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Published and Forthcoming
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Paper
Abstract
Abstract: Product replacement plays a critical role in many high-tech durable goods markets. Since these markets frequently undergo both rapid improvements in quality and falling prices, the consumer's replacement decision is most often due to product obsolescence, as opposed to wear and tear. Managers in these industries know that consumers follow replacement cycles, but little is known about how and why these replacement cycles change over time. And recognizing that consumers do follow such cycles, how should managers alter their own strategies to take advantage of this?
To address these issues, I develop and estimate a dynamic consumer demand model that explicitly accounts for the replacement decision when consumers are uncertain about both future product price and quality. Using a unique data set from the PC processor industry, I show how to combine aggregate data on sales and product ownership to infer replacement behavior. The results reveal substantial variation in replacement behavior over time. I find that a myopic model of replacement underestimates price elasticities by approximately 30 to 40 percent and overestimates the frequency of replacement by 50 percent. I demonstrate that this heterogeneity in consumer replacement behavior provides an opportunity for managers to tailor their product introduction and pricing strategies to target the particular segment of consumers that is most likely to replace in the near future.
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with Dennis Epple and Holger Sieg
Paper
Abstract
Abstract:
Dating at least to the classic works of Alonso, Mills, and Muth, the production function for housing
has played a central role in urban economics and local public finance. Estimating housing production
functions is, however, challenging. The key problem encountered in estimation is that that
the quantity of housing services per dwelling is not observed by the econometrician. Instead, we
observe the value of a housing unit, which is the product of the price per unit of housing services
and the quantity of housing services per dwelling. This paper provides a new flexible approach for
estimating the housing production function which treats housing quantities and prices as latent
variables. The empirical analysis is based on a comprehensive database of recently built properties
in Allegheny County, Pennsylvania. We find that the new method proposed in this paper works
well in the application and provides reasonable estimates for the underlying production function.
Working Papers
- (resubmitted)
with Ron Goettler
Paper
Abstract
Abstract:
We propose and estimate a model of dynamic oligopoly with durable goods
and endogenous innovation. Firms make dynamic pricing and investment decisions
while taking into account the dynamic behavior of consumers who anticipate
the product improvements and price declines. The distribution of currently owned
products is a state variable that affects current demand and evolves endogenously as
consumers make replacement purchases. Our work extends the dynamic oligopoly
framework of Ericson and Pakes (1995) to incorporate durable goods. We propose
an alternative approach to bounding the state space that is less restrictive of frontier
firms and yields an endogenous long-run rate of innovation.
Using a simulated minimum distance estimator, we estimate the model for the PC microprocessor
industry and perform counterfactuals to measure the benefits of competition. Consumer
surplus is 2.5 percent higher ($5 billion per year) with AMD than if Intel
were a monopolist. Innovation, however, would be higher without AMD. Counterfactuals
reveal that consumer surplus can actually increase as the market moves
towards monopoly, which suggests that policymakers ought to consider the dynamic
trade-off of lower current consumer surplus from higher prices for higher
future surplus from more innovation. Comparative statics reveal that competition
does induce higher innovation if consumers have sufficiently high preferences for
quality and low price sensitivity.
Note: This paper was previously circulated under the title "Durable Goods Oligopoly with Innovation: Theory and Empirics." This paper was discussed in the March 2008 issue of Survey of Current Business, published by the Bureau of Economic Analysis in the U.S. Department of Commerce.
- (submitted)
with Baohong Sun
Abstract
Abstract:
The consumption of an addictive good today increases the probability of compulsive consumption in the future, which often increases the risk of long-term negative health outcomes. Consumers are known to engage in sophisticated behaviors to strategically manage their purchase and consumption of addictive goods to reduce the risk of negative outcomes. However, such behavior has not been incorporated into an empirical model of consumer behavior using actual purchase data. In this paper, we construct a dynamic structural model with rational addiction and endogenous consumption to investigate how consumers strategically manage purchases and consumption in the face of addiction. Applying the model to a unique panel data set on consumer purchases of cigarettes, our results shed light on how consumers regulate their purchase and consumption of addictive goods. We use the model to investigate the differential impact of permanent and temporary price changes on purchase and consumption decisions.
- (submitted) with Dennis Epple and Holger Sieg
Abstract
Abstract:
In this paper we provide sufficient conditions under which locational equilibrium models
that assume a single housing price in each community continue to apply in the presence
of location-specific amenities that vary both within and across communities. As a consequence,
the basic ideas that underlie much of the recent empirical tests remain valid. In
particular, under the conditions we develop here, the model, estimation methods, and results
in Epple and Sieg (1999) are valid in the presence of such location-specific amenities.
We also show how to construct simple sufficient statistics that capture location specific
spatial heterogeneity. These measures based on the observed value of housing per unit of
land and exploit recent advances in the estimation of housing production functions. Finally,
we provide an empirical application which illustrates the new techniques developed in this
paper.
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Paper
Abstract
Abstract: From 1995 to 1998, more than 90 percent of mid-range IPOs had underwriter
spreads of exactly seven percent, even though evidence suggests that economies
of scale in the size of the offering should allow for lower fees. Chen and
Ritter (2000) offer collusion as a possible explanation based on empirical
analysis and observation. Alternatively, I investigate whether the spreads
could be the result of non-cooperative behavior on the part of the underwriters.
I build a model that captures several important characteristics
of competition in the IPO industry, such as differentiation among underwriters in their reputation and ability to screen potential entrepreneurs.
In equilibrium, as the underlying distribution of entrepreneurs
becomes increasingly skewed towards larger firms, I demonstrate underwriters may charge approximately
the same spread to entrepreneurs of different valuations. Thus, the model produces a pricing pattern that is consistent
with observation, and does so in a non-cooperative environment.
Works in Progress
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