5
thAnnual International Conference on Industrial
Economics
Monday, June 22, 2015----Tuesday, June 23, 2015
Center for Research of Private Economy and School of Economics Zhejiang University (ZJU)
Hangzhou, China
Conference Location: Conference Room, Hangzhou JinXi Hotel, No.39 Causeway
(Yanggongdi), Xihu District, Hangzhou 310007, China. Tel: 86-571-87992288
Monday, June 22
8:30 Registration
8:45 Welcome
Welcome from ZJU
Jinchuan Shi, Dean of School of Economics and Director of CRPE, ZJU
Introduction to the Conference
Yongmin Chen, University of Colorado and ZJU
9:00-10:20 Session One (Chair: Brian Viard Cheung Kong Graduate School of Business)
Methodological Issues in Analyzing Market Dynamics
Ariel Pakes, Harvard University
When to Exit: Limited Rationality in Firm Decisions
Mo Xiao, University of Arizona 10:20-10:50 Break
10:50-12:10 Session Two (Chair: Ruqu Wang, Queen’s University and ZJU) Search Direction
Simon Anderson, University of Virginia The Double Diamond Paradox
Maarten Janssen, University of Vienna 12:10-13:30 Lunch
13:30-15:30 Session Three (Chair: Zhikai Wang Zhejiang University) Nonlinear Pricing with Asymmetric Competition
Guofu Tan, University of Southern California Bundled Procurement
Jianpei Li, University of International Business and Economics Two-Sided Search in International Market
Yi Xu, Duke University 15:30-16:00 Tea Break
16:00-17:20 Session Four (Chair: Ping Lin, Lingnan University)
The Welfare Effects of Endogenous Quality Choice in Cable TV Markets
Matthew Shum, California Institute of Technology Merger evaluation in Health-Care Markets
John Asker, UCLA
Tuesday, June 23
8:50-10:10 Session Five (Chair: Zibin Zhang, Zhejiang University)
Characterization, Implementation, and Applications of Bargaining Solutions
Cheng-zhong Qin, University of California at Santa Barbara Discriminatory Information Disclosure
Xianwen Shi, University of Toronto 10:10-10:40 Break
Network effects in oligopolistic markets
Rabah Amir, University of Iowa
Cheap Talk, Round Numbers, and the Economics of Negotiation
Steve Tadelis, UC Berkeley 12:00: Closing Remarks
Yongmin Chen, University of Colorado and ZJU
Adjourn and Lunch
Abstracts of Conference Papers
Methodological Issues in Analyzing Market Dynamics
Ariel Pakes
This paper investigates progress in the development of models capable of empirically analyzing the evolution of industries. It starts with a parallel between the development of empirical frameworks for static and dynamic analysis of industries: both adapted their frameworks from models taken from economic theory. The dynamic framework has had its successes: it led to developments that have enabled us to control for dynamic phenomena in static empirical models and to useful computational theory. However when important characteristics of industries were integrated into that framework it generated complexities which both hindered empirical work on dynamics per se, and made it unrealistic as a model of agent behavior. This paper suggests a simpler alternative paradigm, one which need not maintain all the traditional theoretical restrictions, but does maintain the core theoretical idea of optimizing subject to an information set. It then discusses estimation, computation, and an example within that paradigm.
When to Exit: Limited Rationality in Firm Decisions
Avi Goldfarb and Mo Xiao
This paper investigates bounded rationality in a high-stake business setting: a restaurant owner’s decision to exit. We examine the degree to which owners consider the role of random variation in the weather in the profitability of their businesses. Combining a 16 year monthly panel on the alcohol revenues from every restaurant in Texas with weather data, we document that (1) weather affects revenue, (2) the magnitude of this effect is similar across inexperienced and experienced owners, (3) given the same revenue record, experienced owners are more likely to go out of business after good weather (and stay in business after bad weather) than inexperienced ones. This descriptive evidence motivates a single agent dynamic model of belief formation and exit decisions. We inject a modicum of bounded rationality in this model by allowing the owner to underestimate or ignore the impact of unusual weather, thus misinterpreting revenue signals. We plan to provide the magnitude and scope of this bounded rationality problem through estimating this structural model and conducting counterfactual experiments.
