The Econometrics of Market Structure and Competition ... probit model, such as
Section 7.2.1 in. Marno Verbeek (2000), A Guide to Modern Econometrics, Wiley
...
The Econometrics of Market Structure and Competition When: Wednesday(!) 29 January 2014 and Tuesday 11 February 2014 Lecturer: Jaap Abbring
Topic We will study how economic models of firm entry and competition, microeconometric methods, and data on observed entry behavior in a cross-section of markets can be combined to learn about the determinants of market structure and competition in these markets.
Aim The course’s main goal is to make students appreciate the structural econometric approach to empirical economics, which integrates economic theory and statistical methods to solve economic problems. Along the way, it provides students with a basic understanding of 1. Selected topics in microeconometrics (cross-section and panel data, binary and ordered probit models, heterogeneity, state dependence, and selection); and 2. One influential approach to the empirical analysis of market structure and competition.
Content We first study Bresnahan and Reiss’s (1991) approach to measuring the effects of firm entry on competition in a cross-section of retail and professional markets. We first build some intuition by discussing related empirical results prepared by students in advance. Then, we present Bresnahan and Reiss’s economic model of firm entry and competition and study how this model can be estimated using standard procedures for the ordered probit model and data on the numbers of firms in a cross section of markets. Finally, we review Bresnahan and Reiss’s empirical results, with specific attention for problems caused by market heterogeneity and selection. If time permits, we continue by considering the role of dynamics. Bresnahan and Reiss apply a static entry model to a cross section of markets. We will discuss how the interpretation of their empirical results on entry and static competition changes if firms in fact enter, compete, and exit in a dynamic and uncertain market environment. We will also briefly study how a dynamic extension of Bresnahan and Reiss’s model can be used to empirically analyze the dynamic determinants of market structure, uncertainty and sunk entry costs, using panel data on the entry and exit of firms over time in a cross section of markets. Throughout, we will focus on intuition and ignore technicalities where possible.
Preparation Before the first lecture students should: 1. Study an undergraduate text on the ordered probit model, such as Section 7.2.1 in Marno Verbeek (2000), A Guide to Modern Econometrics, Wiley
(students who do not know the binary probit model should first study an undergraduate text on binary response models, such as Sections 7.1.2 and 7.1.3 in Verbeek (2000) or the relevant sections of their bachelor econometrics text book); 2. Read: Timothy F. Bresnahan and Peter C. Reiss (1991), “Entry and competition in concentrated markets”, The Journal of Political Economy, 99(5), 977–1009; 3. Estimate an ordered probit model for the numbers of firms serving a cross-section of geographically distinct retail markets, and interpret the estimates (data and detailed instructions will be provided). Before the second lecture, students may be asked to do some further empirical work. The second lecture will in part be inspired by:
Jaap H. Abbring and Jeffrey R. Campbell (2010), “Last-in first-out oligopoly dynamics”, Econometrica, 78(5), 1491–1527;
but students are not advised nor required to read this paper.
