BPUB 987 Regulation
Spring 2007
Wed, 6:00-9:00 pm, SH-DH 1498 (Jan-Feb)
Fri, 9:00-12:00, SH-DH 1498 (March-April)
Contact Information

Gerry Faulhaber
1457 SH-DH
8-7860
faulhabe@wharton.upenn.edu

Katja Seim
1458 SH-DH
8-8213
kseim@wharton.upenn.edu

Updated 1/16/07; note schedule changes

Course Summary

The objective of this course is to expose you to some active areas of research on the role of government in markets where competitive equilibria "fail." In this course we will emphasize the importance of market structure and industrial performance, including the strategic interaction of firms.

The course will be broken into two parts. In the first part, we will study the theoretical foundations of regulation, including pricing, agency theory, and the political economy of regulation. In the second part of the course, we will study empirical approaches to assessing market power and to evaluating the potential for government intervention and alternative regulatory regimes in various settings. Specific topics include among others the economic analysis of mergers, price discrimination, vertical relations (predatory strategies, tying contracts, resale price maintenance etc.), health and safety regulation, and network externalities.

The course will be participatory in nature. Students are expected to complete all readings prior to class. The professors will not go over the readings; students should expect to comment, question and discuss the readings. Students are required to complete a research paper that might develop into part of a dissertation.


Readings and References

The course assumes familiarity with basic econometrics, at the level of standard first-year graduate econometrics textbooks. Useful references are:

  1. Willig, R.D. and Schmalensee, R. eds., (1989) Handbook of Industrial Organization, Vol. 2, North-Holland: Amsterdam.
  2. Greene, W. (2002) Econometric Analysis, 5th Edition, Prentice Hall.
  3. Cameron, C. and P. Trivedi (2005) Microeconometrics: Methods and Applications, Cambridge University Press.
  4. Maddala, G. S. (1983) Limited Dependent and Qualitative Dependent Variables in Econometrics. Econometric Society Monograph No. 3.

All other readings are available at http://assets.wharton.upenn.edu/~faulhabe/987 (this website, below).

Requirements

1. Readings. We have relatively few readings per session, which we will cover in detail. A careful reading of the papers prior to class is essential.
2. Research Paper. The paper requirement is intended to provide you with an opportunity to get started doing research. It is broken into several parts:

(a) Proposal. Prepare a proposal of 4 pages or less that identifies the question you are interested in analyzing. The proposal should state the current knowledge about the question, critique one or several papers in the research area, describe the questions remaining to be answered by your work, and finally indicate how you will answer the question. Due in class on March 8th.

(b) Data Summary. If you plan to complete an empirical paper, include with your proposal a description of the data (data sources, variables, organization of data set, etc.) you plan to use in the analysis. Due in class on March 8th.

(c) Final Paper. Using feedback from your proposal, prepare a paper of up to 12 pages that outlines your question, related research, and theoretical or empirical analyses. The aim is a document that, with further work, could be turned into one paper for your dissertation. Due May 3rd at 12 noon.

Topics and Readings and for Each Week


January 10 Organizational Meeting & Pricing Natural Monopoly

Baumol, W.J. and Bradford, D.E., "Optimal Departures from Marginal Cost Pricing", American Economic Review, 60, pp. 265-283 (1970)
Faulhaber, G.R., "Cross-Subsidization: Pricing in Public Enterprises", American Economic Review, 65, pp. 967-77 (1975)
Faulhaber, G.R. and Levinson, S.B., "Subsidy-Free Prices and Anonymous Equity", American Economic Review, 71, pp. 1083- 1091 (1981)


January 17 Does Natural Monopoly Require Regulation? The Sustainability Craze

Baumol, W.J., Bailey, E.E., and Willig, R.D., "Weak Invisible Hand Theorems on the Sustainability of Prices in a Multiproduct Monopoly", American Economic Review, 67, pp. 350-365 (1977)

January 24 The Principal-Agent/Mechanism Design Craze

Baron, D.P., "Design of Regulatory Mechanisms and Institutions", Ch. 24 in Willig, R.D. and Schmalensee, R. eds., Handbook of Industrial Organization, (North-Holland: Amsterdam) 1989 pp. 1347-1447 Part 1 Part 2. Thess are huge files; please save them on your own computer for reading.

