Essays on industrial organization

This dissertation studies a range of important policy questions regarding market competition and pricing regulation. In the first chapter, I analyze the effect of market competition on rate of innovation in the Dynamic Random Access Memory (DRAM) market. In this industry, the market has been consolidating over the last two decades. The number of DRAM producers decreased from over 20 in the early 1990s to around 5 now. Policy makers and antitrust agencies are concerned about effects of market consolidation on innovation and consumer price. Thus, it is an important policy question to understand how allowing further mergers in this industry would affect firms' incentive to innovate. To tackle this problem, I estimate a dynamic oligopoly model where firms optimally choose investment and production levels. The model incorporates two key features of the DRAM market. First, innovation becomes increasingly more difficult as process technology advances. Second, via learning-by-doing, production costs gradually decrease with production experience at each technology generation. I find that in the earlier periods of the study, there is a higher rate of innovation in a more competitive market (i.e., duopoly or triopoly) than in a monopoly. However, the relationship is reversed as innovation becomes more difficult. Consumer welfare is always higher in a more competitive market because total production is higher and price is lower. Additional counterfactuals examine how the two industry features affect the innovation-competition relationship. In Chapter 2, I analyze the welfare effects of allowing wholesale price discrimination in the US beer industry. The current US state law requires uniform pricing in the wholesale beer market. This means that a beer distributor has to set a single price for the same product across all the retailers it serves. But some large retailers often argue that they can negotiate better price if wholesale price discrimination is allowed. Costco actually filed a suit in Washington in 2004, but the court uphold the existing regulations. This industry background suggests that understanding the effects of allowing wholesale price discrimination is an important policy question. In theory, wholesale price discrimination can increase or decrease welfare. Welfare may increase if there are differences in price elasticity of demand across markets. In contrast, welfare may decrease if there are differences in downstream costs. Thus, how wholesale price discrimination affects welfare remains an empirical question. Using retail sales and wholesale price data from the Connecticut beer market, where wholesale price discrimination is prohibited, I estimate a structural model of demand and supply. With the estimated demand parameters and firms' costs, I simulate a counterfactual policy of allowing wholesale price discrimination in this market. I find that wholesale prices increase more in markets with lower price elasticities, and with lower downstream costs. Wholesalers are better off while consumers and retailers are worse off. The total welfare decreases about 1.14% when wholesale price discrimination is allowed.

Keywords: Business.
Advisor: Benkard C. Lanier 
Somaini Paulo 
Yurukoglu Ali