal of Econometrics, 1999, 88, pp. 227-50.

2. Demand Estimation
Feb 7: Hong and Wolak (2008) presented by Eduardo and Lisa (Yiqun). Wolak (1996) and some basics elasticity and welfare calculation.
Wolak, F. The Welfare Impacts of Competitive Telecommunications Supply: A HouseholdLevel Analysis. Brookings Papers on Economic Activity: Microeconomics, 1996, pp. 269340. Hong, S.-H. and Wolak, F. Relative Prices and Electronic Substitution: Changes in Household-level Demand for Postal Delivery Services from 1986 to 2004. Journal of Econometrics, 2008, pp. 226-242. Deaton, A. and Muellbauer, J. Economics and Consumer Behavior. New York: Cambridge University Press. 1980. Deaton, A. and Muellbauer, J. An Almost Ideal Demand System. American Economic Review, 1975, 70, pp. 367-83.

3. Dierentiated Product: Demand Estimation

Feb 14: Berry (1994), Berry, Levinsohn, and Pakes (1995). Feb 21: Goldberg (1995) presented by Paulo and Saeed. Berry, Levinsohn, and Pakes (1999) presented by Hui and Zheng. Feb 28: Nevo (2001) presented by Ning and Seokjong. Nevo (2000) presented by Mehrnoush and Masanori. Mar 6: Petrin (2002) presented by Moonsik and Hye Jin. Goolsbee and Petrin (2004) presented by Yingyi and Takashi.
Berry, S. Estimating Discrete Choice Models of Product dierentiation. RAND Journal of Economics, 1994, 25, pp. 242-62. Berry, S., Levinsohn, J, and Pakes, A. Automobile Price in Market Equilibrium. Econometrica, 1995, 63, pp. 841-90. Berry, S., Levinsohn, J, and Pakes, A. Voluntary Export Restrains on Automobiles: Evaluating a Trade Policy. American Economic Review, 1999, 89, pp. 400-430. Nevo, A. Measuring Market Power in the Ready-To-Eat Cereal Industry. Econometrica, 2001, 69, pp. 307-42. Nevo, A. Mergers with Dierentiated Products: the Case of the Ready-To-Eat Cereal Industry. RAND Journal of Economics, 2000, 31, pp. 395-421. Goldberg, P. Product Dierentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry. Econometrica, 1995, 63, pp. 891-952. Petrin, A. Quantifying the Benets of New Products: The Case of the Minivan. Journal of Political Economy, 2002, 110, pp. 705-29.

 Goolsbee, A. and Petrin, A. The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable TV. Econometrica, 2004, 72(2), pp. 351-381. Whinston, M. Antitrust Policy Toward Horizontal Mergers. in Armstrong and Porter (Eds.), Handbook of Industrial Organization, Vol. 3, Ch. 36, pp. 2369-2440. 2006. Nevo, A. A Practitioners Guide to Estimation of Random Coecient Logit Models of Demand. Journal of Economics and Management Strategy, 2000, 9, pp. 513-48. Berry, S., Levinsohn, J, and Pakes, A. Dierentiated Product Demand Systems from a Combination of Micro and Macro Data: The New Car Market. Journal of Political Economy, 2004, 112, pp. 68-105. Anderson, S., DePalma, A, and Thisse, J. Discrete Choice Theory of Product Dierentiation. Cambridge: MIT Press, 1992. Bresnahan, T. Departures from Marginal-Cost Pricing in the American Automobile Industry: Estimates for 1977-1978. Journal of Econometrics, 1981, 17, pp. 201-27. Hendel, I. Estimating Multiple Discrete Choice Models: An Application to Computerization Returns. Review of Economic Studies, 1999, 66, pp. 423-46. Trajtenberg, M. The Welfare Analysis of Product Innovation with an Application to CT Scanners. Journal of Political Economy, 1989, 97, pp. 444-79.

Note: See 6.3 below for class schedule on March 13.

4. Entry and Strategic Interactions

Mar 27: Bresnahan and Reiss (1990), Berry (1992). Apr 3: Berry and Waldfogel (1999) presented by Han and Hong (2011) presented by Apr 10: Seim (2005) presented by Ciliberto and Tamer (2009) presented by and and and . . and . .