Search Direction
Simon Anderson and Regis Renault
A tractable model of pricing under directed search is proposed and integrated with a position auction for better slots (which rationalizes the consumer search order). The equilibrium search order resulting from the auction may be socially optimal or not, depending on the nature of product heterogeneity. Search is always inefficiently low because firms price out further exploration. Equilibrium product prices are such that the marginal consumer's surplus decreases in the order of search. Consumers always find it optimal to follow the order of search that results from the auction. Equilibrium bids factor in position externalities across firms as prices and profits depend on the qualities of firms following in the sequence of positions. We highlight the fundamental role of firm heterogeneity that characterizes markets and their performance. The search framework delivers a full-fledged integration of position auctions and pricing with sequential directed search.
The Double Diamond Paradox
Daniel Garcia, Jun Honda, and Maarten Janssen
We study vertical relations in markets with consumer and retailer search. Retailers search to learn manufacturers' prices. We obtain three important new results. First, we explain why empirical distributions of retail prices are bi-modal, with a regular price and a sales price. Second, under competitive conditions (many retailers or small consumer search cost) social welfare is significantly smaller than in the double marginalization outcome. Manufacturers' regular price is significantly above the monopoly price squeezing retailers' markups and providing an alternative explanation for incomplete cost pass-through. Finally, by randomizing to induce active consumer search, manufacturers can increase their profits.
Nonlinear Pricing with Asymmetric Competition
Yong Chao, Guofu Tan and Adam Chi Leung Wong
Motivated by several recent antitrust cases, we study a strategic model of competition in intermediate-goods markets. Our model is a three-stage game with complete information in which a dominant firm offers a general tariff first and then a rival firm responds with a per-unit price, followed by a buyer making her decision to purchase from one or both firms. We characterize subgame perfect equilibria of the game and study the implications of the equilibrium outcome. Our paper makes three major contributions. First, it provides a novel explanation for the prevalence of nonlinear pricing (a menu of offers conditional on volumes) under oligopoly in the absence of private information: The dominant firm can use a menu of offers to constrain its rival’s choices and extract surplus from the buyer. Second, it shows that when the capacity of the rival firm is constrained, as compared to linear pricing schemes, the nonlinear tariff adopted by the dominant firm reduces the price, sales, and profits of the rival firm as well as the buyer’s surplus. In other words, nonlinear pricing may have antitrust implications in the sense that it can lead to partial foreclosure and harm consumer welfare. Third, we establish an equivalence between a subgame perfect equilibrium of the game and an optimal mechanism in a ”virtual” principal-agent model with hidden action and hidden information. This involves treating the rival firm’s (an agent’s) price as its hidden action meanwhile letting the buyer (another agent) to report the rival firm’s price as her private information to the dominant firm (the principal). As a result of such an equivalence, we can apply mechanism design techniques to solve for subgame perfect equilibria of the game.
Bundled Procurement
Yongmin Chen and Jianpei Li
When procuring multiple products from competing firms, a buyer may choose separate purchase, pure bundling, or mixed bundling. We show that pure bundling will generate higher buyer surplus than both separate purchase and mixed bundling, provided that trade for each good is likely to be efficient. Pure bundling is superior because it intensifies the competition between firms by reducing their cost asymmetry. Mixed bundling is inferior because it allows firms to coordinate to the high prices associated with separate purchase. (Pure) bundling is more likely to be selected as a procurement strategy when: (i) the products’ values are higher relative to their possible costs, (ii) costs for different goods are more negatively or less positively dependent, or (iii) the cost distribution of each product is more dispersed.
Two-sided Search in International Market
Yi Xu
International trade involves the ongoing interaction of individual buyers and sellers. Until recently researchers have seen only the aggregates that these relationships generate or, more recently, the activity of individual exporters or of individual importers separately. Trade modeling in turn has been guided by the data at hand. We exploit newly available data on individual international transactions, which allow tracking the participation of both individual buyers and individual sellers, revealing the connections among them in the cross section and over time. The data provide a new way of thinking about international trade but pose challenges in terms of interpreting the data and in designing models to understand activity at this level of heterogeneity and complexity. We motivate our analysis with a number of stylized facts. First, international buyer-seller relationships are frequently created and destroyed. For example, in the population of Colombian consumer electronics importers, the median number of months between the first shipment and the last shipment is 29. Second, the distribution of foreign exporters across Colombian electronics importers is close to Pareto, as is the distribution of Colombian importers across foreign exporters of consumer electronics to Colombia. Third, the economy is tightly connected through inter.rm relationships. Think of the graph in which each node is a Colombian importer, and two nodes are connected if they buy from at least one common foreign supplier. Roughly two-thirds of the value of Colombian consumer electronics imports is through the largest connected component of this graph, and more than half of Colombian electronics importers are in this component. The model we develop to capture these facts presumes that buyers and sellers actively search for each other. Taking stock of their current situation and the structure of the buyer-seller network, heterogeneous firms on each side of the market choose the hazard rates with which they meet potential business partners. When they encounter one another, and if they are compatible, they form matches that endure until they are destroyed by exogenous events. Search is subject to increasing returns, so firms with more clients find it less expensive to search. And market-wide forces help determines the return to search effort through an aggregate matching function.
