Department of Economics
Economics, Northwestern University, 2014 (expected)
MA, Economics, Northwestern University, 2010
BA, Business Economics, Pontificia Universidad Católica de Chile,
Industrial Organization, Applied Microeconomics
Job Market Paper:
Search and Wholesale Price Discrimination
New version coming soon.
Many markets for homogeneous goods feature market power and heterogeneity in the prices paid by buyers. Search costs are a common explanation for this phenomenon and are a concern as they generate inefficiencies. In this paper, I study a competitive market for homogeneous goods and, by exploiting a unique dataset, I find three facts that are opposite to what one would expect from a market with these characteristics. First, sellers enjoy market power. Second, one can find customers paying 50 or 60% more than others for the same product at the same day. Third, price differences are systematic at the buyer level, providing evidence that sellers actively practice price discrimination. Inspired by these facts and by evidence supporting search costs as the source of market power, I propose and estimate a structural search model for two purposes. First, to measure how the market power generated by search costs affects welfare and, second, to study how price discrimination may magnify or reduce the welfare effects of search costs by altering competition intensity. My results address two important issues. First, search costs imply price distortions that generate a loss in total surplus that is about two-thirds of the welfare loss when shifting from perfect competition to monopoly. That is, even for a competitive market for homogeneous goods, search costs can have a severe effect on welfare. Second, price discrimination increases total surplus by as much as six percent relative to when sellers set uniform prices. The increase in welfare can be partially explained by price discrimination increasing search incentives and, hence, intensifying competition.
Hassle Costs and Price Discrimination: An Empirical Welfare Analysis
R&R, AEJ: Applied Economics.
I study a market in which the soda industry offers two different container formats (refillable or disposable). Purchasing in the refillable format gives access to lower prices but this is not without cost. Hassle costs are used to sort consumer types. The profitability of the market segmentation depends on the joint distribution of consumers' price sensitivity and hassle cost valuations. I find that the more price sensitive consumers are the ones that dislike the least purchasing in the refillable format. This relation implies that hassle costs can be used for targeting low prices to price sensitive consumers without attracting the price insensitive consumers. Using the estimates, I evaluate the overall welfare consequences of this market segmentation and find that the profits would drop by 10 percent and consumer welfare by 16 percent if retailers were forced to serve consumers with a single format. The key effect behind the welfare change is that more consumers are able to enter the market with both formats.
Inertia, Advertising, and Rent Extraction in the Television Industry
Inertia in decisions is observed in many economic environments. In presence of inertia, suppliers can exploit low own-price (and cross-price) elasticities by extracting higher rents. I study the role of inertia on rent extraction using high-frequency television viewership data. I document inertia in television station choices by exploiting commercial breaks. Using the estimates of a choice model, I analyze how the equilibrium advertisement intensity varies for different levels of inertia.
Igal Hendel (Chair)