More or less regulation
Product Quality and Entering Through Tying: Experimental Evidence
Hyunjin Kim & Michael Luca
Management Science, forthcoming
Dominant platform businesses often develop products in adjacent markets to complement their core business. One common approach used to gain traction in these adjacent markets has been to pursue a tying strategy. For example, Microsoft preinstalled Internet Explorer into Windows, and Apple set Apple Maps as the iOS default. Policymakers have raised concerns that dominant platforms may be leveraging their market power to gain traction for lower quality products when they use a tying strategy. In this paper, we empirically explore this question by examining Google’s decision to tie its new reviews product to its search engine. We experimentally vary the reviews displayed above Google’s organic search results to show either exclusively Google reviews (Google’s current tying strategy) or reviews from multiple platforms determined to be the best-performing by Google’s own organic search algorithm. We find that users prefer the version that does not exclude competitor reviews. Furthermore, looking at observational data on user traffic to Yelp from search engines, we find that Google’s exclusion of downstream competitors may have been effective. The share of Yelp’s traffic coming from Google has declined over this period, relative to traffic from Bing and Yahoo (which do not exclude other companies’ reviews), and Google reviews has grown more quickly than Yelp and TripAdvisor during the period in which they excluded these (and other) reviews providers. Overall, these results suggest that tying has the potential to facilitate entry in complementary markets even when the tied product is of worse quality than competitors.
Valuing the Welfare Gains of Uber
Christos Makridis & Yongwook Paik
MIT Working Paper, December 2018
Ridesharing has become ubiquitous throughout the United States. We exploit quasi-experimental variation in the staggered entry of Uber into different metropolitan areas between 2010 and 2016. Using a combination of housing price data from Zillow and social well-being (SWB) data from Gallup, we find that the entry of UberX into a metropolitan area leads to a 3% rise in median housing prices, a 1.5% rise in economic optimism, and a 0.8% rise in life satisfaction. Our estimates are identified based on within-metropolitan comparisons before versus after their entry into the market, conditional on semi-parametric location-specific controls. Using our hedonic pricing elasticity, a back-of-an-envelope calculation suggests that the entry of Uber is associated with a welfare gain of over $633.5 million.
The Second Avenue Subway's Effect on Ride-Hail, Rideshare, and Taxi Usage in New York City
Northwestern University Working Paper, January 2019
On August 14, 2018, New York City Council passed the “Uber cap,” a cap on the number of vehicles permitted to drive for ride-hail. They did so with the stated goal of reducing ride-hail and rideshare (collectively “ride-sourcing”) trips to reduce traffic congestion. Opponents argued that the cap was misguided, because it did nothing to address the source of the growing demand for ride-sourcing: an inconvenient and unreliable subway system. However, this counterargument relies on the assumption that there would be significant substitution away from these car services if the subway system was improved. Past literature on ride-sourcing demand does not address this claim and past literature on taxi demand, which is often assumed to be a good proxy for ride-sourcing demand, does not support it. As such, I measure the substitution away from ride-hail and rideshare caused by an increase in access to the subway system: the opening of the three new Second Avenue Subway (SAS) stations in New York City on January 1, 2017. Using data on daily volume of pick-ups in the four taxi zones around the new stations in a differences-in-differences analysis, I find the SAS caused a decrease of between 200-275 ride-hail and between 110-150 daily total rideshare pick-ups per taxi zone near the new stations, which could suggest that passengers would substitute away from these car services if the subway was improved. I do not find a significant impact on yellow taxi daily total pick-ups, which suggests caution when extrapolating past taxi findings to ride-sourcing. Additionally, looking at only the daily pick-ups in the AM and PM rush hours, I find the SAS caused a decrease of ride-hail and rideshare pick-ups in both times but only decreased yellow taxi PM rush pick-ups.
The Impact of Uber and Lyft on Taxi Service Quality: Evidence from New York City
Mishal Ahmed, Erik Barry Johnson & Byung-Cheol Kim
University of Alabama Working Paper, October 2018
Using detailed trip-level taxi and for-hire-vehicle data and new incident-level complaints data, we study how the entry of Uber and Lyft has affected the quality of taxi services in New York City. In a panel setting with 263 NYC taxi-zones over the time period from 2014 to 2017, we find that increased competition measured by the number of daily Uber/Lyft trips in a given taxi-zone has led to more complaints regarding a variety of service quality dimensions such as unsafe driving, rude behavior and fare refusal. Our results are robust to accounting for potential simultaneity in the determination of complaints and Uber and Lyft penetration.
