Switch on the competition; causes, consequences and policy implications of consumer switching costs

The success or failure of reforms aimed at liberalising markets depends to an important degree on consumer behaviour. If consumers do not base their choices on differences in prices and quality, competition between firms may be weak and the benefits of liberalisation to consumers may be small. One possible reason why consumers may respond only weakly to differences in price and quality is high costs of switching to another firm. This report presents a framework for analysing markets with switching costs and applies the framework in two empirical case studies. The first case study analyses the residential energy market, the second focuses on the market for social health insurance. In both markets, there are indications that switching costs are substantial. The report discusses policy options for reducing switching costs and for alleviating the consequences of switching costs.

Removing the Veil of Ignorance in Assessing the Distributional Impacts of Social Policies

This paper summarizes our recent research on evaluating the distributional consequences of social programs. This research advances the economic policy evaluation literature beyond estimating assorted mean impacts to estimate distributions of outcomes generated by different policies and determine how those policies shift persons across the distributions of potential outcomes produced by them. Our approach enables analysts to evaluate the distributional effects of social programs without invoking the 'Veil of Ignorance' assumption often used in the literature in applied welfare economics. Our methods determine which persons are affected by a given policy, where they come from in the ex-ante outcome distribution and what their gains are. We apply our methods to analyze two proposed policy reforms in American education. These reforms benefit the middle class and not the poor.

Common Sense and Simplicity in Empirical Industrial Organization

This paper is a revised version of a keynote address delivered at the inaugural International Industrial Organization Conference in Boston, April 2003. I argue that new econometric tools have facilitated the estimation of models with realistic theoretical underpinnings, and because of this, have made empirical I. O. much more useful. The tools solve computational problems thereby allowing us to make the relationship between the economic model and the estimating equations transparent. This, in turn, enables us to utilize the available data more eectively. It also facilitates robustness analysis and clarifies the assumptions needed to analyze the causes of past events and/or make predictions of the likely impacts of future policy or environmental changes. The paper provides examples illustrating the value of simulation for the estimation of demand systems and of semiparametrics for the estimation of entry models.

Quantifying the Benefits of Entry into Local Phone Service,

See http://www.netinst.org/NET_Working_Papers.html #46

Price Effects of Regulation: Telecommunications, Air Passenger Transport and Electricity Supply

Price Effects of Regulation draws on research undertaken at the OECD to quantify the effects of domestic regulatory regimes on prices in up to 50 economies for 3 sectors — international air passenger transport, telecommunications and electricity supply. The study finds wide variations in regulatory regimes across economies for each sector. The results suggest a positive relationship between the stringency of regulatory regimes and higher prices in each sector. For example, the bilateral system of restrictions on the number of air passenger flights between countries and the conditions under which they operate are estimated to collectively increase airfares by between 3 and 22 per cent.regulation - price effects - telecommunications - air transport - airlines - electricity - trade restrictions

A global analysis of third generation mobile telecommunications market entry

National regulatory authorities (NRAs) attempt to encourage participation in spectrum assignments by enhancing entrants' likelihood of success. The question this study addresses is: Can NRA policy tools really affect the probability an entrant wins a 3G spectrum licence? In particular, the econometric analysis allows consideration of whether licence concession or mode of assignment encourages entry. The study finds that auction assignment processes only slightly increase the probability of entry, whilst price and quantity concessions have no impact. --Market entry,global mobile telephone markets,3G spectrum assignment

What drives new firms into an industry? An integrative model of entry

The paper focuses on the theoretical and empirical formulation of an entry model that integrates strategic considerations and firms' heterogeneity. Entry decisions are derived from a profit function, and, subsequently, the number of entrants is defined as the sum of firms that have effectively decided to enter a given industry. As the aggregation of individual entry decisions yields a discrete outcome, the econometric methodology is based on panel count data models, rendering a novel departure from previous works. The results suggest that both incumbents' behaviour towards entry and firm-specific characteristics provide additional and interesting insights in understanding entry.entry, firms' heterogeneity, manufacturing, panel count data models

Industrial Location At the Intra-Metropolitan Level: A Negative Binomial Approach

The objective of this paper is to analyse the incidence of agglomeration economies on the new firms’ location decisions inside metropolitan areas. Following the literature we consider that agglomeration economies are related to the concentration of an industry (location economies) and/or the size of the city itself (urbanisation economies). We assume that those economies differ according the technological level of firms. So we use a sample of new firms belonging to high, intermediate and low technology levels. Our results confirm those sectoral differences and show some interesting location patterns of manufacturing firms Taking into account the renovated debate about the importance of the geography and distance in the location of economic activity, we introduce in the estimation the effect of the central city size as determinant for the location of new firms in the rest of the metropolitan area. This allows us to analyse if a suburbanisation effect exists and if that effect is the same depending on the industry and the central city size of the metropolitan area. Our main statistical source is the REI (Spanish Industrial Establishments Register), which has plant-level microdata for the creation and location of new industrial firms.

The Distribution of Gains from Access to Stocks

Recent market developments raise doubts regarding further spread of household stock market participation. We study, computationally and econometrically, net gains from access to stocks, and estimate the potentially changing role of their determinants across the distribution of such gains for US households. We highlight conflicting influences on net gains using a computational portfolio model, and use empirical estimates to derive differences in characteristics of potential entrants relative to marginal investors by the end of the dramatic recent expansion in the stockholder base. Findings suggest that downturns can have significant effects around the participation margin, through their influence on incomes, wealth, and employment. The role of education is found more limited than typically estimated, and confined to the low end of the gains distribution. Estimated characteristics of potential entrants relative to marginal stockholders suggest that further growth in participation poses considerable challenges, in view of more limited finances, younger age, more limited education and financial alertness, and above all significantly less self-declared willingness to assume financial risk by potential stockholders compared to marginal investors. The hurdle to financial practitioners interested in expanding the stockolder base is not estimated to be small.Portfolio choice, stock market participation, binary quantile regression

Product Quality Selection and Firm Survival. Evidence from the British Automobile Industry, 1895-1970.

This paper proposes an additional determininant of firm survival. Based on a detailed examination of firm survival in the British automobile industry between 1895 and 1970, we conclude that firm’s selection of submarket-defined by quality level-influenced survival. In contrast to findings for the US automobile industry, there is no evidence of first-mover advantage in the market as a whole. However, we do find evidence of first-mover advantage after conditioning on submarket choice.firm survival, product differentiation, submarket, product quality