Working Papers

On Anticompetitive Third-Degree Price Discrimination

Third-degree price discrimination increases output and welfare if certain local demand curvature conditions hold. These curvature conditions, known for nearly a century, have never been evaluated empirically before. To successfully evaluate the output and welfare effects of third-degree price discrimination, demand specification must be sufficiently flexible to allow for curvature heterogeneity across local markets. Otherwise, demand specification bakes-in empirical output and welfare predictions of price discrimination. I show that with the notable exception of logit demand, most other demands families predict output and welfare reductions as their elasticity and curvature are negatively correlated. I use supermarket scanner data to evaluate demand curvature conditions nonparametrically for thousands of chain-store-product combinations and show that, more often than not, third-degree price discrimination (local store pricing) decreases output and welfare relative to uniform pricing (chain-store pricing). Furthermore, I show that using output as a proxy for welfare as Robert Bork suggested overstates potential gains and understates potential damages of price discrimination.
CEPR DP 19742.
Additional material: Online Appendix

Trade Protection, Industrial Policy, and the Shaping of Local Preferences

The Spanish industrial policy prohibited automobiles imports from 1939 to 1986, when Spain joined the European Union. We document how the industrial policy spurred the development led Spain to become the 5th largest automobile manufacturer in the world. This policy limited consumer choice but also resulted in pronounced regional and national home bias favoring local brands. We estimate a rich oligopoly equilibrium model to approximate the protection equivalence of the long-lasting effect of industrial policy through changes in consumer preferences. Today, domestic automakers still enjoy an advantage equivalent to an 8.5% tariff, compared to the 10.3% import-duty into the EU.
CEPR DP 19765

Elasticity and Curvature of Discrete Choice Demand Models

We study the determinants of cost pass-through in differentiated product markets. Random utility models of demand, such as mixed logit, are attractive because they place limited restrictions on customer substitution patterns. We show the shape of the distributions of customer preferences determines cost pass-through. Common functional form assumptions for these distributions lead to biased estimates of both pass-through and substitution. We offer a flexible and parsimonious unit-demand specification that accommodates both log-concave demands (incomplete pass-through) and log-convex demands (over-shifted pass-through) up to CES demand. Instruments and estimation are straightforward, and Monte Carlo analysis validates our ability to recover the underlying demand curvature. Using automobile data, we find the bias from ex-ante shape restrictions is large. Results show that flexibly estimating cost pass-through has important implications for evaluating trade and subsidy policies.
Earlier version: CEPR DP 18310

Amazon HQ2: A Tale of Shocks to Housing Price Expectations

The measurement of the contribution of expectations to house prices is unresolved in the macro-housing literature. We leverage a novel quasi-natural experiment using Amazon's unanticipated split location decision for its second headquarters to identify the impact of this expectations shock on local house prices, seller expectations and market liquidity. We find that listed and transacted prices increased on average 7.9% and 7.5%, respectively in the six months following the announcement. Furthermore, price gains were common across all market segments and the announcement had no effect on rents. We develop a tractable general equilibrium macro-housing model featuring mortgages and endogenous housing supply able to replicate the response of the price-rent ratio to an expectations shock. The model quantifies the differences between credit and expectations shocks and generates testable predictions for identifying the nature of a housing price shock. Our empirical and theoretical results provide a benchmark test for structural models that attempt to incorporate shocks to price expectations.
Earlier version: CEPR DP 18314

Targeted Pricing and the Shape of Demand

We study the role of demand specification in empirical assessments of the welfare effects of third-degree price discrimination. Building on the central role of demand curvature in theoretical analyses of such pricing, we quantify how its welfare implications depend on the shape of the distribution of consumer preferences in Logit models of demand. For the case of ready-to-eat cereal, we estimate a parsimonious specification capable of accommodating both log-concave and log-convex demands, as well as nested, but more restrictive, specifications from the literature. The flexible specification matches consumption patterns across different income levels, and the estimates reject the common practice of modeling preferences as linear or log-linear in consumer demographics. Misspecification leads to significant differences: flexible demand implies consumer welfare gains under uniform pricing are three to nine times higher than simpler models and profit losses two to 19 times greater.