Joel Waldfogel Spring 2005
1459 Sh-Dh
waldfogj@wharton.upenn.edu
Office Hours: Monday 3-4, by appt.
New time and place for class: Fri 1:30-4:30 in JMHH 304
BPUB 987 “Regulation”
(a.k.a. a Potpourri of Topics in Business School Industrial Economics)
This course will expose you to some active areas of industrial economic research of possible interest to business school doctoral students, as well as the classic papers that underlie them. Given the predilections of the instructor, the emphasis will be on a “descriptive” empirical approach. That is, we will be more interested in phenomena than technique. It should be understood that this is not a full-service graduate introduction to industrial economics. Students interested in that should take Econ 780-781, to which this is a complement.
My goal in this course is to get you interested – and involved – in research on topics covered in this course. I also want to acquaint you with the industrial economics research community around campus. Research on topics related to this course is alive and well in ECON, BPUB, MGMT, OPIM, and HCMG.
This syllabus is being prepared at Halloween 2004. Topics will likely be added before the Spring term begins.
1) Read papers for class.
2) Hand in a paper proposal (< 10 pages) that follows on one of the course topics. The proposal should identify a question and its place in the literature. You should state what’s known about the question, then describe the narrow and deep versions of your question, and finally indicated how you’ll answer the question, including both a description of data and your proposed empirical strategy. Due Thurs, May 5th at noon.
3) Present this proposal, as you are developing it, in class. (20 minute presentation toward the end of the term, as time permits).
4) Submit 3 referee reports on current papers in the topics covered. They need not be on our reading list if you have approval from me. Due prior to the start of class the day we cover the paper(s).
5) Submit a one-page description of a proposed research topic related to the topic in class that day (3 times during semester – choose your three the first day).
Course readings are primarily articles available online or in the bulkpack. Students may also wish to purchase John Sutton, Sunk Costs and Market Structure, MIT Press, as well as Jean Tirole, The Theory of Industrial Organization, MIT Press for reference.
1. Entry Models
One of the big topics in this course will be “product selection,” which products does a market economy bring forth. The first step toward product selection is the entry problem. Many of you will have seen these papers before.
2. Product Selection in Theory
Which products does a market economy bring forth? Today we consider some theoretical models.
I want you to think about how the formal problem these papers try to
solve relates to the problem in the entry literature.
I also want you to think about why formal modelling of product selection
is hard. Finally, I want you to
think about what one can do to study a market’s selection of differentiated
products.
Read Spence and Mankiw and Whinston, skim the other classic articles.
3. Empirical Studies on
Product Selection
The theoretical papers covered under the last topic indicate the markets can “get it wrong” in a variety of ways. Markets can generate too few products/firms, or too many. When too few, it sometimes falls to government to provide, or finance, things. Policies such as these motivate the studies asking whether government provision “crowds-out” private provision. This question is presumably apt whenever government is in some market, either as a seller or as a subsidizer.
· Inefficient Underprovision and Crowding Out
o D.Cutler and J. Gruber, “Does Public Insurance Crowd Out Private Insurance?,” QJE, 111 (May 1996), 391-430.
o
Berry and Waldfogel. Public Radio in the United States: Does
It Correct Market Failure or Cannibalize Commercial Stations?. Journal of Public
Economics, vol. 71, no. 2, February 1999, pp. 189-211.
Just as markets can generate too few products/firms, markets can generate too many. Here are two studies purporting to document this phenomenon.
· Free Entry and Social Inefficiency (read one or the other)
o
Berry & Waldfogel,
Free Entry and Social Inefficiency in Radio
Broadcasting. RAND Journal of
Economics, vol. 30, no. 3, Autumn 1999, pp. 397-420
o
Hsieh, Chang-Tai; Moretti, Enrico.
Can Free Entry Be Inefficient? Fixed
Commissions and Social Waste in the Real Estate Industry. Journal of
Political Economy, vol. 111, no. 5, October 2003, pp. 1076-1122.
