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.     

WHAT HAPPENS WHEN DEMAND IS ESTIMATED WITH A MISSPECIFIED MODEL?*

We conduct Monte Carlo experiments to investigate the biases of assuming a misspecified demand model. We study continuous models (linear, log‐linear and AIDS), and discrete choice models (logit) in the context of differentiated products and aggregate data. Estimating demand with the ‘wrong’ model yields varying degrees of bias in estimated elasticities, but the logit model can yield unbiased estimates for a certain size of the assumed market potential. Merger simulations confirm the key importance of market potential in logit estimation suggesting that a discrete choice model may be preferable even when the discreteness of the purchase decision is questionable.     

Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis

Government-guaranteed mortgage loans (GFRMs) and adjustable-rate mortgages (ARMs) were introduced to make payment to income (PTI) and loan-to-value (LTV) qualification conventions less restrictive. This paper analyzes the effect of GFRMs and ARMs on the demand for housing. Using a large national data set for the 1988 to 1989 period, we employ a two-stage procedure to estimate housing demand. In the first stage, a multinomial logit model estimates the probability of choosing an FRM, ARM or GFRM. Predicted values from the logit are used to construct user costs and estimate housing demand. Using the model estimates, we simulate demand under four different mortgage availability regimes: FRM, FRM and GFRM, FRM and ARM and all three. These simulations indicate that GFRMs, by relaxing LTV constraints, increase housing demand by approximately 6.2% relative to the FRM regime; the addition of ARMs, by relaxing both PTI and LTV constraints, raises demand by an additional 6%, for a total of 12.2% with inclusion of all alternatives.     

Transitions Out of Casual Employment: The Australian Experience

This paper uses longitudinal data to examine the extent to which casual employees, who account for almost 25 percent of all Australian employees, are able to access non‐casual jobs in the future, and to contrast their experiences with that of other labor market participants. A dynamic mixed multinomial logit model of labor market states is estimated which reveals high rates of mobility from casual employment into non‐casual employment. Among men, casual employees are found to be far more likely to make the transition into non‐casual employment than otherwise comparable unemployed job seekers. For women, however, this is not the case.     

Beyond Illinois Brick: The Law and Economics of Cost Pass-Through in the ADM Price Fixing Case

This article reviews the legal standards and theeconomics of pass-through to indirect purchasers andillustrates these principles with a case involving ADMin the market for high fructose corn syrup (HFCS).With three assumptions about production technologies,buyers of HFCS experience a 100 percent pass throughof the direct overcharge. The extent of pass throughof the increase by buyers is shown to dependcritically upon the market structure of the purchasingindustry and the shape of the retail demand curve. Flexible demand functional forms are needed to avoidconstraining estimated pass through rates.     

Market Power and Joint Dominance in U.K. Brewing

Market power and joint dominance are examined in U.K. brewing. I assess unilateral and coordinated effects, where the latter is equated with joint dominance, and show how one can distinguish between the two econometrically. The application makes use of two demand equations: the nested logit of McFadden [1978a] and the distance-metric of Pinkse, Slade, and Brett [2002] . The two equations yield very different predictions concerning elasticities and markups. Nevertheless, although there is evidence of market power using either demand model, that power is due entirely to unilateral effects. In other words, neither model uncovers evidence of coordinated effects (tacit collusion).     

MARKET STRUCTURE AND PRICING STRATEGY OF CHINA'S AUTOMOBILE INDUSTRY*

In this study, using market‐level data on quantities, prices' and automobile characteristics from 1995 to 2001, we conduct a market analysis of the Chinese automobile industry under imperfect competition. On the demand side, we apply a nested multinomial logit model to the national market share data in order to ascertain the demand features of China's automobile market. On the supply side, we assume Bertrand behavior to uncover the markups set by automobile manufacturers. Our empirical results suggest that some large automobile manufacturers set high markups, indicating their strong market power in China's automobile market. However, their declining markups in the late 1990's imply a reduction in market control by the major producers.     

