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Chapter 1: Re-exploring Markups and the Gains from International Trade This article investigates the welfare implication of trade liberalization, with variable markups, using evidence from the global smartphone industry. Higher trade exposure imposes forces on firms' markups from two directions: more competitive markets induce firms to lower their markups, while lower delivery costs motivate firms to lower their prices to an extent smaller than the decline in costs with the higher market demand and enhance their markups. To date, most structural work in international trade has ignored the potential welfare gains of trade liberalization through the markup channel by alleviating price distortions or has otherwise failed to track both of the directional forces that international trade imposes on markups. Accounting for the smartphone markets of 40 countries, I build a model of supply and demand in which both firms' product portfolio and pricing strategies are endogenous. I find that an increase in tariff rates would prompt mostly low-quality goods producers to exit the affected markets while increasing the price-to-cost margins of the remaining low-quality goods producers; meanwhile, the markups of the high-quality goods incumbents vary only little, or even reducing slightly to offset the market demand slump that the higher costs generate. My results suggest that if researchers only focus on the loss of variety when examining the impacts of higher trade barriers following traditional methods of measurement without paying attention to the markup channel, then the average consumer surplus loss could be underestimated by 7% to 10% through the price distortion. Chapter 2: Export Dynamics This paper studies firms' export dynamics using evidence from the global cellphone industry. Exporters tend to enter foreign markets that are geographically close or culturally similar to their previous export destinations. Most structural work of international trade has ignored firms' sequential export decisions across countries when estimating entry costs or has failed to build a framework in which firms' export-dynamic actions can be tractable or in which entry costs can be accurately estimated. I build a dynamic model in which firms first sequentially choose global regions for penetration and then spread out over the countries in the regions. I estimate firms' region- and country-level entry sunk costs for starting a business and the country-specific fixed costs for maintaining operation. I find that entering a new region with consumer characteristics similar to the previous export regions could reduce the entry costs as drastically as 81%. Relatedly, adding countries after penetrating a region would incur much lower entry costs than the costs associated with entering the first country in that region. Stricter trade regulation in large countries, such as the G7 group, would also reduce importers' entry margins and their trade value in the surrounding, smaller European countries. Moreover, conditional on the same productivity level, the geographical location of a firm's headquarters could determine as much as 70% of the variation in global expansion and sales. My model primitives predict a world with more advanced infrastructure, which can shorten the world's distance by half, could reduce delivery cost, and greatly enhance the consumer surplus in the mobile phone market by 1.3% to 3.87%. Compared to a static model, my dynamic model reports a gradual and less volatile increase in consumer surplus and market competition.
This dissertation investigates the relationship of competition and firms' price responses, by analyzing: i) whether new entry reduces price discrimination, ii) when incumbents reduce price discrimination preemptively in response to the threat of entry, and iii) how competition increases prices. The dissertation consists of three independent essays addressing each of the above questions. The first two essays present an empirical analysis of the airline industry and the third essay presents a theoretical analysis of the credit card industry. In the empirical study of the relationship between competition and firms' pricing in the airline industry, I emphasize the importance of distinguishing the equilibrium behaviors with respect to different market characteristics. Major airlines can price discriminate differently in a market where they compete with low-cost carriers comparing to in another market where they don't, and also they can respond dfferently to the threat of entry depending on whether they are certain about the rival's future entry. The study reveals that competition has a positive effect on price discrimination in the routes where major airlines compete against one anther. In these routes, competition reduces lower-end prices to a greater extent than upper-end prices. In contrast, an entry by low-cost carriers results in a significant negative relationship between competition and price discrimination. Thus, the opposite results in the literature are both evident in the airline industry, and it is very important to identify the different forces of competition on price discrimination. Firms can respond to potential competition as well as actual competition. So, I extend the study to the relationship of potential competition and price discrimination, specially in cases where major airlines compete against one another while facing Southwest's threat of entry. I also attempt to suggest major airlines' motives of reducing price discrimination preemptively. The results of the study suggest that incumbents reduce price dispersion when it is possible to deter the rival's entry and that the potential rival discourages incumbents from deterring entry by announcing before its beginning service. Finally, I examine when competition can increase prices in a market, by analyzing the issuing side of the credit card industry. This industry is characterized by a two-sided market with a platform. Under the no-surcharge rule that restricts merchants to set the same price for cash and card purchases, the equilibrium interchange fee increases with competition. This occurs because issuers can compensate losses from competing on the issuing side by collectively increasing the interchange fee. As a result, limiting competition may improve social welfare when the interchange fee is higher than the social optimal level. In contrast, in the absence of the no-surcharge rule, the analysis shows that competition always improves social welfare by lowering the price of the market.
