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ECO 3901

INDUSTRIAL ORGANIZATION II

 University of Toronto. Department of Economics

Fall 2022

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Instructor: Victor Aguirregabiria                        E-mail: victor.aguirregabiria@utoronto.ca

Office:  Dept. of Econ. Room 309                      Course website: https://q.utoronto.ca/courses/286576

Lectures (in person):   Tuesdays 11am to 1:00pm. Department of Economics (GE), Room 100.

Office Hours (in person): Thursdays 5:00-6:00pm. Department of Economics (GE), Room 309

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 A. COURSE DESCRIPTION

 This course deals with Empirical Industrial Organization. It covers topics related to econometric models and empirical applications of competition in industries. We study empirically the determinants of firms’ behaviour and market outcomes in the context of problems of market entry/exit, investment, innovation, product design, networks, matching, and natural resources. The course focuses on research papers using empirical static and dynamic games to investigate firms’ strategies and competition, and how firms’ information and beliefs play a fundamental role in competition and on market outcomes and welfare. The course emphasizes the importance of combining data, economic models, and appropriate identification strategies and econometric techniques to answer empirical questions in economics.

 

 B. MEETINGS

  • Lectures: Tuesdays from 11am to 1:00pm in Department of Economics (GE), Room 100.
  • Office Hours: Thursdays 5:00-6:00pm. Department of Economics (GE), Room 309.

  

C. EVALUATION

Your final grade will be based on the following requirements.

  • Problem set (50%). I will distribute the problem set online on Tuesday, October 25th. Your completed problem set is due on Tuesday, November 15th, via Quercus, before 11:59pm.
  • Final exam (50%). The final exam is a “Take Home Exam”. I will distribute the final exam on the last day of class on Tuesday, December 6th. Your completed exam is due on Friday, December 9th, via Quercus, before 11:59pm.

  

D. GENERAL REFERENCES

The following are general references which are useful for all the topics covered in this course.

  • Aguirregabiria, V. (2021): “Empirical Industrial Organization: Models, Methods and Applications,” Chapters 1 to 2 and 4 to 9.
  • Aguirregabiria, V., A. Collard-Wexler, and S. Ryan (2021): “Dynamic Games in Empirical Industrial Organization,” Handbook of Industrial Organization, Volume 4, Chapter 4, pp. 225-343.
  • Aguirregabiria, V., and A. Nevo (2013): “Recent developments in empirical IO: Dynamic demand and dynamic games,” Advances in Economics and Econometrics, 3, 53–122.
  • Berry, S., and G. Compiani (2021): “Empirical Models of Industry Dynamics with Endogenous Market Structure,” Annual Review of Economics, 13, 309–334.

 

E. OUTLINE AND REFERENCES

 Topics:

  1. Demand estimation
  2. Static price competition
  3. Static market entry
  4. Introduction to single-agent dynamic structural models in empirical IO
  5. Dynamic demand
  6. Dynamic pricing

 

Topic 1: Demand Estimation

  • Introduction
  • Demand systems in product space
  • Demand systems in characteristics space

Main references

  • Aguirregabiria (2021) – book: Chapter 2.
  • Berry, S. (1994): "Estimating Discrete Choice Models of Product Differentiation," RAND Journal of Economics, 25, 242-262.
  • Berry, S., J. Levinsohn and A. Pakes (1995): "Automobile Prices in Market Equilibrium," Econometrica, 60(4), 889-917.
  • Conlon, C., and J. Gortmake (2020): “Best practices for differentiated products demand estimation with PyBLP,” RAND Journal of Economics, 51(4), 1108–1161.
  • Koijen, R., and M. Yogo (2019): “A Demand System Approach to Asset Pricing,” Journal of Political Economy, 127(4), 1475-1515.
  • Nevo, A. (2011): “Empirical Models of Consumer Behavior,” Annual Review of Economics, 3, 51-75.