The impact on broadband access to the Internet of the dual ownership of telephone and cable networks

In Portugal, until recently, the telecommunications incumbent offered broadband access to the Internet, both through digital subscriber line and cable modem. We estimate the impact on broadband access to the Internet of the structural separation of these two businesses. Using a panel of consumer level data and a random effects mixed logit model, we estimate the price elasticities of demand and the marginal costs of broadband access to the Internet. Based on these estimates, we simulate the effect of structural separation on prices and social welfare. Our estimates indicate that structural separation would cause a substantial welfare increase. These results raise questions about the policy of some countries of allowing the dual ownership of telephone and cable networks.     

ASSESSING THE IMPACT OF RETAILER STORE BRAND PRESENCE ON MANUFACTURER BRANDS IN AN EQUILIBRIUM FRAMEWORK*

This article assesses the impact of retailer store brand products on manufacturer brand prices, profitability and consumer welfare in Boston's white fluid milk market. Estimates from a random coefficients logit demand model are used to specify and test a set of pricing games. Under the selected model, milk manufacturers are Stackelberg leaders to retailers, and store brand milks are procured by retailers at cost. The model is used to investigate counterfactual markets without retailer store brand milks. Counterfactual Simulation results indicate that store brands increase channel profits, retailer profits and consumer welfare, while having mixed effects on equilibrium retail prices.     

Forecasting New Product Adoption with Probabilistic Neural Networks

Forecasting the adoption of innovative products is an important managerial task. In this paper we examine the usefulness of a probabilistic neural network (PNN) algorithm for forecasting new product adoption. We compare this approach with one widely accepted forecasting procedure, the binomial logit model, and two other neural network algorithms: a feed‐forward neural network model estimated with backward propagation (NNBP), and a feed‐forward neural network model estimated with a genetic algorithm (NNGA). To test the relative forecasting accuracy of these algorithms, we examine the first‐time adoption of DVD players. Our analysis is based on longitudinal consumer data collected between March 2000 and March 2001. We find that the PNN algorithm significantly outperforms the logit model and the two remaining neural network algorithms.     

U.S. Monetary Policy Surprises and Mortgage Rates

This article examines how the U.S. monetary policy surprises impact the mortgage rates in the nation and across five regions from 1990 to 2008. Regression analysis based on bootstrapping shows that surprises in the target federal funds rate (the target factor) have a significantly positive impact on the 1‐year adjustable‐rate mortgage (ARM) rate within the week of the Federal Open Market Committee announcements and the positive impact lasts up to 1 week after the announcements. Surprises in the future direction of the Federal Reserve monetary policy (the path factor) have significantly positive impacts on both the 1‐year ARM rate and the 30‐year fixed mortgage rates in the first week after the announcement. Furthermore, the responses of mortgage rates are asymmetric and affected by the size of monetary policy surprises, the stage of the business cycle and whether the monetary policy is tightening or loosening. There also exists heterogeneity in the mortgage rate pass‐through process across regions and monetary policy surprises have differential impacts on the regional mortgage rates. The cross‐region variations are mainly correlated with the regional housing market conditions, such as home vacancy and rental vacancy rates.     

Measuring Welfare from Ambulatory Surgery Centers: A Spatial Analysis of Demand for Healthcare Facilities

This paper studies competition between healthcare facilities, particularly between hospitals and ambulatory surgery centers (ASC's), in the market for outpatient surgery. The goal is to answer questions about the existence and magnitude of welfare gains earned from the use of ASC's. These questions are relevant to current policy debates about the usefulness of ASC's. I calculate welfare by specifying a multinomial logit model of consumer demand for healthcare facilities, and estimating structural elements of demand functions. Total elimination of ASC's results in between 10.2 and 28.1 minutes of welfare loss per patient surgery.     

