The Impact of Cost Changes on Industry Dynamics

This paper inquires into the response of industry dynamics to increases in costs. We show that increases in marginal and fixed costs may have interesting, non-obvious effects on entry and exit. Before costs change, the model exhibits behavior that matches many industries such as manufacturing and retail: fewer but larger firms over time, and significant amounts of entry and exit. When costs rise, price rises and the market quantity supplied falls, but the amount of entry and exit may rise or fall. The most intuitive outcome from a cost increase is the competitor neutral case, in which entry decreases and exit increases. Two other possible cases are the entrant favoring case, in which entry and exit both increase, and the incumbent favoring case, in which entry and exit both decrease. The model places restrictions on which outcomes are possible given which costs rise (marginal or fixed). The entrant favoring case can arise only from an increase in marginal cost, which favors small entering firms relative to larger incumbents. The incumbent favoring case can come about only from an increase in fixed cost, which favors incumbents with their larger market share relative to small entrants. These restrictions allow one to infer the nature of the cost increases even when costs are not directly observed. The model can be used to examine the impacts of cost-increasing regulation or exogenous process innovation on industry dynamics.marginal cost, fixed cost, dynamic industry models, entry, exit, failure, market size

An Empirical Investigation of Biased Survey Data and an Attempted Cure

In this paper I investigate response bias in survey data on annual driving mileage and evaluate the performance of a proposed remedy, Orbit. Individuals systematically exaggerate their deviation from the sample average, and using the self-reported data leads to misleading estimates of the income elasticity of travel mileage. I extend the Orbit procedure, which is designed to correct for reporting bias, to allow misreporting at the lower censoring point. Orbit fails to detect the nature of the bias and distorts the income elasticity estimate even further. The message for practitioners using biased data is therefore a cautionary one.Orbit, response bias, travel demand, semiparametric estimation, censoring, ordered choice data.

The Impacts of the Americans with Disabilities Act on the Entry and Exit of Retail Firms

Congress enacted The Americans with Disabilities Act of 1990 over the protests of small business advocates who claimed that the ADA would trigger a wave of bankruptcies. Although the profitability of firms may suffer from the costs of ADA compliance, no systematic evidence is available on the ADA’s effect on firms. This paper seeks to determine if the ADA had a measurable impact on the number of retail firms, the entry of new firms, and the exit of existing firms in each market. I first develop a theoretical model of the response of industry dynamics to increases in costs (an extension of Klepper’s (1996) model). I show that increases in marginal and fixed costs may have interesting and non-obvious effects on entry and exit. The restrictions the model places on observed changes in entry and exit allow inference about which components of the ADA raised marginal cost and which raised fixed costs. The same model could easily be adapted to examine the impacts of other forms of cost-increasing regulation or exogenous process innovation on industry dynamics. The data used in the study are counts of business establishments currently operating by county and type of business. While standard count models can be used to investigate changes in the number of firms after the ADA, investigating the ADA’s impacts on entry and exit is more challenging. Backing out the entry and exit rates from the establishment count data is a major econometric contribution of the paper. Applying techniques from queuing theory, we develop the maximum likelihood estimator for a generalized Poisson queuing system based on the available count data. The model incorporates unobserved heterogeneity in and correlation between the entry and exit rates. Identification of the entry and exit rates is secured through the assumption that entry and exit are Poisson stochastic processes, conditional on time-varying covariates and correlated, gamma-distributed mixing terms (i.e., random effects that relax the Markovian assumptions in the model). Although we use techniques drawn from the existing queuing theory literature, the likelihood for the count data is non-trivial to derive and we have not seen the likelihood for this model presented elsewhere. We develop this model here out of necessity, due to the particular limitations of the available data; however, there are many other potential applications for the econometric model. The empirical results imply that the ADA indeed decreased the number of retail firms. There were fewer retail firms after the ADA was passed, and the drop was larger in states in which the ADA was more of a legal innovation, and in states that had more disabled people, more ADA-related lawsuits, and more ADA-related labor complaints. The same conclusions hold when baseline trends for larger establishments (those least vulnerable to the costs imposed by the ADA) are differenced out. Regarding entry and exit, there is also evidence that employment and access discrimination suits imposed real costs on retail stores, encouraging exit. However, the exit of incumbents was partially offset by new entrants, which may imply that stores less able to adapt to the new requirements made room for the entry of stores better able to adapt. So, while the prediction by the pessimists that the ADA would cause firms to fail may be correct, the decline in the number of firms was partially offset by new entry.Americans with disabilities act, industry dynamics, social regulation, queuing theory, heterogeneous Poisson stochastic process

The Supply Side of the Digital Divide: Is There Redlining in the Broadband Internet Access Market'

The newest dimension of the Digital Divide is access to broadband (high-speed) Internet service. Using a comprehensive U.S. data set covering all forms of technology (chiefly DSL and cable modem), I look for evidence of redlining, where broadband carriers avoid areas with high concentrations of poor and minority households. There is little evidence of redlining based on income or on black or Hispanic concentration. There is mixed evidence concerning redlining based on Native American or Asian concentration. Other findings: market size, education, Spanish language use, commuting distance, and Bell presence increase access probability; inner city or rural location decreases access probability.

Bootstrapping the Conditional Moment Test for Parametric Duration Models

This letter evaluates the performance of auxiliary regression-based specification tests for parametric duration models estimated with censored data. The test using asymptotic critical values has poor size. Bootstrapping corrects the size problem but results in a biased power curve.conditional moment test, test size, right censoring, type I censoring, duration analysis, exponential distribution, Weibull distribution, specification test, power curve, bootstrap bias

Telecommunications Regulation and New Services: a Case Study at the State Level

The effects that regulation has on the innovation and the introduction of new telecommunications services have not been previously quantified in the literature. This study compares state-regulated services in Indiana under rate of return regulation (RoRR) and under alternative regulation. The econometric model comprises an count process (for innovation) followed by a duration process with selection (for regulatory delay). Moving away from RoRR increased the rate of service creation to three times the old rate. Expected approval delays nearly disappear. A prediction exercise indicates that the firm would have introduced 12 times as many services to consumers if the alternative regulation had been in place the entire time.regulation, product innovation, telecommunications, count data, duration data, tobit model

Endogenous Regulatory Delay and the Timing of Product Innovation

This paper endogenizes the interplay between innovation by a regulated firm and regulatory delay. When product innovation costs fall over time, an extra day of regulatory delay increases time to introduction by more than a day. In the signaling model, the firm therefore times its innovation to communicate its private information about the marginal cost of delay to the regulator. Successful signaling leads the regulator to reduce regulatory delay. The model places testable restrictions on the empirical relationship between innovation delay and regulatory delay. The model is consistent with data gathered from a large U.S. telecommunications provider.product innovation, regulatory delay, innovation delay, regulator, telecommunications, Ameritech

The Growth of the Broadband Internet Access Market in California: Deployment, Competition, Adoption, and Challenges for Policy (Research Brief)

This report is a brief version of a longer study of the California broadband market (Paper 63). Readers interested in more background information, more empirical analysis, and more complete documentation of sources and methodology can refer to the longer report, which is available at: http://digitalcommons.pepperdine.edu/sppworkingpapers/63/