BIASES IN STATIC OLIGOPOLY MODELS? EVIDENCE FROM THE CALIFORNIA ELECTRICITY MARKET*

Estimating market power is often complicated by a lack of reliable marginal cost data. A number of empirical studies identify industry competition and marginal cost levels by estimating the firms' first order condition within a conjectural variations framework. Few studies, however, have analyzed the accuracy of this technique. In this paper, we use direct measures of marginal cost for the California electricity market to measure the extent to which estimated mark‐ups and marginal costs are biased. Our results suggest that the technique poorly estimates mark‐ups and the sensitivity of marginal cost to cost shifters.     

Why Do Vacant Houses Sell for Less: Holding Costs,Bargaining Power or Stigma?

This article introduces Nash bargaining into a search model to identify various channels through which vacancy affects selling price and liquidity in the resale market for houses. The model shows the various vacancy effects in the form of greater seller holding cost, lower seller bargaining power and unobserved negative attributes or stigma. We use a 20‐year data series on house transactions to test for these effects in a simultaneous model of price and liquidity, using the long data series to allow for variation across market phases. The robust vacancy effects on price and liquidity across all market phases primarily reflect greater seller holding cost and diminished bargaining power. Repeatedly, vacant houses also exhibit significant stigma effects in the rising market but not in stable or declining market phases. At the same time, vacant houses enjoy stronger shopping externality effects from surrounding houses for sale than do their occupied counterparts.     

Back‐to‐Front Down Under? Part‐Time/Full‐Time Wage Differentials in Australia

We investigate part‐time full‐time hourly wage gaps using panel data from the first four waves of the new Household, Income and Labour Dynamics in Australia Survey. We find that, once unobserved individual heterogeneity has been taken into account, part‐time men and women typically earn an hourly pay premium. This premium varies with casual employment status, but is always positive. We advance some hypotheses as to why there is a part‐time pay advantage in Australia.     

ENDOGENOUS COSTS AND PRICE‐COST MARGINS: AN APPLICATION TO THE EUROPEAN AIRLINE INDUSTRY*

This paper allows for endogenous costs in the estimation of price cost margins. In particular, we estimate price‐cost margins when firms bargain over wages. We extent the standard two‐equation set‐up (demand and first‐order condition in the product market) to include a third equation, which is derived from bargaining over wages. In this way, price‐cost margins are determined by wages and vice versa. We implement the model using data for eight European airlines from 1976–1994, and show that the treatment of endogenous costs has important implications for the measurement of price‐cost margins and the assessment of market power. Our main result is that observed prices in Europe are virtually identical to monopoly prices, even though observed margins are consistent with Nash behavior. Apparently, costs had been inflated to the point that the European consumers were faced with a de facto monopoly prices.     

Which Tangible and Intangible Assets Matter for Innovation Speed in Start‐Ups?*

The launch of the first product is an important event for start‐ups, because it takes the new venture closer to growth, profitability, and financial independence. The new product development (NPD) literature mainly focuses its attention on NPD processes in large firms. In this article insights on the antecedents on innovation speed in large firms are combined with resource‐based theory and insights from the entrepreneurship literature to develop hypotheses concerning the antecedents of innovation speed in start‐ups. In particular, tangible assets such as starting capital and the stage of product development at founding and intangible assets such as team tenure, experience of founders, and collaborations with third parties are considered as important antecedents for innovation speed in start‐ups. A unique data set on research‐based start‐ups (RBSUs) was collected, and event‐history analyses were used to test the hypotheses. The rich qualitative data on the individual companies are used to explain the statistical findings. This article shows that RBSUs differ significantly in their starting conditions. The impact of starting conditions on innovation speed differs between software and other companies. Although intuition suggests that start‐ups that are further in the product development cycle at founding launch their first product faster, our data indicate that software firms starting with a beta version experience slower product launch. The amount of initial financing has no significant effect on innovation speed. Next, it is shown that team tenure and experience of founders leads to faster product launch. Contrary to expectations, alliances with other firms do not significantly affect innovation speed, and collaborations with universities are associated with longer development times.     

A Model of Time‐on‐Market and Real Estate Price Under Sequential Search with Recall

This article develops a model and provides a closed‐form formula to uncover the theoretical relationship between real estate price and time on market (TOM). Our model shows a nonlinear positive price‐TOM relationship, and it identifies three economic factors that affect the impact of TOM on sale price. We demonstrate that conventional metrics for real estate return and risk, which are borrowed in a naïve fashion from finance theory, do not account for marketing period risk and tend to overestimate real estate returns and underestimate real estate risks. Our model provides a simple way to correct such bias. This theory helps to explain the apparent “risk‐premium puzzle” in real estate.     

