Economic Thoughts and Essays

By Rhys Williams

Difference-in-discontinuities method

Posted on by Rhys Williams

This post will review the econometric method of difference-in-discontinuities design, outlining the technical details, the strength and weaknesses, and provide an intuitive explanation for how this method can be used to identify causal effects of a treatment policy. In doing so, we will refer to its application in Ferguson and Kim (2023). Firstly, we outline the empirical question posed by Ferguson and Kim (2023) and discuss some potential ways of answering this question, to then motivate the use of the difference-in-discontinuities design approach.

Ferguson and Kim (2023) apply the difference-in-discontinuities technique to answer the question of whether a policy of decentralised agricultural production (called the Household Responsibility System or HRS) can causally explain the increase in agricultural yields seen in China in the late 1970s and 1980s. [...]

The Use of Instruments in Demand Estimation

Posted on by Rhys Williams

See my earlier article on demand estimation for background.

There are two broad approaches to estimating aggregate-level demand: product-space approaches and characteristics-space approaches. Product-space approaches, such as Price Invariant Generalised Logarithmic models and Almost Ideal Demand Systems, treat individual products as the unit of analysis and endeavour to estimate demand functions using restrictions from economic theory. However, these approaches need to estimate N^2 elasticities (considering both own-price and cross-price elasticities), where N is the number of products, hence, even for a modest market with (e.g.) 20 products, over 400 parameters need to be estimated. This is computationally difficult, leading to the curse of dimensionality, and poses a key downside to product-space approaches, along with the detraction that such methods do not allow for the counterfactual estimation of new products being introduced. [...]

How to Estimate Demand

Posted on by Rhys Williams

I recently attended a fantastic workshop on demand estimation and have been doing a lot of reading around this topic recently, so wanted to share an outline of the IO story on demand estimation.

Estimating underlying demand functions – that illustrate what happens to quantity purchased when prices change – is useful for a variety of policy analyses, such as estimation of merger control, the introduction of tariffs, welfare effects, product entry etc. In essence, we want to calculate the elasticities which exist between varying products. However, this is not easy, both conceptually and computationally.

To begin with, there is a fundamental problem of endogeneity. [...]

Resale Price Maintenance and Fixed Book Prices

Posted on by Rhys Williams

This article is based on a paper I’ve just had published in the Journal of Competition Law and Economics, available here.

Resale Price Maintenance (RPM) is an agreement between manufacturers and retailers, whereby manufacturers only supply retailers with their output, if the retailer agrees to sell the products at a specified price. There are a number of valid reasons why manufacturers and retailers would agree to such a restriction on behaviour. One example is that manufacturers might want to encourage retailers to offer promotional services, or help showcase the product (for example, offering test drives of cars, making nice stands to draw customers’ attention to the latest book, providing walk-throughs of the technical specifications of different laptops, etc). [...]

The Difference-in-Difference Revolution

Posted on by Rhys Williams

I don’t often post about econometric topics, as I am not an econometrician, but as an applied microeconomist, I have been reading a lot about the difference-in-difference revolution and the new approaches taken to deal with staggered adoption. As the best way to learn something is to teach it, I thought I’d write a blog post explaining my understanding of the problem and the various solutions available. As I am not an econometrician, I will be mainly explaining this through intuition and will add links to the various sources for those interested in a deeper dive on the technical details.

The Problem

For a long time, empiricists would use the two-way fixed effects estimator to estimate linear regressions of interest on a panel dataset of interest. [...]

Vertical Integration

Posted on by Rhys Williams

In this post, I want to talk a bit about vertical integration and some cool papers I’ve read on the topic.

To begin with, we can think of a vertical structure being a situation where we have upstream and downstream firms. Upstream firms tend to be manufacturers, or other firms high up in the production process, whilst downstream firms are retailers or firms lower down in the production process. An industry where manufacturers and retailers are non-integrated (separate) can lead to an incentive problem, whereby both firms want/need to make a profit but end up setting too high a price.

Let’s think about this more carefully. [...]

The forbidden regression of price on HHI

Posted on by Rhys Williams

I recently came across a neat paper by around 25 economists (former chief economists at the US’ FTC and DoJ Antitrust Division) which provided a rebuke of attempts by econometricians to study the relationship between price and the Herfindhal-Hirschman Index (a measure of concentration).

As a general rule, when two firms merge horizontally (i.e. at the same level within the same market), there are two mechanisms which would tend to push prices up and a counteracting force which would put downward pressure on prices. The first two mechanisms (which tend to increase price) are called unilateral and co-ordinated effects. Unilateral effects come from the fact that the merged entity has more market power than before, and it can use this market power (to some degree) to push up prices.* [...]

Decarbonisation of the UK Electricity Sector

Posted on by Rhys Williams

As part of the UK’s target to achieve net-zero carbon emissions it has set the target of achieving a reduction in greenhouse gas (GHG) emissions by 61% in 2030, compared to 1990 levels (Table 1). Between 1990 and 2021 (latest year available), we have seen a strong reduction in emissions (73%) from the electricity sector but a lesser reduction (9%) in heating[1] and (13%) transportation (Table 1). The 9% reduction in emissions from heating over the last 30 years is far from the 27% reduction required over the next nine years. In the transport sector, where 2021 figures are likely depressed due to COVID-19, targets require a 33% reduction over the next nine years. [...]

Will the rise of AI cause the downfall of a monopolist? How Google can adapt to the revolution in internet search and maintain its incumbent position

Posted on by Rhys Williams

This is an essay I recently wrote as part of my MRes Business Economics course.

The rise of large language models (LLMs) including generative pre-trained transformer models (GPTs) has the power to upend many traditional digital business models, including those in the search engine sector. LLMs allows consumers to easily obtain answers to their questions, in a personalised and engaging manner, without having to navigate through search results and paid advertisements. ChatGPT has already demonstrated that this is a disruptive technology with phenomenal consumer interest – more than 100 million people had used the product within 2 months of its launch, making it the fastest growing consumer application in history[i], and demonstrating the power of S-curve dynamics and tipping points in this market. [...]

Perfect Competition or Collusion?

Posted on by Rhys Williams

    I recently interviewed for a Cambridge college as part of the undergrad admissions process and one of the questions I asked was as follows:

    “We have a scenario where two shops (e.g. supermarkets) are selling the same product (e.g. chocolate bar) at the same price, does this necessarily mean that collusion is occurring? What other factors might the authority want information on?”

    I find this to be an interesting question, as there isn’t a right or wrong answer and so it allowed applicants to discuss a wide range of economic phenomena, from market structure to pricing decisions and I wanted to elaborate upon a few of these points here. [...]