Excess entry happens because private benefits of entry
exceed social benefits. Ownership
structure can affect the deviation between private and social benefits.
(What do I mean by this?)
·
Ownership structure and product variety
o
Berry and Waldfogel, “Do Mergers Increase Product Variety” The
Quarterly Journal of Economics. Cambridge: Aug 2001. Vol. 116, Iss. 3; p. 1009.
·
Questions
o
From a social
perspective, what are the costs and benefits of entry?
How does the social calculus relate to the private calculus?
o
In what
industries might you expect free entry to be inefficient?
o
How might we
control excess entry? Think of
private and government solutions.
4. Distributional Approach to Product Markets (All-Waldfogel-All-the-Time
Day)
We’ve seen markets get it wrong. There are other interesting features of the operation of differentiated product markets that are interesting, even when not technically “wrong” (inefficient). This section of the course deals with the way that product markets distribute satisfaction to heterogeneous consumers when production takes place with substantial fixed costs. The phenomenon is interesting in itself (to me, anyway). It also influences the downstream effects of consumption.
5. Trade, Market Expansion, and Distributional Effects
What happens when markets are large relative to fixed costs?
6. Endogenous Fixed costs and Market Structure
What determines market structure? In Econ 1, we imagine the interaction of U-shaped cost curves with the market demand curve determining the number of firms that fit in a market which, in turn, determines the nature of price competition. As markets get large, in the basic view, the number of firms gets large, and pricing gets competitive. While this view may be appropriate for some industries (name a few, if you can), it is not appropriate for all industries. This topic examines the work of Sutton to guide our thinking about contexts where the simpler view is incomplete.
·
Avner Shaked; John
Sutton Product Differentiation and
Industrial Structure The Journal of Industrial
Economics, Vol. 36, No. 2. (Dec., 1987), pp. 131-146.
·
John Sutton. Sunk
Costs and Market Structure, MIT Press, 1991.
·
Some empirical work
in this tradition:
·
Paul Ellickson, “Does
Sutton Apply to Supermarkets?” working paper, Duke
· Berry and Waldfogel, “Product Quality and Market Size” WP 2004
· Questions
o In what circumstances would industries not fragment as they grow large?
o Make a list of industries that you would expect, by their characteristics, to remain concentrated as they grow large. Explain.
o Does this theory have any managerial use?
o How does the work in this area relate to the “distributional approach”?
7. Information and Competition
·
George J. Stigler. The
Economics of Information The
Journal of Political Economy, Vol. 69, No. 3. (Jun., 1961), pp. 213-225.
·
Lee
Benham . The Effect of Advertising on the Price
of Eyeglasses
Journal of Law and Economics, Vol. 15, No. 2. (Oct., 1972),
pp. 337-352.
·
Jeffrey
Milyo; Joel Waldfogel. The
Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart
The American Economic Review, Vol. 89, No. 5. (Dec., 1999), pp.
1081-1096.
o
Stable URL: http://links.jstor.org/sici?sici=0002-8282%28199912%2989%3A5%3C1081%3ATEOPAO%3E2.0.CO%3B2-L
·
Jeffrey R Brown, Austan
Goolsbee.
Does
the Internet make markets more competitive? Evidence from the life insurance
industry The Journal of Political
Economy. Chicago: Jun 2002. Vol. 110, Iss. 3; p. 481
·
Ginger Zhe Jin, Phillip Leslie
The
effect of information on product quality: Evidence from restaurant hygiene grade
cards . The Quarterly
Journal of Economics. Cambridge: May 2003. Vol. 118, Iss. 2; p. 409
· Glenn Ellison & Sara Ellison. “Search, Obfuscation, and Price Elasticities on the Internet.” NBER working paper 10570. June 2004.