The Welfare Effects of Endogenous Quality Choice in
Cable Television Markets
Greg Crawford, Alex Scherbakov, and Matthew Shum
This paper develops a model of consumer and producer behavior to measure the welfare consequences of endogenous quality choice in imperfectly competitive markets. We introduce the concept of a “quality markup” which quantifies the welfare costs of market power over quality at the quality margin and demonstrate how to measure the relative welfare consequences of market power over price and quality. Our model is applied to the U.S. paid-television markets in 1997-2006. We find that on average socially optimal prices are lower than the observed ones by 17 to 34 percent resulting in 115 percent increase in the consumer surplus and 16 percent increase in the total welfare. In turn, socially optimal quality levels are higher than the observed ones by 7 to 55 percent on average implying increase in the consumer and total surplus by 43 and 10 percent respectively. We find substantial variation in the outcomes across markets.
Merger evaluation in Health-Care Markets
John Asker
In many healthcare markets, consumers have zero, or close to zero, out of pocket expenses. This raises the prospect of competition primarily occurring, on the consumer-facing side, on quality dimensions. Industry consolidation may change the incentives for quality provision by healthcare providers. To investigate this, a revealed preference approach is taken to measure quality pre- and post-merger around a merger in the outpatient dialysis market in the USA. These measures are used to asses the extent of non-price competition. Merger simulation techniques are then extended to non-price competition, and used to evaluated the competitive effects of the merger and the efficacy of a range of feasible divestiture policies.
Characterization and Implementation of Nash Bargaining
Solutions with Non-Convex Problems
Cheng-Zhong Qin, Guofu Tan and Adam Wong
This paper considers bargaining problems arising from a class of economic environments. These problems are characterized by being star-shaped. Convex or comprehensive bargaining problems are star-shaped but not conversely. We completely characterize single-valued solutions satisfying the Nash axioms on the class of star-shaped bargaining problems. For the case with two players, we show that there are two and only two solutions, with each being a selection of Nash product maximizers in favor of a given player. We design a non-cooperative extensive-form game to implement these solutions. We extend our analysis to allow for asymmetries and for more than two players. Finally, we discuss applications of our results to repeated oligopoly games.
Discriminatory Information Disclosure
Hao Li and Xianwen Shi
We consider a price discrimination problem in which a seller has a single object for sale to a potential buyer. At the time of contracting, the buyer's private type is his incomplete private information about his value, and the seller can disclose, without observing, additional private information to the buyer that is informative about his value and is correlated to his private type. In both discrete-type and continuous-type settings, we show that, under general conditions, discriminatory information disclosure dominates full information disclosure in terms of the seller's revenue. A methodological contribution of our analysis is that the orthogonal decomposition technique, an important tool in dynamic mechanism design, should be used with caution when information disclosure is part of the design.
Network effects in oligopolistic markets
Rabah Amir
This talk will deal with a general analysis of oligopolistic markets with demand-side network externalities in an industry with a homogeneous good and perfect compatibility. The solution concept of rational expectations Cournot equilibrium is contrasted with the standard Cournot equilibrium concept. The notion of industry viability is precisely modeled and shown to potentially fail under general conditions. Viability is always enhanced by having more firms in the market and/or by technological improvements. We also characterize the effects of market structure on industry performance, with an emphasis on departures from standard markets. As per-firm profits need not be monotonic in the number of competitors, we revisit the concept of free entry equilibrium for network industries by using a refinement of Nash Equilibrium in firms' entry decisions. The approach relies on lattice-theoretic methods, which allow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided.
Cheap Talk, Round Numbers, and the Economics of
Negotiation
Matt Backus, Thomas Blake and Steven Tadelis
Can sellers credibly signal their private information to reduce frictions in negotiations? Guided by a simple cheap-talk model, we posit that impatient sellers use round numbers to signal their willingness to cut prices in order to sell faster, and test its implications using millions of online bargaining interactions. Items listed at multiples of $100 receive offers that are 5%-8% lower but that arrive 6-11 days sooner than listings at neighboring “precise" values, and are 3%-5% more likely to sell. Similar patterns in real estate transactions suggest that round-number signaling plays a broader role in negotiations.