Bresnahan, T. and Reiss, P. Entry in Monopoly Markets. Review of Economic Studies, 1990, 57, pp. 57-81. Bresnahan, T. and Reiss, P. Entry and Competition in Concentrated Markets. Journal of Political Economy, 1991, 99, pp. 977-1009. Berry, S. Estimation of a Model of Entry in the Airline Industry. Econometrica, 1992, 60, pp. 889-917. Berry, S. and Waldfogel, J. Social Ineciency in Radio Broadcasting. RAND Journal of Economics, 1999, 30(3), pp. 397-420. Han, L. and Hong. S.-H. Testing Cost Ineciency under Free Entry in the Real Estate Brokerage Industry, Journal of Business and Economic Statistics, 2011, 29(4), pp. 564578. Seim, K. An Empirical Model of Firm Entry with Endogenous Product-Type Choices. 2005, forthcoming in RAND Journal of Economics.

 Ciliberto, F. and Tamer, E. Market Structure and Multiple Equilibria in Airline Markets. 2009, Econometrica, 2009, 77, pp. 1791-1828. Bresnahan, T. Suttons Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration: Review Article. RAND Journal of Economics, 1992, 23, pp. 137-52. Bresnahan, T. and Reiss, P. Empirical Models of Discrete Games. Journal of Econometrics, 1991b, 48, pp. 57-81. Bajari, P., Hong, H., and Ryan, S. Identication and Estimation of a Discrete Game of Complete Information. Manuscript. Minnesota. 2006. Bajari, P., Hong, H., Krainer, J., and Nekipelov, D. Estimating Static Models of Strategic Interactions. Manuscript. Minnesota. 2006. Brock, W. and Durlauf, S. Discrete Choice with Social Interactions. The Review of Economic Studies, 2001, 68, pp. 235-260. Mazzeo, M. Product Choice and Oligopoly Market Structure. RAND Journal of Economics, 2002, 33(2), pp. 1-22. Tamer, E. Incomplete Simultaneous Discrete Response Models with Multiple Equilibria. Review of Economic Studies, 2003, 70, pp. 147-65. Sweeting, A. Coordination Games, Multiple Equilibria, and the Timing of Radio Commercials. 2007, Duke University.

5. Dynamic Model
Apr 17: Rust (1987), Hotz and Miller (1993), Aguirregabiria and Mira (2002). Apr 24: Olley and Pakes (1996) presented by Bajari, Benkard, and Levin (2007) presented by and and . .

Rust, J. Optimal Replacement of GMC Bus engines: An Empirical Model of Harold Zurcher. Econometrica, 1987, 55, pp. 999-1033. Hotz, J. and Miller, R. Conditional Choice Probabilities and the Estimation of Dynamic Models. Review of Economic Studies, 1993, 60, pp. 497-529. Aguirregabiria, V. and Mira, P. Swapping the Nested Fixed Point Algorithm: A Class of Estimators for Discrete Markov Decision Models Econometrica, 2002, 70, pp. 1519-1543. Olley, G. and Pakes, A. The Dynamics of Productivity in the Telecommunications Equipment Industry. Econometrica, 1996, 64, pp. 1263-97. Bajari, P., Benkard, L., and Levin, J. Estimating Dynamic Models of Imperfect Competition. Econometrica, 2007, 75, pp. 1331-1370. Aguirregabiria, V. and Mira, P. Sequential Estimation of Dynamic Discrete Games. Econometrica, 2007, 75, pp. 1-53. Hotz, J., Miller, R., Sanders, S., and Smith, J. A Simulation Estimator for Dynamic Models of Discrete Choice. Review of Economic Studies, 1994, 61, pp. 265-289. Aguirregabiria, V. The Dynamics of Markups and Inventories in Retailing Firms. Review of Economic Studies, 1999, 66, pp. 275-308.

