Differentiated Products Industries Research Articles

The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model

We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus. We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi-experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not. We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria. Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 35 percent and lowers producer profits by about 20 percent. Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level. This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular.

The Welfare Consequences of ATM Surcharges: Evidence from a Structural Entry Model

We estimate a structural model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on ATM entry and consumer and producer surplus. We estimate the model using data on firm and consumer locations, and identify the parameters of the model by exploiting a source of local quasi-experimental variation, that the state of Iowa banned ATM surcharges during our sample period while the state of Minnesota did not. We develop new econometric methods that allow us to estimate the parameters of equilibrium models without computing equilibria. Monte Carlo evidence shows that the estimator performs well. We find that a ban on ATM surcharges reduces ATM entry by about 12 percent, increases consumer welfare by about 10 percent and lowers producer profits by about 10 percent. Total welfare remains about the same under regimes that permit or prohibit ATM surcharges and is about 17 percent lower than the surplus maximizing level. This paper can help shed light on the theoretically ambiguous implications of free entry on consumer and producer welfare for differentiated products industries in general and ATMs in particular.

Competitive analysis using a flexible demand specification

Econometric methods can be helpful when one is trying to understand the nature of competition between products in differentiated products industries, an issue that arises in many competition policy contexts. However, misspecification of the consumer demand system can result in biased econometric results and misleading conclusions. We discuss some considerations that go into choosing a demand system specification and suggest that a ‘flexible functional form’ be used. This approach avoids placing restrictions on the demand elasticities. We identify and discuss other issues that arise in the estimation of demand systems. We conclude with an empirical example concerning the calculation of lost profits damages in a patent infringement case. This example demonstrates how using a flexible functional form leads to a substantially more reliable damages calculation than using the particular restrictive functional form that is commonly used to calculate lost profits damages in patent litigation.

EU Merger Control in Differentiated Product Industries

EU Merger Control Regulation No 4064/89 tended to rely on a dominance test, based on the market share of undertakings, to indicate the level and potential changes in market power. The use of such in differentiated product industries is questionable. New EC Merger Regulation No 139/2004 introduces a substantive test to ensure that all post-merger scenarios posing a threat to competition, even amongst small undertakings, are detected. We propose the use of a structural approach to undertake a substantive test. We illustrate our point over 28 periods, 178 products (13 companies), for Retail Carbonated Soft Drinks. We estimate company (product) mark-ups using a simple Nested Logit model, Berry (1994) and a more sophisticated model, Berry, Levinsohn and Pakes (1995). While the dominance test may fail to identify damaging mergers in differentiated products industries, this technique will not.

Firm Size and Market Power in Carbonated Soft Drinks

Sutton (1998) offers us a simple way to model firm size distributions across differentiated products industries. We analyse the implications of this approach for company markups using a structural model for a specific industry. We incorporate the complexities of multi-product (brand) companies operating with different (strategic) configurations of product characteristics and stores to estimate brand markups, using Irish AC Nielsen retail data for Carbonated Soft Drinks. As a second step we estimate that market power does not increase in companies with higher market share, controlling for other factors. This challenges a traditional mind-set.

An econometric analysis of trade diversion under NAFTA

We provide an econometric analysis of whether or not the tariff preferences extended to Canada and Mexico under the North American Free Trade Agreement (NAFTA) may have resulted in trade diversion. A review of previous studies, both descriptive and econometric, suggests that trade diversion has occurred especially as evidenced by Mexico’s increased shares of US imports apparently at the expense of several Asian countries. We use a conceptual framework based on a partial-equilibrium model of differentiated product industries under monopolistic competition for many countries. The model is implemented empirically using a fixed-effect panel analysis of US imports at the Harmonized System (HS) 2-digit level for the period, 1992–1998. Of the 70 sets of regressions that were run, the coefficients of the tariff rates were statistically significant in 15 cases. The strongest evidence of trade diversion was found mainly for US imports of textile and apparel products. We also estimated regressions for selected commodities at the HS 4-digit level. The results suggest trade diversion for textiles, apparel, and some footwear products but not for trade in motor cars and vehicles and television receivers, which may have been more influenced by changes in foreign direct investment and outsourcing rather than tariff preferences.

Are multinationality and diversification complementary or substitute strategies?: An empirical analysis on European leading firms

This paper models the multinationality and diversification of firms jointly. It applies a new typology, distinguishing diversification at home and abroad (multinationality in primary/secondary industries), to the corporate structures of a sample of leading EU manufacturing firms. This provides the framework for a sequential stochastic model of firms’ decision making. Results suggest that multinationality and diversification are, in general, complementary strategies. In differentiated-product industries, this implies that proprietary assets are a public good within the firm. In homogeneous-product industries, however, there is some evidence of substitutability, in that the two strategies may be alternative routes for escaping constraints on growth.

Identification of the oligopoly solution concept in a differentiated-products industry

A central part of the “new empirical industrial organization” has been the study of market power in homogenous-product industries. This paper discusses extension of these methods to differentiated-products industries. The requirements for identification of conjectural variation parameters are shown to be hard to satisfy in practice. An alternative menu-approach is discussed.

An Empirical Model of Pricing, Market Share and Market Conduct: An Application to Import Competition in US Manufacturing

In this paper we set out a new empirical model of pricing, market share and market conduct for a differentiated products industry. The model exhibits the property of a variable elasticity of firm demand: as a firm’s market share increases, it faces increasingly inelastic demand. Price–cost margins therefore increase as market share rises. Market conduct is described using conjectural variations. The model has a flexible functional formulation and is particularly suitable for time series estimation. We illustrate its use by investigating the structure of market competition in pricing strategies between domestic and importing firms in different sectors of US industry during the 1980s.