The thesis is organized as follows. Chapter 2 contains a survey of the three most in‡fluential models on fi…rm heterogeneity and of the most important empirical work on firrm heterogeneity. The chapter starts with a brief review of the homogeneous productivity imperfect competition literature. Chapter 2 …finishes with a comparison of the three most in‡fluential models of fi…rm heterogeneity and the oligopoly model put forward in the thesis. Chapter 3 addresses exporting uncertainty under heterogeneous popularity. Chapter 4 contains the chapter on …firm heterogeneity under oligopoly. Chapter 5 constitutes the models on …firm heterogeneity and endogenous quality. Chapter 6 points out the within-sector specialization model. Chapter 7 addresses the effect of importer characteristics on unit values and the role of markups and quality to explain this effect. Chapter 8 concludes.
Based on data on publicly traded insurance firms, the first essay examines questions about the effect of large catastrophic events on insurance firms. Rather than looking at a single event, thirty catastrophic events were aggregated into quintiles and the cumulative abnormal returns around these events were found to be significantly positive over a 25 day trading window. There is no significant evidence that post-catastrophic stock returns are correlated to the magnitude of the catastrophe. The second essay analyzes the effect of a large land grant university, the University of Illinois, on the State Treasury of Illinois. If the State Treasury were acting as its own agent trying to maximize revenues, would it choose higher education as an investment versus other alternative investments. While it is true the State makes large expenditures for the operations of the University, it is also true that individuals receiving degrees on average receive higher incomes. Taxes or higher incomes offset the cost of operating the University. The study is broken out by the level of student: undergraduate, masters, doctorate, medical professional, and by function of the University. It was found that all levels of education have a positive return not only for the individual, but also for the State Treasury. This is in excess of any non-pecuniary benefits to the State of having a better educated population, or the local taxation effects on the county or city where the campus is located. These returns are found to be higher than other types of investments.
This dissertation is a collection of three essays analyzing the pricing behavior of firms in different market contexts. In the first essay, I propose that a key determinant of contestability is the nature of the potential entrant's own home market. Is it competitive or monopolistic? I develop a repeated game framework to evaluate whether the threat of"hit and run" entry disciplines incumbent pricing when potential entrants have their own home markets. I test the predictions of the model in an experimental setting and the results show that the threat of entry from firms in monopoly markets does not serve to discipline an incumbent in the contestable market. The second essay extends the previous analysis to an imperfectly contestable market scenario, when there are sunk costs to entering the monopoly market. Two polar experimental treatments are considered: one where the entrant has its own monopoly market and the other in which it earns normal returns. Results show that the threat of hit and run entry is very potent even in the presence of a modest level of sunk cost only if the entrant firm earns normal returns in its own market. In contrast, firms from monopoly markets tacitly cooperate to charge monopoly prices in each market. The third essay explores the phenomenon of international price differences in the online book industry. My sample consists of price data collected from 49 online bookstores for 99 books in English from 12 book categories. The online bookstores are situated either in the United States, Canada or the United Kingdom. The data points out that publishers frequently use different list prices for the same book in different countries. This is especially interesting since I find that the list prices provide a general rule of thumb for offeredprices in an online bookstore. Regressions with book specific fixed effects, category effects and prominent-bookstore effects suggest that a large part of the offered prices can be explained by the list prices charged at online stores. The paper provides some discussions on reasons behind such dispersions and its persistence.