January 31 The Politics of Regulation

Noll, R.G., "Economic Perspectives on the Politics of Regulation", Ch. 22 in Willig, R.D. and Schmalensee, R. eds., Handbook of Industrial Organization, (North-Holland: Amsterdam) 1989 pp. 1253-1287 This is a huge file; please save it on your own computer for reading.
Laffont, J.-J. and Tirole, J., "The Politics of Government Decision-making: A Theory of Regulatory Capture", Quarterly Journal of Economics, CVI, pp. 1089-1128 (1991)


February 7 A Political Economy Approach to Regulation

Faulhaber, G.R., "Voting on Prices: the Political Economy of Regulation", in Rosston and Waterman, eds., Interconnection and the Internet, Lawrence Erlbaum (1997)
Faulhaber, G.R. "Lobbying, Voting and the Political Economy of Regulation", working paper (1999)
Faulhaber, G.R. "Information, Disinformation and Lobbying in a Median Voter Model", working paper (2000)

February 14 Antitrust New and Old

Baron, David, "Antitrust", from Business and Its Environment, pp. 199-221.
Evans, D.S. and R. Schmalensee, "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries", Antitrust Bulletin, 2001
Faulhaber, G.R., "Bottlenecks and Bandwagons: Access Policy in the New Telecommunications", in Vogelsang, ed. Handbook of Telecommunications Economics, 2003


February 21 The Limits of Regulation: Introducing Competition

Faulhaber, G.R., "Policy-Induced Competition: The Telecommunications Experiments", Information and Economic Policy, 2003

 

March 2 Information and Regulation of Information
Guest Lecturer: Professor Joel Waldfogel

Background:
Stigler, G. (1961) "The Economics of Information," Journal of Political Economy, 69(3), 213-225.

Main Papers:
Brown, J. and A. Goolsbee (2002), "Does the Internet make markets more competitive? Evidence from the life insurance industry," The Journal of Political Economy 110(3), 481-507.
Jin, G. and P. Leslie (2003), "The Effect of Information on Product Quality: Evidence from Restaurant Hygiene Grade Cards," The Quarterly Journal of Economics 118(2), 409-451.
Milyo, J. and J. Waldfogel (1999), "The Effect of Price Advertising on Prices: Evidence in the Wake of 44 Liquormart," American Economic Review 89(5), 1081-1096.

Optional
Dranove, D., D. Kessler, M. McClellan, and M. Satterthwaite (2003), "Is More Information Better? Effect of "Report Cards" on Health Care Providers," Journal of Political Economy 111(3), 555-88.

 

March 9 Spring break. No class.

 

March 16 Differentiated Products Demand with an Application to Merger Analyses
Research Proposal Due in Class

Background:
U.S. Department of Justice and the Federal Trade Commission, "Horizontal Merger Guidelines" (1997)
Main Papers:
Berry, S. (1994) "Estimating Discrete-Choice Models of Product Differentiation." RAND Journal of Economics 25 (2): 242-62.
Nevo, A. (2000) "Mergers and Differentiated Products: The Case of the Ready-To-Eat Cereal Industry," RAND Journal of Economics 31(3), 395-421.
Petrin, A. (2002) "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy 110(4): 705-29.

Optional

Nevo, A. (2000) "A Practitioner's Guide to Estimation of Random Coefficients Logit Models of Demand." Journal of Economics and Management Strategy 9(4): 513-48.

