Two essays in empirical industrial organization: Semiparametric tests of industry structure and accounting for changes in industry profitability.

Abstract

The first essay develops a method of testing oligopoly behavior that eliminates the need to impose parametric restrictions on technology. Hall's (1988) margin estimation procedure is modified for application at the industry level, and conjectural variations parameters are estimated. These estimates are used to test common hypotheses about oligopoly behavior. Application of the model to the aluminum industry in the early 1980's results in rejection of Bertr and , dominant firm, and defending market share equilibria. Cournot equilibria cannot be rejected for certain ranges of inelastic market dem and . The model is also extended to incorporate biased measurement error, important in industry studies. In the empirical section, it is shown that measurement error bias is significant. Finally, a comparison with parametric estimates suggests that functional form assumptions do matter. The second essay employs a micro-based model of industry behavior to account for changes in the profitability of a sample of eight oligopolistic industries from 1958 to 1982. I find that profit rates in five of the industries declined sharply over the period. Competitive factors, including (1) slower market growth which lead to heightened domestic competition, and (2) declining relative import prices, exerted a constant, modest downward pressure on profit rates. Increasing unit costs were not important early in the period but became a dominant factor in the 1970's. Finally, residual factors, termed a "dem and -capacity imbalance", were also important in explaining the fall in profitability. In addition to analyzing profit rate declines, the essay includes time series estimates of price-cost margin (PCM) equations for individual industries. Employing this original approach, I find that real unit costs and market growth rates provide consistent and significant power in explaining PCM levels, but that the coefficients on concentration ratios, import shares, capital-sales ratios, and cyclical indicators often have the "wrong" sign, or are insignificant. The importance of market growth is consistent with recent theoretical literature highlighting the impact that dem and conditions have on the maintenance of tacit collusive agreements.Ph.D.EconomicsCommerce-BusinessEconomic theoryUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/162453/1/9013909.pd