Estimating Loan‐to‐Value Distributions

We estimate a model of house prices, combined loan‐to‐value ratios (CLTVs) and trade and foreclosure behavior. House prices are only observed for traded properties and trades are endogenous, creating sample‐selection problems for existing approaches to estimating CLTVs. We use a Bayesian filtering procedure to recover the price path for individual properties and produce selection‐corrected estimates of historical CLTV distributions. Estimating our model with transactions of residential properties in Alameda, California, we find that 35% of single‐family homes are underwater, compared to 19% estimated by existing approaches. Our results reduce the index revision problem and have applications for pricing mortgage‐backed securities.     

CUT‐THROAT FRINGE COMPETITION IN AN EMERGING COUNTRY MARKET: TAX EVASION OR THE ABSENCE OF MARKET POWER?*

Brazil's established soft‐drink firms recently lost ground to multiple low‐price entrants, with small‐scale operations and minimal advertising. While incumbents attributed such undercutting to entrants' lower costs from non‐compliance with the law, ‘generics’ counterargued that incumbents' high prices stemmed from unilateral market power rather than cost heterogeneity. By estimating a structural model, I can single‐handedly explain established brands' high prices through low equilibrium price elasticities of demand. Tax evasion in the fringe, while plausible, appears to be offset by higher procurement costs or less efficient scale. More generally, a competitive informal sector can alleviate the allocative distortions in certain concentrated industries.     

Wage Effects of On‐the‐Job Training: A Meta‐Analysis

A meta‐analysis is used to study the average wage effects of on‐the‐job training. This study shows that the average reported wage effect of on‐the‐job training, corrected for publication bias, is 2.6 per cent per course. The analyses reveal a substantial heterogeneity between training courses, while wage effects reported in studies based on instrumental variables and panel estimators are substantially lower than estimates based on techniques that do not correct for selectivity issues. Appropriate methodology and the quality of the data turn out to be crucial to determine the wage returns.     

Cross‐Border Mergers and Market Segmentation

This paper shows that cross‐border mergers are more likely to occur in industries which serve multiple segmented markets rather than a single integrated market, given that cost functions are strictly convex. The product price rises in the market where an acquisition is made but falls in the other, decreasing the acquisition price of other firms (in contrast to the results in the existing merger literature on integrated markets). Although the sum of consumer surplus across the countries may rise in response to a given acquisition, one of the countries gains at the expense of the other.     

On the Nature of Self‐Assessed House Prices

In models of optimal household behavior, the value of housing affects consumption, savings and other variables. But homeowners do not know the value of their house for certain until they sell, so while they live in their home they must rely on local house price data to estimate its value. This article uses data from the recent housing boom and bust to demonstrate that changes in households' self‐assessed home values are strongly consistent with the predictions of a model in which households optimally filter available house price data. Specifically, we show that self‐assessed house prices did not increase as rapidly as house price indexes during the boom and did not decline as severely during the bust. A Kalman filter model nearly perfectly replicates these data. These findings have direct implications for economists studying asking prices during booms and busts, optimal default decisions and other key housing‐related phenomena.     

Switching Costs in Two‐Sided Markets

In many markets, there are switching costs and network effects. Yet the literature generally deals with them separately. This paper bridges the gap by analyzing their interaction (or ‘indirect bargain’) in a dynamic two‐sided market. It shows that in the symmetric equilibrium, the classic result that the first‐period price is U‐shaped in switching costs does not emerge, but instead switching costs always intensify the first‐period price competition. Moreover, an increase in switching costs on one side decreases the first‐period price on the other side. Policies that ignore these effects may overestimate the extent to which switching costs can reduce welfare.     

Estimating store choices with endogenous shopping bundles and price uncertainty

We develop a structural model of retail store choices for which household shopping plans and price beliefs are endogenously determined. In our model individual households make their store choices based on their expected basket costs, which are determined by their shopping plans and price beliefs. Previous studies use realized purchases as a proxy for unobserved shopping lists and also assume homogenous price expectation across all households over the entire sample period. Our approach improves the measures of expected basket costs by estimating intended shopping lists of households using a duration model and also by constructing household-, time-, store-, and goods-specific price expectations. In our empirical application using a scanner data set, we find that the store choices become significantly more elastic to prices when the correction is applied.     

Third‐Degree Price Discrimination and Consumer Surplus

This paper considers the effects of monopoly third‐degree price discrimination on aggregate consumer surplus. Discrimination is likely to reduce surplus (relative to that obtained with a uniform price), but surplus can rise under reasonable conditions. If the ratio of the pass‐through coefficient to the price elasticity at the uniform price is higher in the market with the higher price elasticity then surplus is larger with discrimination (for a large set of demand functions). The relatively high pass‐through coefficient implies a large price reduction in this market. With logit demand functions surplus is higher with discrimination if pass‐through is above 0.5.     