·
Questions
o How would you test Stigler’s theory?
o How do you reconcile Benhan and MW results?
o How do you reconcile MW and JL results?
o Why is this an important current research topic?
8. Information & Brand
·
Benjamin Klein; Keith
B. Leffler. The Role of Market Forces in
Assuring Contractual Performance. The Journal of Political Economy,
Vol. 89, No. 4. (Aug., 1981), pp. 615-641.
· Austan Goolsbee & Judy Chevalier. “Measuring Price Competition Online: Amazon and Barnes & Noble” NBER working paper 9085, July 2002
·
Smith,
Michael D. & Brynjolfsson, Erik (2001) Consumer
Decision-making at an Internet Shopbot: Brand Still Matters. Journal of Industrial Economics 49 (4), 541-558
· Joel Waldfogel & Lu Chen. “Does Information Undermine Brand? Information Intermediary Use and Preference for Branded Web Retailers” NBER Working paper 9942, Sept 2003
· Questions
o
What role might brands play online?
Explain.
o
What market structure would you expect to see in online retailing?
Explain based on primitive features of the industries.
o
How do you reconcile the disparate results of the SB, GC, and WC
studies?
9. Selling Information
(including music downloading)
· Hal Varian, “Buying, Sharing and Renting Information Goods”
o http://www.sims.berkeley.edu/~hal/Papers/sharing.pdf
·
Yannis Bakos; Erik
Brynjolfsson; Douglas Lichtman Shared
Information Goods Journal
of Law and Economics, Vol. 42, No. 1. (Apr., 1999), pp. 117-155.
o
Stable URL: http://links.jstor.org/sici?sici=0022-2186%28199904%2942%3A1%3C117%3ASIG%3E2.0.CO%3B2-5
·
S. J. Liebowitz . Copying
and Indirect Appropriability: Photocopying of Journals
The Journal of Political Economy, Vol. 93, No. 5. (Oct., 1985),
pp. 945-957.
o
Stable URL: http://links.jstor.org/sici?sici=0022-3808%28198510%2993%3A5%3C945%3ACAIAPO%3E2.0.CO%3B2-T
·
Felix Oberholzer Koleman Strumpf. “The
Effect of File Sharing on Record Sales An Empirical Analysis” working paper,
HBS & UNC
o
http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf
·
Rafael Rob & Joel
Waldfogel. “Piracy on the High C's: Music Downloading, Sales
Displacement, and Social Welfare in a Sample of College Students”
o
http://www.nber.org/papers/w10874
· Questions
o How does information sharing affect music (or movie or book) sales, in theory?
o How would you ideally determine, empirically, whether unpaid sharing affects sales?
o Explain the empirical strategies employed by OS, RW.
o How do you reconcile their disparate results?
10. Consequences of “Supply-Side Nonconvexities”:
Media Markets & Voting
The basic consequence of the way that markets select what to produce is the surplus that transactions create for buyers and sellers. In some markets, there are other effects. Information, in particular, affects the way that people conduct their lives. This is interesting in itself (to me, anyway). It’s also of potential use to would-be regulators as they decide whether – and how – to regulate media markets.
· Matthew Gentkow. “Television and Voter Turnout”
o http://gsbwww.uchicago.edu/fac/matthew.gentzkow/research/TV.pdf
·
David Stromberg
RADIO'S
IMPACT ON PUBLIC SPENDING
The Quarterly Journal of Economics. Cambridge: Feb
2004. Vol. 119, Iss. 1; p. 189
· David Stromberg Mass Media Competition, Political Competition, and Public Policy The Review of Economic Studies. Oxford: Jan 2004. Vol. 71, Iss. 246; p. 265
· Felix Oberholzer-Gee and Joel Waldfogel “Strength in Numbers.” Forthcoming, Journal of Law & Economics.
· Questions
o Can you think of any rationales for regulating media?
o What are some other outcomes that media availability might affect?
12. Demand-Induced Innovation