Essays on Industrial Organization: Regulatory Uncertainty and Dynamic Decision-Making by Firms.

Abstract

This dissertation is composed of three papers concerned with how firms respond to uncertainty and dynamic interactions. These are areas that have long been important research topics among industrial economists. The justification for this is obvious: the course of events is rarely deterministic, and the past often exerts a marked influence on present decisions. Both factors lead actors to adopt very different strategies from what they would do in a deterministic, one-shot world.

In my first paper, I show how varying levels of uncertainty about the regulatory environment shift the boundaries of the firm by affecting the incentives for both ownership and control. In my second paper, I use a theoretical model to explore how uncertainty about the timing of a regulatory change affects competition between oligopolists. I find that for this form of uncertainty, the standard “real options” prediction of lower investment in uncertain environments does not necessarily hold. In my third paper, I examine the theory of entry deterrence by means of spatial preemption. I first develop a theoretical model of entry deterrence among multiproduct oligopolists that incorporates the stylized facts of consumer heterogeneity and brand awareness. The desirability of different strategies will vary depending on the intensity of consumers’ brand preferences. I test the model’s predictions using data on retail hotel markets, where properties are differentiated by their quality and related through the ownership of their brands. My findings strongly support the model’s predictions about when spatial preemption will be a credible strategy.