Upzoning Chicago: Impacts of a Zoning Reform on Property Values and Housing Construction
Urban Affairs Review, forthcoming
What are the local-level impacts of zoning change? I study recent Chicago upzonings that increased allowed densities and reduced parking requirements in a manner exogenous of development plans and neighborhood characteristics. To evaluate outcomes, I use difference-in-differences tests on property transaction prices and housing-unit construction permits. I detect significant, robust increases in values for transactions on parcels that received a boost in allowed building size. I also identify value increases for residential condominiums, indicating that upzoning increased prices of existing housing units. I find no impacts of the reforms, however, on the number of newly permitted dwellings over five years. As such, I demonstrate that the short-term, local-level impacts of upzoning are higher property prices but no additional new housing construction.
Do Consumers Strike Bad Deals with Debt Collectors? Evidence from Out-of-Court Settlements
Ing-Haw Cheng, Felipe Severino & Richard Townsend
Dartmouth College Working Paper, January 2019
We test whether consumers negotiating with debt collectors agree to “bad deals” that are worse than their outside option. We examine new data on civil lawsuits where consumers can either settle with collectors or exercise their outside option to go to court. Random assignment of judges with different styles generates exogenous variation in the likelihood of negotiation. Using linked credit registry data, we find evidence that settlements cause increased financial distress, without benefiting consumers through improved access to credit, collector concessions, or avoidance of uncertainty. Consumers experience more financial distress when making deals with highly experienced collectors. Overall, the evidence suggests that consumers are prone to strike bad deals with debt collectors.
Quality Overprovision in Cable Television Markets
Gregory Crawford, Oleksandr Shcherbakov & Matthew Shum
American Economic Review, forthcoming
We measure the welfare distortions from endogenous quality choice in imperfectly competitive markets. For U.S. cable-television markets between 1997-2006, prices are 33% to 74% higher and qualities 23% to 55% higher than socially optimal. Such quality overprovision contradicts classic results in the literature and our analysis shows that it results from the presence of competition from high-end satellite TV providers: without the competitive pressure from satellite companies, cable TV monopolists would instead engage in quality degradation. For welfare, quality overprovision cable customers would prefer smaller lower quality cable bundles at a lower price, amounting to a twofold increase in consumer surplus for the average consumer.
Market Concentration in Homebuilding
Jacob Cosman & Luis Quintero
Johns Hopkins University Working Paper, November 2018
We investigate the impact of increasing concentration in local residential construction markets on housing production. We show that the increase in concentration in the past decade has led to lower production volume, fewer units in the production pipeline, and greater unit price volatility. Our results imply that the greater concentration has decreased the annual value of new housing production by $106 billion. Because housing is a determinant of the business cycle these findings provide further evidence that the secular decline in competitive intensity in the American economy is altering macroeconomic dynamics.
Examining Both Sides of the Transaction: Bargaining in the Housing Market
Darren Hayunga & Henry Munneke
Real Estate Economics, forthcoming
This article examines the bargaining power and information advantages of housing market participants with special interest in the outcomes of individuals compared to real estate agents. Prior studies examining agents’ sales of their own properties find that they obtain higher prices than their clients, which is notable because it suggests a possible conflict of interest. In addition to reexamining agents’ sales after correcting for a simultaneity issue, we consider agents’ purchases of their own properties as well as the sales and purchases of the other market participants. Agents’ purchases offers direct evidence of their ability to transact while in competition with other market participants without the potential conflict of interest. The results demonstrate that agents hold bargaining power relative to individuals. Companies (investors) also exhibit bargaining power over individuals, which seems to concentrate in vacant properties as well as during economic expansionary periods.
Inspection regimes and regulatory compliance: How important is the element of surprise?
