Tag: IO

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). [...]

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. [...]

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. [...]