Additional references

  • Aguiar, L., and J. Waldfogel (2018): “Quality Predictability and the Welfare Benefits from New Products: Evidence from the Digitization of Recorded Music,” Journal of Political Economy, 126(2), 492-524.
  • Berry, S., J. Levinsohn and A. Pakes (2004): "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Vehicle Market," Journal of Political Economy, 112(1), 68-104.
  • Ito, K., and S. Zhang (2020): “Willingness to Pay for Clean Air: Evidence from Air Purifier Markets in China,” Journal of Political Economy, 128(5), 1627-1672.
  • McFadden, D. (1974): "Conditional Logit Analysis of Qualitative Choice Behavior," in P. Zarembka (ed.), Frontiers in Econometrics, 105-142, Academic Press. New York.
  • Pakes, A. (2010): "Alternative Models for Moment Inequalities, Econometrica, 78, 1783-1822.
  • Trajtenberg, M. (1989): “The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners,” Journal of Political Economy, 97, 444-79.

 

Topic 2: Static Price Competition

2.1. Bertrand Competition

2.2. Nevo (2001) on Cereals

2.3. Pass-through of taxes

2.4. Spatial price competition

Main references

  • Aguirregabiria (2021) – book: Chapter 4.
  • Bresnahan, T. (1982): “The Oligopoly Solution Concept is Identified,” Economics Letters, 10, 87-92.
  • Ellickson, P., P. Grieco, and O. Khvastunov (2020): “Measuring competition in spatial retail,” RAND Journal of Economics, 51, 189-232.
  • Hollenbeck, B., and K. Uetake (2021): “Taxation and market power in the legal marijuana industry,” RAND Journal of Economics, 52(3), 559–595.
  • Miravete, E., J. Thurk, and K. Seim (2018): “Market Power and the Laffer Curve,” Econometrica, 86 (5), 1651– 1687.
  • Nevo, A. (2001): "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, 69(2), 307-342.

Additional references

  • D’Haultfœuille, X., I. Durrmeyer, and P. Février (2019): “Automobile Prices in Market Equilibrium with Unobserved Price Discrimination,” Review of Economic Studies, 86(5), 1973–1998.
  • Luco, F., and G. Marshall (2020): “The Competitive Impact of Vertical Integration by Multiproduct Firms,” American Economic Review, 110 (7), 2041-2064.

 

Topic 3: Static Market Entry

3.1. Bresnahan and Reiss (JPE, 1991)

3.2. Empirical Models of Market Entry with Heterogeneous firms

3.3. Entry and Spatial Competition

3.4. Entry, endogenous selection, and price competition

Main references

  • Aguirregabiria (2021) – book: Chapter 5.
  • Berry, S. and E. Tamer (2007): "Identification in Models of Oligopoly Entry," in Advances in Economics and Econometrics: Theory and Applications, Ninth World Congress, vol. 2, R. Blundell, W.K. Newey and T. Persson, eds., Cambridge Univ. Press.
  • Bresnahan, T. and P. Reiss (1990): “Entry into Monopoly Markets,” Review of Economic Studies, 57, 531-553.
  • Bresnahan, T. and P. Reiss (1991): “Econometric Models of Discrete Games,” Journal of Econometrics, 48, 57-81.
  • Bresnahan, T. and P. Reiss (1991): “Entry and Competition in Concentrated Markets,” Journal of Political Economy, 95, 977-1009.
  • Ciliberto, F. and E. Tamer (2009): “Market Structure and Multiple Equilibria in Airline Markets,” Econometrica, 77(6), 1791-1828.
  • Li, S., J. Mazur, Y. Park, J. Roberts, A. Sweeting, and J. Zhang (2022): “Repositioning and market power after airline mergers,” RAND Journal of Economics, 166-199.
  • Seim, K. (2006): “An Empirical Model of Firm Entry with Endogenous Product-Type Choices,” RAND Journal of Economics, 37(3).
  • Tamer, E. (2003): “Incomplete Simultaneous Discrete Response Model with Multiple Equilibria,” Review of Economic Studies, 70(1), 147-165.