Matthew Philip Makofske
Economics Letters, April 2019, Pages 30-34
Regulatory compliance is often promoted via unannounced inspections where firms found to be in violation of environmental, health, or safety regulations face punishments. When compliance is costly to firms, a key aspect of this approach is that the timing of inspections is unannounced and difficult to anticipate, lest firms comply only when they believe an inspection is likely. With data from Los Angeles (LA) County food-service health inspections, I estimate how the (in)ability to anticipate inspection timing affects compliance using a novel approach. Many facilities such as hotels, grocery stores, or food courts, consist of multiple food-service establishments sharing a single physical location. Multiple establishments within a single facility are commonly, though not always, inspected on the same day; meaning all but one of the establishments involved likely anticipate the timing of their next inspection to a considerable extent. Within such facilities, I show that establishments perform significantly worse on days in which they receive the sole inspection conducted at their facility. These sole inspections detect 7.75% more violations, 9.1% more inspection score point deductions, and 16.3% more major critical violations (the most severe violations of the county health code).
How easy is it to understand consumer finance?
Matt Burke & John Fry
Economics Letters, April 2019, Pages 1-4
We consider the readability of payday loan websites against conventional lenders. Our findings show that credit card websites are harder to read and contain more complex terminology. Our central contribution is to provide the first known measurement of readability in consumer finance - something regulators have found helpful in other domains.
Patent Trolls and Startup Employment
Ian Appel, Joan Farre-Mensa & Elena Simintzi
Journal of Financial Economics, forthcoming
We analyze how frivolous patent infringement claims made by nonpracticing entities (NPEs, or “patent trolls”) affect startups’ ability to grow and create jobs, innovate, and raise capital. Our identification strategy exploits the staggered adoption of anti-troll laws in 32 US states. The laws lead to a 4.4% increase in employment at high-tech startups - an increase driven by IT firms, a frequent target of NPEs. Increased access to financing, both venture capital and patent-backed lending, is a key channel driving our findings. Measures aimed at curbing the threat posed by NPEs can thus help reduce the real and financing frictions faced by startups.
Supply Chains and Antitrust Governance
Nitish Jain, Sameer Hasija & Serguei Netessine
University of Pennsylvania Working Paper, November 2018
Antitrust regulations are meant to promote fair competition in the market, but balancing administrative and legal costs with enforcement can be difficult when multi-layered supply chains are involved. The canonical example of this challenge is the landmark Illinois Brick ruling, which limits antitrust damages to only the direct purchasers of a product; for instance, consumers can file antitrust claims against colluding retailers but not against colluding manufacturers -- only retailers can file claims against manufacturers. This controversial ruling was meant to reduce legal costs, but it can clearly lead to missed enforcement opportunities. In this paper we demonstrate how the Illinois Brick ruling interacts with contracts adopted in the supply chain and we show that otherwise equivalent supply chain arrangements can have markedly different effects. In particular, we find that wholesale price, minimum order quantity, revenue-sharing and quantity discount contracts lead retailers to take legal action against manufacturers in the event of collusive behavior. However, the wholesale price plus fixed fee contract structure (a.k.a. a two-part tariff or slotting fee contract) facilitates collusion among the manufacturers with retailers compensated by the fixed fee and not filing the antitrust litigation. We further demonstrate that collusion is more likely under high demand uncertainty and high competition at the retail level but is less likely under high competition at the manufacturer level. Our paper helps public enforcers identify market conditions conducive to antitrust violations.
Private Communication among Competitors and Public Disclosure
University of Pennsylvania Working Paper, January 2019
Conventional wisdom suggests that firms benefit from coordinating pricing and production decisions. One way firms can coordinate such decisions is through private communication. However, private communication between competing firms is typically not allowed by anti-trust regulations. In the absence of private communication, theories at the intersection of accounting and industrial organization suggest that competing firms can use public disclosure to coordinate. These theories predict a substitutive relation between private communication and public disclosure that serves a coordinating role: private communication reduces the need to coordinate via public disclosure. I exploit data on the extent of private communication among competing firms in strategic alliances to examine how private communication manifests in firms’ public disclosure decisions. Consistent with theoretical predictions, I find that firms that enter into strategic alliances with competitors reduce their public disclosure about expected future business conditions, including forecasts of demand and production levels, and that the reduction is most pronounced for firms in alliances that entail more extensive private communication.