Regulation of Duopoly: Managed Competition vs Regulated Monopolies

This paper discusses the regulation of oligopolistic differentiated product industries. The regulator can control the prices, and impose quantity restrictions, but cannot control effectively the quality choices of the firms. We inquire about the optimal choice of regulatory regime--whether and under what conditions managed competition or segmentation of the market between regulated monopolies achieves better results. In the spatial duopoly model analyzed here, unhindered competition will generally result in an inefficient allocation. When the regulator knows the technologies, optimal managed competition results in distortions of the quality choice, but an optimal regulated monopolies regime acheives the first best outcome. When the regulator is uncertain about the technologies neither of these methods will yield the first best outcome. The regulated monopolies regime still tends to produce better quality choices, but managed competition tends to be more effective at extracting rents from the firms. The overall comparison depends on some finer details of the environment.

Estimating demand elasticities in a differentiated product industry: The personal computer market

Supply and demand functions are typically estimated using uniform prices and quantities across products, but where products are heterogeneous, quality differences should be considered explicitly. This study employs hedonic coefficients to estimate price elasticities for differentiated products in the market for personal computers. The methodology allows for the estimation of varying demand elasticities among models. Instead of restricting market competition to the two nearest models, as is typically done in the differentiated-product literature, cross-elasticities of substitution have been allowed to decline continuously with distance between models in quality space. Estimated demand elasticities are consistent with observed changes in market structure. Entrant firms and new models face more elastic demand.

The Use of the Logit Model in Applied Industrial Organization

Qualitative choice models, such as the logit model, can capture important firm and product asymmetries. This paper surveys use of the logit model in industrial organization, with special focus on its application to merger analysis. The basic model and its motivation are reviewed, as is its estimation. Discussed in some detail is the use of the logit model to predict the price and welfare effects of horizontal mergers in differentiated products industries. Simulation using a qualitative choice model is argued to be far superior to traditional structural analysis. Logit merger simulations have the particular virtues of low informational and computational burdens and the use of the logit model can be motivated as reflecting a diffuse prior on the structure of demand.

Model Entry and Exit in a Differentiated-Product Industry: The Personal Computer Market

Entry and exit literature focuses almost exclusively on firm-level decisions, leaving out an important aspect of firm behavior: whether to introduce new models while the firm produces similar goods, and where to locate them in the existing product space, taking into account own models and the possibility of new entry. This paper analyzes model entry and exit decisions in the case of the personal computer market. Differences in new model spatial location between incumbents and entrants are found, while both model over- pricing and firm reputation are found to be significant in the probability of model's exit estimation.

The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy

Using the logit model, and assuming Nash equilibrium in prices and constant marginal cost, it is straightforward to estimate critical demand parameters and simulate mergers. In this way, the logit model can be used to predict the price and welfare effects of mergers. We explore the effects of mergers in this model both analytically and through simulations of hypothetical mergers of U.S. long distance carriers. We find that only mergers involving AT&T would be likely to lessen welfare significantly. Simulations such as these provide a firmer foundation for antitrust policy than traditional structural indicators. The logit model is not always appropriate, but the basic methodology can be adapted to other demand systems. Copyright 1994 by Oxford University Press.

On monopoly power in a differentiated product industry

This paper develops an increasing monopoly model based on the notion that consumers buying a particular brand have varying preferences for the brand. The model predicts a monopoly-increasing effect in certain types of goods that might be termed “reputation goods”. Examples of “reputation goods” are primary medical care, prescription drugs, and personal legal services. Entry may be accompanied by a rise in price in these types of goods because following entry preferred brands mostly have loyal customers with relatively inelastic demands.

Conjectural variations and market performance in a differentiated product industry

Conjectural variations and market performance in a differentiated product industry

The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade

A general equilibrium model of world trade with two differentiated-product industries and two factors is developed to illustrate how the gravity equation, including exporter and importer populations, as well as incomes, fits with the Heckscher-Ohlin model of interindustry trade and the Helpman-Krugman-Markusen models of intraindustry trade. The study extends the microeconomic foundations for a generalized gravity equation in Bergstrand (1985) to incorporate relative factor-endowment differences and nonhomothetic tastes. Empirical estimates of this generalized gravity equation for single-digit Standard Industrial Trade Classification industry groups yield plausible inferences of their capital-labor intensities. Copyright 1989 by MIT Press.

Différenciation des produits et structures de marché: Un tour d'horizon

This paper is a survey of some recent theoretical models related to the endogeneous determination of market structure in differentiated products industries. Usually, market structure is explained mainly by supply side characteristics such as economies of scale, econo mies of scope and sunk costs. These variables remain however exoge neous, which is incompatible with long term competition. Here, this view is contrasted with the one which emphasizes three aspects: the nature of product differentiation, the process of entry and choice of product, and the competition for sequential innovations.

Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products

In choosing the level of quality to purchase, the buyer of a differentiated product also chooses a point on the marginal price schedule for that product. Hence, in general, the demand functions for product characteristics cannot be consistently estimated by ordinary least squares. Market equilibrium results in a matching of characteristics of demanders and suppliers. This matching restricts the use of buyer and seller characteristics as instruments when estimating demand and supply functions for product characteristics. The paper develops these issues. A stochastic structure for hedonic equilibrium models is then proposed, identification results are presented, and estimation procedures are outlined.

A Simple Theory of International Trade with Multinational Corporations

Using the idea that firm-specific assets associated with marketing, management, and product-specific R & D can be used to service production plants in countries other than the country in which these inputs are employed, I develop a simple general equilibrium model of international trade in which the location of plants in a differentiated product industry is a decision variable. The model is then used to derive predictions of trade pattern, volumes of trade, the share of intra-industry trade, and the share of intrafirm trade as functions of relative country size and differences in relative factor endowments.