Additional references

  • Bajari, P., H. Hong, J. Krainer and D. Nekipelov (2007): “Estimating Static Models of Strategic Interactions,” Journal of Business & Economic Statistics, 28(4), 469-482.
  • Berry, S. (1992): “Estimation of a Model of Entry in the Airline Industry,” Econometrica , 60(4), 889-917.
  • Berry, S. and J. Waldfogel (2010): “Product Quality and Market Size,” Journal of Industrial Economics, 58(1), 1-31.
  • Ciliberto, F., C. Murry, and E. Tamer (2021): “Market Structure and Competition in Airline Markets,” Journal of Political Economy, 129, 2995-3038.
  • Ellickson, P., and S. Misra (2008): “Supermarket Pricing Strategies,” Marketing Science, 27(5), 811-828.
  • Jia, P. (2008): “What Happens when Wal-Mart comes to town? Empirical Analysis of the Discount Retailing Industry,” Econometrica.
  • Kuehn, J. (2018): “Spillovers from entry: the impact of bank branch network expansion,” RAND Journal of Economics, 49(4), 964-994.

 

Topic 4: Introduction to Single-Agent Dynamic Structural Models in Empirical IO

4.1. Introduction

4.2. Example 1: Demand of storable goods

4.3. Example 2: Demand of a new durable product

4.4. Example 3: Product repositioning in differentiated product markets

4.5. Example 4: Evaluating the effects of a policy change

4.6. Example 5: Explaining the cross-sectional dynamics of prices in a retail market

Main references

  • Aguirregabiria (2021) – book: Chapter 6.
  • Aguirregabiria, V. and P. Mira (2010): “Dynamic Discrete Choice Structural Models: A Survey,” Journal of Econometrics, 156(1), 38-67.
  • Rust, J. (1994): “Structural estimation of Markov decision processes,” in R. E. Engle and McFadden (eds.) Handbook of Econometrics Volume 4, North-Holland. Amsterdam.
  • Aguirregabiria, V. and P. Mira (2002): “Swapping the nested fixed point algorithm: A class of estimators for discrete Markov decision models,” Econometrica, 70, 1519-1543.
  • Arcidiacono, P. and R. Miller (2011): “CCP Estimation of Dynamic Discrete Choice Models with Unobserved Heterogeneity,” Econometrica, 79(6), 1823-1867.
  • Hotz, J., and R.A. Miller (1993): “Conditional choice probabilities and the estimation of dynamic models,” Review of Economic Studies, 60, 497-529.

Additional references

  • Aguirregabiria, V., and J. Suzuki (2014): “Identification and counterfactuals in dynamic models of market entry and exit,” Quantitative Marketing and Economics, 12 (3): 267–304.
  • Abbring, Jaap, and Øystein Daljord (2020): “Identifying the discount factor in dynamic discrete choice models,” Quantitative Economics, 11 (2): 471–501.
  • An, Y., Y. Hu, and R. Xiao (2021): “Dynamic decisions under subjective expectations: A structural analysis,” Journal of Econometrics, 222 (1): 645–675.
  • Buchholz, N., M. Shum, and H. Xu (2021): “Semiparametric estimation of dynamic discrete choice models,” Journal of Econometrics, 223 (2): 312–327.
  • Hu, Y., and M. Shum (2012): “Nonparametric identification of dynamic models with unobserved state variables,” Journal of Econometrics, 171 (1), 32–44.
  • Komarova, T., F. Sanches, D. Silva, and S. Srisuma (2018): “Joint analysis of the discount factor and payoff parameters in dynamic discrete choice models,” Quantitative Economics, 9 (3), 1153–1194.

 

Topic 5: Dynamic Demand

5.1. Introduction

5.2. Data and descriptive evidence

5.3. Dynamic Demand of Differentiated Storable Products

5.4. Dynamic Demand of Differentiated Durable Products

Main references

  • Aguirregabiria (2021) – book: Chapter 7.
  • Aguirregabiria, V. and A. Nevo (2013): "Recent Developments in Empirical IO:  Dynamic Demand and Dynamic Games,” in Advances in Economics and Econometrics, Volume 3, D. Acemoglu, M. Arellano, and E. Dekel (eds.)
  • Erdem, T., S. Imai and M. P. Keane (2003): "Brand and Quantity Choice Dynamics under Price Uncertainty," Quantitative Marketing and Economics, 1, 5-64.
  • Gowrisankaran, G. and M. Rysman (2012): “Dynamics of Consumer Demand for New Durable Goods,” Journal of Political Economy, 120, 1173-1219.
  • Hendel, I., and A. Nevo (2006): "Measuring the Implications of Sales and Consumer Inventory Behavior,” Econometrica, 74, 1637-1674.