Imports as Product and Labour Market Discipline

This article tests the pro‐competitive effect of trade in the product and labour markets of UK manufacturing sectors between 1988 and 2003 using a two‐stage estimation procedure. In the first stage, we use data on 11,799 firms from 20 manufacturing sectors to simultaneously estimate mark‐up and workers' bargaining power parameters according to sector, firm size and period. We find a significant drop in both the mark‐up and the workers' bargaining power in the mid‐1990s. In the second stage, we relate our parameters of interest to trade variables. Our results show that imports from developed countries have significantly contributed to the decrease in both mark‐ups and workers' bargaining power.     

Unobserved Worker Quality and Inter-Industry Wage Differentials*

This study quantitatively assesses two alternative explanations for inter-industry wage differentials: worker heterogeneity in the form of unobserved quality and firm heterogeneity in the form of a firm's willingness to pay (WTP) for workers' productive attributes. Building on hedonic models of differentiated product demand, we develop an empirical hedonic model of labor demand and apply a two-stage nonparametric procedure to recover worker and firm heterogeneities. In the first stage we recover unmeasured worker quality by estimating market-specific hedonic wage functions nonparametrically. In the second stage we infer each firm's WTP parameters for worker attributes by using first-order conditions from the demand model. We apply our approach to quantify inter-industry wage differentials on the basis of individual data from the NLSY79 and find that worker quality accounts for approximately two thirds of the inter-industry wage differentials.     

High‐end Encroachment Patterns of New Products

Previous research describes two key ways in which a new product may encroach on an existing market. In high‐end encroachment, the new product first sells to high‐end customers and then diffuses down‐market; in low‐end encroachment, the new product enters at the low end and encroaches up‐market. This paper focuses on high‐end encroachment, which can further be broken down into three subtypes, which are called the immediate, the new‐attribute, and the new‐market forms of high‐end encroachment. This paper makes three key contributions. First, it provides a sound theoretical underpinning for the three distinct subtypes of high‐end encroachment—a linear reservation price curve model (LRPCM) is used to establish this theoretical foundation. Second, this paper delineates and illustrates four different ways the high‐end new‐market diffusion process may progress over time. These four are: (1) the traditional type, where the new product diffuses relatively slowly and methodically over time; (2) the fad scenario, where the new product opens a new market but then fizzles out after a relatively short period of high sales; (3) the rapid diffusion outcome, where the new product opens a new market and then rapidly diffuses down‐market; and (4) the prolonged‐niche type, where the new product purposefully restricts itself to its own niche rather than diffusing down‐market. The third key contribution of this paper is to offer managerial insights into the new‐market high‐end encroachment process by discussing two short case studies; namely, a retrospective look at the introduction of the iPhone, and a prospective look at Tesla's challenges in growing the market for its electric car. With regard to the iPhone, it helps explain why Apple precipitously dropped the price of the iPhone by one third only 68 days after its introduction. With regard to Tesla, it discusses how Tesla must leverage the revenues that stem from its current high‐end pricing power. Tesla must be able to progress down the learning curve fast enough so that it can create a virtuous cycle; a cycle in which cost reductions and technology improvements lead to price reductions and increased sales, which in turn lead to further cost reductions. At the conclusion of the paper, a step‐by‐step approach is offered to aid in determining which type of encroachment should be pursued and in determining how the encroachment pattern will eventually develop. The encroachment framework and the step‐by‐step approach are intended to help managers better assess and mitigate the risks inherent with a new product introduction.     

The Long‐Run Relationship Between House Prices and Rents

I use standard error‐correction models and long‐horizon regression models to examine how well the rent–price ratio predicts future changes in real rents and prices. I find evidence that the rent–price ratio helps predict changes in real prices over 4‐year periods, but that the rent–price ratio has little predictive power for changes in real rents over the same period. I show that a long‐horizon regression approach can yield biased estimates of the degree of error correction if prices have a unit root but do not follow a random walk, and I construct bootstrap distributions to conduct appropriate inference in the presence of this bias. The results lend empirical support to the view that the rent–price ratio is an indicator of valuation in the housing market.     

Acquisition or greenfield start‐up? Institutional,cultural and transaction cost influences

In this paper, we develop and test a model of diversification mode choice (how firms decide between acquisitions and greenfield start‐up ventures) which includes institutional, cultural, and transaction cost variables. Using a sample of Japanese firms entering western Europe, our results show the model correctly predicts over eighty‐seven percent of the mode choices. Thus, we provide strong initial evidence to support using institutional, cultural and transaction cost variables to predict firms’ choices between acquisitions and greenfield start‐ups in international expansion. Our findings also suggest that organizations which have developed strong intangible capabilities may be able to more readily leverage these capabilities through greenfield start‐ups. Copyright © 2000 John Wiley & Sons, Ltd.