Rust, J. Structural Estimation of Markov Decision Processes. Handbook of Econometrics, 1994, Vol. 4 Ch. 51, pp. 3081-143. Benkard, L. Learning and Forgetting: The Dynamics of Aircraft Production. American Economic Review, 2000, 90, pp. 1034-54. Pakes, A. Patents as Options: Some Estimates of the Value of Holding European Patent Stocks. Econometrica, 1986, 54, pp. 755-84. Aguirregabiria, V. and Mira, P. Dynamic Discrete Choice Structural Models: A Survey. Manuscript. Univ. of Toronto. 2007. Benkard, L. Dynamic Equilibrium in the Commercial Aircraft Market. Review of Economic Studies, 2004, 71, pp. 581-611. Ackerberg, D., Benkard, L., Berry, S., and Pakes, A. Econometric Tools for Analyzing Market Outcomes. Forthcoming in the Handbook of Econometrics, Vol. 6. Bajari, P. and Hong, H. Semiparametric Estimation of a Dynamic Game of Incomplete Information. Manuscript. Minnesota. 2005. Ryan, S. The Costs of Environmental Regulation in a Concentrated Industry. Manuscript. MIT. 2006. Pakes, A. and McGuire, P. Computing Markov-Perfect Nash Equilibrium: Empirical Implicaitons of a Dynamic Model. RAND Journal of Economics, 1994, pp. 555-89. Ericson, R. and Pakes, A. Markov-Perfect Industry Dynamics: A Framework for Empirical Work. Review of Economic Studies, 1995, 62, pp. 53-82.

6. Other Topics
6.1. Treatment Eects May 1: Hong (2011) presented by and .

Hong, S.-H. Measuring the Eect of Napster on Recorded Music Sales: Dierence-inDierences Estimates under Compositional Changes., Journal of Applied Econometrics, forthcoming, 2011. Abadie, A. Semiparametric Dierence-in-Dierences Estimators, Review of Economic Studies, 2005, 72, pp. 1-19. Athey, S. and Imbens, G. W. Identication and Inference in Nonlinear Dierence-indierences Models, Econometrica, 2006, 74, pp. 431-497. Heckman, J. J., Ichimura, H., and Todd, P. E. Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme, Review of Economic Studies, 1997, 64, pp. 605-654. Heckman, J. J., Ichimura, H., and Todd, P. E. Matching as an Econometric Evaluation Estimator, Review of Economic Studies, 1998, 65, pp. 261-294. Imbens, G. W. and Wooldridge, J. M. Recent Developments in the Econometrics of Program Evaluation, Journal of Economic Literature, 2009, 47, pp. 5-86. Meyer, B. D. Natural and Quasi-experiments in Economics, Journal of Business and Economic Statistics, 1995, 13, pp. 151-161.

6.2. Search and Price Dispersion May 1: Hortacsu and Syverson (2004) presented by and .

Hortacsu, A. and Syverson, C. Product Dierentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of S&P 500 Index Funds. Quarterly Journal of Economics, 2004, 119, pp. 403-56. Sorenson, A. Equilibrium Price Dispersion in Retail Markets for Prescription Drugs. Journal of Political Economy, 2000, 108. Genesove, D. Search at Wholesale Auto Auctions. Quarterly Journal of Economics, 1995, 110, pp. 29-49.

6.3. Network Eects and Switching Costs March 13: Rysman (2004) presented by Thomas and Xiaoying. Hong and Lezende (2011) presented by Cong and Joao.
Rysman, M. Competition Between Networks: A Study of the Market for Yellow Pages. Review of Economic Studies, 2004, 71, pp. 483-512. Hong, S.-H. and Lezende, R. Lock-in and Unobserved Preferences in Server Operating Systems: A Case of Linux vs. Windows, Journal of Econometrics, forthcoming, 2011. Gandal, N., Kende, M., and Rob, R. The Dynamics of Technological Adoption in Hardware/Software Systems: The Case of Compact Disc Players. RAND Journal of Economics, 2000, 31, pp. 43-61. Goolsbee, A. and Klenow, P. Evidence on Learning and Network Externalities in the Diusion of Home Computers. Journal of Law and Economics, 2002, XLV, pp. 317-44. Greenstein, S. Did Installed Base Give an Incumbent Any (Measurable) Advantages in Federal Computer Procurement?. RAND Journal of Economics, 1993, 24, pp. 1939-. Nair, H., Chintagunta, P., and Dube, J. Empirical Analysis of Indirect Network Eects in the Markets for Personal Digital Assistants. Quantitative Marketing and Economics, 2004, 2, pp. 23-58. Saloner, G., and Shepard, A. Adoption of Technologies with Network Eects: An Empirical Examination of the Adoption of Automated Teller Machines. RAND Journal of Economics, 1995, 26, pp. 479-501.

Additional Note: 1. For non-technical (and not peer-reviewed) review of new empirical IO, you may nd it interesting to read the articles from the Symposia on Con out of Economics, Journal of Economic Perspectives, 2010, Vol. 24, No. 2, particularly by Angrist and Pischke, Nevo and Whinston, and Keane, as well as Einav and Levin in the same issue.