Additional references

  • Aguirregabiria, V. (2022): “Dynamic demand for differentiated products with fixed-effects unobserved heterogeneity,” CEPR discussion paper.
  • Allcott, H., M. Gentzkow, and L. Song (2022): “Digital Addiction,” American Economic Review, 112 (7), 2424-2463.
  • Heiss, F., D. McFadden, J. Winter, A. Wuppermann, and B. Zhou (2021): “Inattention and Switching Costs as Sources of Inertia in Medicare Part D,” American Economic Review, 111 (9), 2737-2781.
  • Hendel, I., and A. Nevo (2013): “Intertemporal Price Discrimination in Storable Goods Markets,” American Economic Review, 103 (7), 2722-2751.

 

Topic 6: Dynamic Pricing

6.1. Introduction

6.2. Capacity dependent pricing

6.3. Intertemporal price discrimination

Main references

  • Aguirregabiria (2021) – book: Chapter 8-9.
  • Kano, K. (2013): “Menu costs and dynamic duopoly.” International Journal of Industrial Organization, 31 (1), 102–118.
  • Mysliwski, M., F. Sanches, D. Silva, and S. Srisuma (2020): “The Welfare Effects of Promotional Fees,” Technical report. CeMMAP Working Paper, CWP35/20.
  • Sweeting, A., J. Roberts, and C. Gedge (2020): “A model of dynamic limit pricing with an application to the airline industry,” Journal of Political Economy, 128 (3), 1148–1193.
  • Williams, K. (2022): “The Welfare Effects of Dynamic Pricing: Evidence From Airline Markets,” Econometrica, 90(2), 831-858.

Additional references

  • Aguirregabiria, Victor (1999): “The dynamics of markups and inventories in retailing firms,” The Review of Economic Studies, 66 (2): 275–308.
  • Braido, L., and B. Ledo (2018): “Dynamic price competition in auto insurance brokerage,” RAND Journal of Economics, 49(4), 914-935.
  • Byrne, D., and N. de Roos (2019): “Learning to Coordinate: A Study in Retail Gasoline,” American Economic Review, 109 (2), 591-619.
  • Slade, M. (1998): “Optimal pricing with costly adjustment: evidence from retail grocery prices,” The Review of Economic Studies, 65 (1), 87–107.

 

F. CLASS SCHEDULE

 WEEK- DATE                  TOPIC                 ____________________________               

Week 1: Sep. 13                 Topic 1: Demand estimation

Week 2: Sep. 20                  Topic 1: Demand estimation

Week 3: Sep. 27                  Topic 2: Static price competition

Week 4: Oct. 4                    Topic 2: Static price competition

Week 5: Oct. 11                  Topic 3: Static market entry

Week 6: Oct. 18                  Topic 3: Static market entry

Week 7: Oct. 25                  Topic 4: Introduction to single-agent dynamic structural models in empirical IO

Tuesday, Oct. 25: Problem set is handed-out

Week 8: Nov. 1                   Topic 4: Introduction to single-agent dynamic structural models in empirical IO

*** READING WEEK – November 7 to 11 – No classes ***

Week 9: Nov. 15                Topic 5: Dynamic demand

Tuesday, Nov. 15, Problem set is due

Week 10: Nov. 22              Topic 5: Dynamic demand

Week 11: Nov. 29              Topic 6: Dynamic pricing

Week 12: Dec. 6                Topic 6: Dynamic pricing

Final Exam is handed out on Tuesday, December 6.

Your completed exam is due on Friday, December 9.

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Course Summary:

Date Details Due