Essays on Spatial Price Dispersion

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This dissertation explores price differences observed in the market. While some differences are necessitated by market conditions, the others are strategic. I illustrate the former in a study of electricity spot markets in Italy and the latter for the video rental industry. The first project examines the welfare gains from eliminating price differences in the Italian electricity spot market. The market is divided into two geographic zones - North and South - with limited interzonal transmission capacity that often results in congestion. Congestion leads to different market clearing prices in the two zones, thereby creating potential market imperfections. We employ current market data to characterize the present market structure with limited interzonal transmission. We then simulate a scenario with no transmission congestion and measure the gains from market integration. Our empirical results indicate that easing transmission bottlenecks reduces spot market expenditure substantially by almost four percent. We further find that that the major firm in the market does not exercise its full market power and benefits from improved transmission. In the second project, I examine the effect of competition on prices in a market where the product is offered at different quality levels, in the context of the video rental industry. Videos can be classified into DVD and VHS. Firms can also be categorized as branded stores that belong to a major chain and unbranded stores that do not belong to any major national chain. As competition increases, prices of both DVD and VHS should decrease, but from the theory it is not clear which one will decrease more. Moreover, branded and unbranded stores may respond differently to the change in competition. Using a difference-in-difference approach I estimate the effect of competition on the price difference between DVD and VHS. I use an instrumental variables approach to address price-competition endogeneity. My empirical results indicate that the effect of competition on price difference varies according to the type of store and the type of competition faced.

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  • 08/16/2018
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