Essays in Industrial Organization

Abstract

This dissertation contains three essays in industrial organization economics that use theoretical, reduced-form, and structural analysis to examine various effects of policies and market mechanisms in concentrated industries.

The first chapter, "Equilibrium and Welfare Implications of Store Brands in Vertical Markets," theoretically and empirically studies the effect of store brands on equilibrium outcomes and welfare. I demonstrate the ambiguous theoretical predictions of how store brands can impact equilibrium outcomes using a simplified model, motivating two related empirical exercises that assess the implications of store brands in the U.S. yogurt market. First, I use an event study framework to show that after a store brand introduction, the prices of retailer national brand products increase. Second, I develop a structural model of upstream vertical interaction between manufacturers and retailers, incorporating the strategic use of store brands and downstream consumer demand for differentiated products. I fit the model to observed pricing and quantity data to recover underlying consumer preference parameters and marginal costs. I then conduct counterfactual simulations that remove retailer store brands to show that the benefit of store brands to retailers and consumers, and the harm to manufacturers, is magnified under increased upstream market concentration.

The second chapter, "Patent Licensing and Bias in Estimation and Prediction'' (with Xuan Teng), evaluates the consequences of analyzing market outcomes when patent licensing relationships exist but are not observed by the researcher. First, we theoretically illustrate the bias in estimated marginal costs due to not accounting for the alignment of pricing incentives between licensors and licensees and demonstrate the resulting ambiguous direction of bias in prediction of merger effects. Second, using market simulations, we analyze these biases in two types of mergers in markets with patent licensing: licensor-licensee mergers and licensee-licensee mergers. For both types of mergers, we find that a mis-specified model that does not incorporate existing patent licensing relationships can predict merger effects that are: i) opposite to the true merger effects that account for existing patent licensing relationships; ii) typically over-predicted. Furthermore, we characterize the variation in estimation and prediction biases with respect to royalty rates and the sum of diversion ratios between a licensor and licensees. The simulation results support the importance of incorporating patent licensing relationships when modeling markets with relatively large royalty rates.

The third chapter, "Product Responses to Income-Based Subsidies in the U.S. Infant Formula Industry", develops a structural supply and demand model of the infant formula industry to evaluate the role that endogenous firm product offerings play in determining equilibrium market outcomes and welfare measures. Using the structural model's preference and cost estimates, I evaluate counterfactual scenarios which increase the proportion of infant formula voucher recipients and show i) the policy's negative effect on consumers without vouchers, and, ii) how the magnitude of consumer, producer, and total surplus depend on firms' adjustment margins.