Endogenous Product Choice : A Progress Report

Empirical models of differentiated product demand are widely used by both academics and practitioners. While these methods treat carefully the potential endogeneity of price, until recently they have assumed the number and characteristics of the products o.ered by firms are exogenous. This paper presents a progress report on an ongoing research agenda to address this issue. First, it summarizes how the appropriate choice of “orthogonal” instruments can yield consistent estimates of own and cross-price elasticities in the presence of endogenous product characteristics. Second, it summarizes how to measure “quality markups” and the welfare consequences of endogenous product quality in U.S. cable television markets. Related papers and extensions to consider multiple product characteristics and dynamics are also discussed.

Monopoly quality degradation and regulation in cable television

Using an empirical framework based on the Mussa-Rosen model of monopoly quality choice, we calculate the degree of quality degradation in cable television markets and the impact of regulation on those choices. We find lower bounds of quality degradation ranging from 11 to 45 percent of offered service qualities. Furthermore, cable operators in markets with local regulatory oversight offer significantly higher quality, less degradation, and greater quality per dollar, despite higher prices

Asymmetric information and imperfect competition in the loan market

We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects

The Impact of “Rollover” Contracts on Switching Costs in the UK Voice Market : Evidence from Disaggregate Customer Billing Data

In February 2008, British Telecommunications (BT) introduced automatically renewing, or “rollover”, contracts into the UK market for fixed-voice telephone service. These contracts included a 12-month Minimum Contract Period (MCP) with associated Early Termination Charges (ETCs). Unless customers opted out, at the end of the 12 months they would automatically be rolled over into a new MCP and face new ETCs if they later wished to leave BT. Using a unique, disaggregate, customer billing dataset, we measure the impact of rollover contracts on BT customers’ decision to switch to another provider. We find that, controlling for the effects of tenure, broadband purchase, price discounts, and self-selection, rollover households switch after their first MCP 34.8% (54.8%) less than comparable customers on standard plans (fixed-term contracts). These imply rollover contracts induce switching costs on the order of 33.0% of the monthly price of the average BT fixed-voice telephone service. This raises significant concerns about the competitive effects of such contracts n media and telecommunications markets.

Cable regulation in the internet era

The market for multi-channel video programming has undergone considerable change in the last 15 years. Direct-Broadcast Satellite service, spurred by 1999 legislation that leveled the playing field with cable television systems, has grown from 3% to 33% of the U.S. MVPD (cable, satellite, and telco video) market. Telephone operators have entered in some parts of the US and online video distributors are a growing source of television viewing. This chapter considers the merits of cable television regulation in light of these developments. It surveys the dismal empirical record on the effects of price regulation in cable and the more encouraging but incomplete evidence on the benefits of satellite and telco competition. It concludes with a consideration of four open issues in cable markets: horizontal concentration and vertical integration in the programming market, bundling by both cable systems and programmers, online video distribution, and temporary programming blackouts from failed carriage negotiations for both broadcast and cable programming. While the distribution market is clearly now more competitive, concerns in each of these areas remain

Monopoly quality degradation in cable television

Using an empirical framework derived from models of nonlinear pricing, we estimate the degree of quality degradation in cable television markets. We find lower bounds on quality degradation ranging from 11% to 45% of observed service qualities. Furthermore, cable operators in markets with local regulatory oversight tend to offer significantly higher quality products, and engage in less quality degradation. While prices are also higher in markets with local regulatory oversight, we find that consumers experienced greater quality per dollar in these markets compared to consumers in markets without regulatory oversight

LRS-II: A Specialized Knowledge System For Launch Resource Scheduling

This research used the Level 5 expert system software to develop a specialized knowledge system called the Launch Resource Scheduling system (LRS-II). LRS-II will be used as a decision aid by USSPACECOM to determine if there is sufficient launch capability to meet future satellite requirements and to quickly assess the impact of contingencies such as launch or on-orbit failures. LRS-II uses multiple knowledge bases to match satellite launch requirements to available launch vehicles, launch pads, and upper stages. Specialized knowledge about resources are stored in dBase III files, specific fields of the satellite record records to schedule the earliest launch requirement. During manifesting, the constraints of satellite and resource availability, site processing time, shuttle mission duration, and satellite on-orbit checkout time are used to insure the selected launch date is accurate

Asymmetric information and imperfect competition in lending markets

We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition