Essays on Industrial Organization

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This dissertation comprises three essays on industrial organization. In Chapter 1 I study the productivity effects of corporate diversification, where productivity is understood as a measure of sales per input at the productive unit level, and diversified firms are defined as firms that operate in different industries. I develop and estimate a dynamic structural model that allows current diversification level and research and development expenditures to affect future productivity. I then apply this model to a panel of U.S. manufacturing firms to measure the impact of diversification on productivity. My estimates suggest that diversification plays a key role in explaining the differences in productivity across firms and time. The average return to diversification is estimated at around 4\% at the productive unit level, though there is considerable variation across industries and firms. Moreover, the effect of current diversification on future productivity depends crucially on already attained productivity. This non-linearity typically takes the form of complementarities between current productivity and diversification, where current productivity tends to reinforce the effect of diversification on future productivity. Finally, I use the estimates from the model to test two different hypotheses related to firm diversification. First, I test the hypothesis that diversification is most likely to produce economies of scope in research and development. Second, I study the relationship between firm diversification and the misallocation of inputs. I find that the average gross rate of return to research and development is 3.5 times higher in diversified firms than in non-diversified firms. Finally, my results support the hypothesis that diversified firms are more efficient in the allocation of inputs. In Chapter 2 I study how incumbents respond to a threat of entry by a competitor using nonprice modes of competition. My analysis focuses on the U.S. airline industry, by studying how incumbent airlines change their flight schedules (departure times around the clock) and the degree of product differentiation in terms of departure times when Southwest Airlines threatens entry into a market (i.e., when it establishes presence at both endpoint airports of a market) but before it starts flying non-stop flights in that market. I find that incumbents increase significantly their degree of differentiation in departure times when threatened by Southwest's entry. This implies that flights' departure times are scheduled more evenly spaced around the clock after Southwest threatens entry into the market. Around 60\% of Southwest's impact on incumbent schedules takes place before Southwest enters the market. In addition, the results show that this effect depends strongly upon the level of market share that the incumbent airline has in the market. Finally, the evidence on whether incumbents are trying to deter or accommodate entry seems to point towards the deterrence motive. Chapter 3 investigates the effects of an airline's scale of operation at an airport (or airport presence) and airport constraints on market structure and pricing for the U.S. airline industry. I estimate a static complete information game where firms decide first whether or not to enter a market and its product offerings (conditional on entry), and then the prices to be charged for its products. The model is estimated using data from the U.S. airline industry for the period 2014- 2016, and for markets comprised by the 55 largest U.S. cities. I find that, on average, fixed entry costs represent a substantial proportion of airlines' variable profits, reflecting presumably the relevance of economies of scale in the airline industry. In addition, the fixed costs of serving a market decline significantly with airport presence at the origin and destination airports of the market, and increase if the market contains at least one capacity constrained or slot controlled airport in any of its endpoints. I study the effects of airport constraints and airport presence on market structure by running counterfactual exercises. The results indicate that airport constraints and airport presence affect pricing and market structure significantly. Elimination of airport constraints or changes in airport regulation affecting airport presence considerably encourages airlines to enter into new markets offering non-stop service, and in a greater extent, offering stop service. As a consequence, the change in market structure tend to drive prices down. The results speak to the importance of policies aimed to make market entry less costly or improve airport access for potential entrants.

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  • 03/29/2018
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