Differences in consumer loyalty and willingness to pay for service attributes across digital channels: A study of the Japanese digital content market

In this paper, the impact that the Internet access device has on consumer loyalty behaviors relative to Internet content was explored. To do so, a mixed logit demand function for mobile and PC subscribers to digital content was estimated and consumers’ willingness to pay for attributes related to specific content providers and their levels of service quality were measured. It was found that significant differences in loyalty and willingness to pay for service quality factors existed between mobile and PC Internet content subscribers, suggesting that while content may be developed as device independent, consumers interact differently with similar Internet content accessed through different devices. Specifically, the willingness to pay for more robust and more frequently updated content was on average higher in the mobile segment than in the PC segment. In addition, the overall switching costs consumers attributed to specific content providers via the mobile channel were far higher than through the PC channel. These results suggest that more robust content management systems must be developed to accommodate for such differences in consumer behavior.     

Shock Value: Bill Smoothing and Energy Price Pass‐Through

Energy prices are volatile, affect every consumer and industry in the economy, and are impacted by regulations including gas taxes and carbon pricing. Like the pass‐through literature in general, the growing energy pass‐through literature focuses on marginal prices. However, multi‐part pricing is common in energy retail pricing. I examine the retail natural gas market, showing that while marginal prices exhibit full or nearly full pass‐through, fixed fees exhibit negative pass‐through. This is consistent with the stated desire by utilities and regulators to prevent ‘bill shock.’ I discuss implications for pass‐through estimation and for proposed alternative pricing structures for regulated utilities.     

A price leadership model for merger analysis

We provide a methodology to simulate the coordinated effects of a proposed merger using data commonly available to antitrust authorities. The model follows the price leadership structure in Miller, Sheu, and Weinberg (2021) in an environment with logit or nested logit demand. The model calibration leverages profit margin data to separately identify the extent of coordinated pricing from marginal costs. Using this framework, we demonstrate how mergers can shift incentive compatibility constraints and thereby lead to adverse competitive effects. The incentive compatibility constraints also affect the extent to which cost efficiencies and divestitures mitigate competitive harms.     

Non-Exclusive Dealing with Retailer Differentiation and Market Penetration

Retailer differentiation exists in most industries and gives manufacturers an incentive to contract with different retailers to penetrate a market. This paper analyzes the impact of this penetration effect on vertical contract exclusivity in an oligopolistic model with differentiated retailers. In the model, manufacturers endogenously choose contract types and negotiate with retailers on wholesale prices. We show that, when the penetration effect is sufficiently strong, non-exclusive contracts lead to higher profits for the manufacturers and retailers. The model is applied to an example with logit demand, which shows that both manufacturers choosing the non-exclusive contracts is a dominant-strategy Nash equilibrium even though they may both be better off under exclusive contracts when the products have high quality or low costs.     

Pass‐Through and the Prediction of Merger Price Effects

We use Monte Carlo experiments to study how pass‐through can improve merger price predictions, focusing on the first order approximation (FOA) proposed in Jaffe and Weyl [ 2013 ]. FOA addresses the functional form misspecification that can exist in standard merger simulations. We find that the predictions of FOA are tightly distributed around the true price effects if pass‐through is precise, but that measurement error in pass‐through diminishes accuracy. As a comparison to FOA, we also study a methodology that uses pass‐through to select among functional forms for use in simulation. This alternative also increases accuracy relative to standard merger simulation and proves more robust to measurement error.     

Quality certification vs. product traceability: Consumer preferences for informational attributes of pork in Georgia

Consumer willingness-to-pay for informational attributes of food products is important information for food producers and supply chain participants and policy makers. We examine consumer demand in the pork sector of the Republic of Georgia. Results of conditional and mixed logit estimation, conducted on choice experiment data, reveal that Georgian consumers treat quality certification and product traceability attributes as substitutes. We also find that producers and other supply chain participants should be concerned primarily with maintaining the appearance of pork products. Retailer specific factors such as location and type of outlet can also substitute for product traceability. Store location and product appearance, however, are complementary attributes. In light of the recent turbulence in Georgia these consideration may be of paramount importance as participants in the supply chain seek to rebuild damaged infrastructure.