Heterogeneous Price Effects of Consolidation: Evidence from the Car Rental Industry
Ali Umut Guler, Kanishka Misra & Vishal Singh
Marketing Science, forthcoming
We study the price effects of consolidation in the car rental industry using three cross-sections of price data from U.S. airport markets spanning the years 2005 to 2016. The auto rental industry went through a series of mergers during this period, leading to a significant increase in market concentration. We find that the concentration of ownership affects the business (weekday) and leisure (weekend) segments differently. Average weekday prices rose by 2.1% and weekend prices fell by 3.3% with the increase in market concentration. Given the periodic differences in demand from business and leisure travelers, we explain this finding with a model of horizontal product differentiation that allows for heterogeneity in customer types and firms’ marginal costs. Consolidation leads to marginal cost savings, but the extent to which these savings are passed onto different customer types depends on the magnitude of switching costs. In particular, weekday customers with high switching costs are charged higher prices because of suppliers’ augmented market power whereas the more price-sensitive weekend segment enjoys the lower prices facilitated by efficiency gains. Our findings highlight that consolidation can have differential welfare effects on different customer groups and merger analyses should account for the heterogeneous impact based on firms’ price discrimination practices rather than just considering average effects.
Mergers and Product Quality: A Silver Lining from De-Hubbing in the U.S. Airline Industry
Nicholas Rupp & Kerry Tan
Contemporary Economic Policy, forthcoming
This paper investigates how de‐hubbing, which occurs when an airline ceases hub operations, impacts product quality. Examining four cases of de‐hubbing following U.S. airline mergers between 1998 and 2016, we analyze three product quality measures: on‐time performance, travel time, and flight cancellations. In order to isolate a merger's impact on product quality, we compare the results of four de‐hubbing events that followed a merger with three de‐hubbing cases that occurred independently of a merger. We find a silver lining from mergers because product quality improvements are isolated to de‐hubbing events which follow airline mergers rather than nonmerger‐induced de‐hubbing.
Benefits left on the table: Evidence from the Servicemembers’ Civil Relief Act
Benjamin Castleman, Richard Patterson & William Skimmyhorn
Economics of Education Review, forthcoming
In this study we test whether behaviorally-motivated informational interventions can lead individuals to utilize consumer financial protections. Specifically, we use a large-scale randomized controlled trial to test whether gain/loss framing and reminder messaging can lead servicemembers in the United States Army to utilize an interest-rate protection outlined in the Servicemember Civil Relief Act (SCRA). While we find that reminder messaging increases engagement with informational materials, we find no differences in engagement across gain and loss framing. Furthermore, we find that information provision has no effect on servicemember credit outcomes, regardless of how SCRA protections are framed or whether email reminders are sent. We run a second experiment to explore what factors may be limiting the efficacy of our interventions and find that low engagement with emails and significant attrition throughout the application process are likely to contribute to our results. Taken together, our results suggest that financial education or information interventions offered via email face significant challenges to their effectiveness even when the apparent benefits seem large.
Productivity and credibility in industry equilibrium
RAND Journal of Economics, forthcoming
I analyze a model of production in a competitive environment with heterogeneous firms. Efficient production requires individuals within the organization to take noncontractible actions for which rewards must be informally promised rather than contractually assured. The credibility of such promises originates from a firm's future competitive rents. In equilibrium, heterogeneous firms are heterogeneously constrained, and competitive rents are inefficiently concentrated at the top. I explore several policy and empirical implications of this result.
Learning by Viewing? Social Learning, Regulatory Disclosure, and Firm Productivity in Shale Gas
Robert Fetter et al.
NBER Working Paper, December 2018
In many industries firms can learn about new technologies from other adopters; mandatory disclosure regulations represent an understudied channel for this type of social learning. We study an environmentally-focused law in the shale gas industry to examine firms’ claims that disclosure requirements expose valuable trade secrets. Our research design takes advantage of a unique regulatory history that allows us to see complete information on chemical inputs prior to disclosure, along with the timing of information availability for thousands of wells after disclosure takes effect. We find that firms’ chemical choices following disclosure converge in a manner consistent with inter-firm imitation and that this leads to more productive wells for firms that carefully choose whom to copy - but also a decline in innovation among the most productive firms, whose innovations are those most often copied by other firms. Our results suggest there is a long-run welfare trade-off between the potential benefits of information diffusion and transparency, and the potential costs of reduced innovation.