 

March 23 Vertical Integration and Vertical Relationships

Background:
U.S. Department of Justice and the Federal Trade Commission, "Non-Horizontal Merger Guidelines" (1997)
Main Papers:
Baker, G. and T. Hubbard (2003), "Make Versus Buy in Trucking: Asset Ownership, Job Design and Information," American Economic Review 93, 551 - 572.
Busse, M., Silva-Risso, J., and F. Zettelmeyer (2006) "$1000 Cash Back: The Pass-Through of Auto Manufacturer Promotions," American Economic Review, 96 (4), 1253 - 1270.
Villas-Boas, Sofia (2006) "Vertical Relationships Between Manufacturers and Retailers: Inference With Limited Data," CUDARE Working Paper 943, University of California-Berkeley.

Optional

Chipty, T. (2001), "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry," American Economic Review 91, 428 - 453.
Martin, S., H.-T. Normann, and C. Snyder (2001), "Vertical Foreclosure in Experimental Markets," RAND Journal of Economics 32 (3), 466 - 496.
Ordover, J., G. Saloner and S. Salop (1990), "Equilibrium Vertical Foreclosure," American Economic Review 80, 127 - 142.

March 30 Markets with Demand-Side Increasing Returns

Background:
Manski, C., (1993) "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies 60, 531 - 42.
Main Papers:
Gowrisankaran, G. and J. Stavins (2004), "Network Externalities and Technology Adoption: Lessons from Electronic Payments," RAND Journal of Economics 35 (2), 260 - 276.
Rysman, M. (2004), "Competition Between Networks: A Study of the Market for Yellow Pages," The Review of Economic Studies 71 (2), 483 - 512.
Saloner, G. and A. Shepard (1995), "Adoption of Technologies with Network Effects: An Empirical Examination of the Adoption of Automated Teller Machines," RAND Journal of Economics 26, 479 - 501.

Optional

Gandal, N., M. Kende and R. Rob, (2000). "The Dynamics of Technological Adoption in Hardware/ Software Systems: the case of Compact Disc Players." RAND Journal of Economics 31, 43-61.
Ackerberg, D. and G. Gowrisankaran, (2006). "Quantifying Equilibrium Network Externalities in the ACH Banking Industry," RAND Journal of Economics, forthcoming.

April 6 Switching Costs

Background:
Klemperer, P. (1995), "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies 62 (4), 515 - 539.
Main Papers:
Dubé, J.-P., G. Hitsch and P. Rossi (2006) "Do Switching Costs Make Markets Less Competitive?," Working Paper, Graduate School of Business, University of Chicago.
Taylor, C. (2003), "Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," The RAND Journal of Economics 34, 223 - 247.
Viard, B. (2006), "Do Switching Costs Make Markets More or Less Competitive?: The case of 800-number Portability," forthcoming RAND Journal of Economics.

Optional

Moshkin, N. and R. Shachar (2002), "The Asymmetric Information Model of State Dependence," Marketing Science 21, 435 - 454.
Shum, M. (2004), "Does Advertising Overcome Brand Loyalty? Evidence from the Breakfast Cereals Market," Journal of Economics & Management Strategy 13, 241 - 272.

April 11 Price Discrimination and Dispersion 6:00-9:00 pm
Note Time and Date Change for this Class Only

Busse, M. and M. Rysman (2005), "Competition and Price Discrimination in Yellow Pages Advertising," RAND Journal of Economics, 36(2), 378-390.
Leslie, P. (2004), "Price Discrimination in Broadway Theatre," RAND Journal of Economics 35(3), 520 - 541.
McManus, B. (2006), "Nonlinear Pricing in an Oligopoly Market: the Case of Specialty Coffee," RAND Journal of Economics, forthcoming.
Sorenson, A. (2000), "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy 108(4), 833 - 850.

April 20 Entry, Product Selection and Efficiency

Berry, S. and J. Waldfogel (2001), "Do Mergers Increase Product Variety," The Quarterly Journal of Economics 116(3), 1009.
Cutler, D. and J. Gruber (1996), "Does Public Insurance Crowd Out Private Insurance?," Quarterly Journal of Economics 111, 391-430.
Ellickson, P. (2006), "Does Sutton Apply to Supermarkets?" RAND Journal of Economics, forthcoming.
Hsieh, C. and E. Moretti (2003), "Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry," Journal of Political Economy 116(5), 1076-1122.