2.2 The Evolution of Market Power in the U.S. Automobile Industry
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Questions and Answers

What is the primary source of data for the study?

  • Ward's Automotive (correct)
  • Individual consumer choices
  • Consumer survey responses
  • Automobile market data

How are prices adjusted in the study?

  • Deflated to 2015 US$ using the GDP deflator
  • Adjusted based on inflation rates in each year
  • Not adjusted, prices are used in their original values
  • Deflated to 2015 US$ using the consumer price index (correct)

What is the time period covered by the data set?

  • 1980 to 2015
  • 1988 to 2018
  • 1980 to 2018 (correct)
  • 1988 to 2015

What is the basis for defining market size in the study?

<p>Number of households in the United States (B)</p> Signup and view all the answers

What does the “second choice” data refer to?

<p>Consumer surveys regarding alternative products consumers would consider (B)</p> Signup and view all the answers

How do the authors account for price endogeneity in their analysis?

<p>By using a different instrumental variable (B)</p> Signup and view all the answers

Which of the following is NOT a feature of the data set used in the study?

<p>Average household income (A)</p> Signup and view all the answers

What is the main methodological approach used to estimate the demand model?

<p>2SLS with RXR as an instrumental variable (A)</p> Signup and view all the answers

What is the purpose of analyzing a longer time period in the study?

<p>All of the above (D)</p> Signup and view all the answers

What is the primary source of variation in real exchange rates within a make?

<p>Differences in assembly locations for different models of the same make (A)</p> Signup and view all the answers

What is the expected sign of the coefficient on the instrumental variable (RXR) in the first-stage regression?

<p>Positive (A)</p> Signup and view all the answers

What does the first-stage F-statistic of 14.09 indicate?

<p>The instrumental variable is strong (A)</p> Signup and view all the answers

What is the estimated pass-through of real exchange rates (RXR) to prices?

<p>0.117 (C)</p> Signup and view all the answers

Why is the OLS estimate of the price coefficient expected to be biased?

<p>Prices are correlated with unobserved demand shocks (D)</p> Signup and view all the answers

What is the expected direction of change in the price coefficient when using the IV compared to OLS?

<p>The IV coefficient is expected to be smaller than the OLS coefficient (D)</p> Signup and view all the answers

What is the main purpose of including make fixed effects and year fixed effects in the model?

<p>All of the above (D)</p> Signup and view all the answers

What is the maximum horsepower recorded for cars?

<p>645.00 (C)</p> Signup and view all the answers

Which vehicle type has a higher average curb weight?

<p>SUVs (C)</p> Signup and view all the answers

Which value represents the minimum MPG for SUVs?

<p>18.01 (D)</p> Signup and view all the answers

What is the range of prices for cars as indicated by the minimum and maximum values?

<p>$35.85 to $72,750.83 (B)</p> Signup and view all the answers

What is the average height of cars based on the given data?

<p>55.76 (B)</p> Signup and view all the answers

Which vehicle characteristic shows the largest random coefficient, indicating strong consumer substitution?

<p>Vehicle style (D)</p> Signup and view all the answers

What does the doubling of the random coefficient associated with trucks suggest?

<p>Unobservable taste heterogeneity is significant (C)</p> Signup and view all the answers

How have consumer demographics affected price sensitivity over the observed years?

<p>Shift toward less price sensitivity with higher incomes (C)</p> Signup and view all the answers

What was the average share-weighted own-price elasticity across the sample?

<p>-5.06 (C)</p> Signup and view all the answers

What method was used to display consumers' price sensitivity over different years?

<p>Smoothed kernel regression (C)</p> Signup and view all the answers

What was the main assumption about model parameters in the baseline specification?

<p>Parameters were fixed over the time period (A)</p> Signup and view all the answers

What was a primary focus of the robustness checks performed on the main results?

<p>Flexibility in parameters, including price sensitivity (D)</p> Signup and view all the answers

Which of the following statements is true regarding the distribution of consumers' price sensitivity from the years 1985, 2000, and 2015?

<p>It shifted towards less price sensitivity (C)</p> Signup and view all the answers

What was the mean markup for the 1980 baseline?

<p>0.42 (B)</p> Signup and view all the answers

Which hypothetical cartel membership has the highest mean markup in 2018?

<p>Top 5 + Nissan (D)</p> Signup and view all the answers

What HHI corresponds to the Top 3 + Fiat cartel membership in 2018?

<p>3,724 (D)</p> Signup and view all the answers

Which of the following is a reason why a price-fixing cartel in 2018 would be unlikely to persist?

<p>Antitrust authorities' scrutiny (A)</p> Signup and view all the answers

Which statement about markups is true regarding the comparison between 1980 and 2018?

<p>Markups decreased from 1980 to 2018 (B)</p> Signup and view all the answers

Which exogenous force can change markups in the model?

<p>Changes in consumer demographics or preferences (A)</p> Signup and view all the answers

What would be the result of forming a cartel with the six largest parent companies?

<p>Increased coordination of pricing decisions (A)</p> Signup and view all the answers

In the context provided, what is Fiat's relationship with Chrysler in 2018?

<p>Fiat is the parent company of Chrysler (B)</p> Signup and view all the answers

What assumption is made in the model regarding the setting of prices?

<p>Prices are set independently of all other products (A)</p> Signup and view all the answers

What is the HHI for the 1980 baseline?

<p>2,661 (B)</p> Signup and view all the answers

What is the Lerner index used to measure in the context of the model?

<p>The markups as a function of elasticity (B)</p> Signup and view all the answers

What methodology is suggested to improve estimates of price sensitivity?

<p>Adding restrictions to increase precision (C)</p> Signup and view all the answers

What do the average prices in the model represent?

<p>Average prices in 2015 US$ (D)</p> Signup and view all the answers

Under what condition can the case of single-product firms be a good approximation?

<p>When products manufactured by the same parent are not strong substitutes (A)</p> Signup and view all the answers

Which of the following is NOT mentioned as a factor for changing markups?

<p>Changes in global market trends (A)</p> Signup and view all the answers

What aspect does the decomposition of price elasticities emphasize in the context of markups?

<p>The role of price elasticities as key estimands for determining markups (D)</p> Signup and view all the answers

Flashcards

Average Sales of Cars

The average sales value of cars in the dataset.

Average Curb Weight of SUVs

The average curb weight of SUVs in the dataset.

Maximum Height of a Car

The maximum height of a car in the dataset.

Average Horsepower of Cars

The average horsepower of cars, which is the power output of the engine.

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What are Sales and MPG?

Data like 'Sales' and 'MPG' represent measurements of the car's features.

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Logit Model

A statistical model that predicts the probability of an event occurring, especially in situations with choices or decisions.

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Two-Stage Least Squares (2SLS)

A technique used to estimate the parameters of a model when there is a correlation between the explanatory variable and the error term, leading to biased OLS estimates.

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Instrumental Variable (IV)

A variable that is correlated with the endogenous variable but not directly correlated with the error term, used in 2SLS to estimate the causal effect of the endogenous variable.

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Fixed Effect

A variable that takes on different values for each level of another categorical variable. E.g., 'make' fixed effect captures specific characteristics of each car brand.

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Real Exchange Rate (RXR)

The relative price of goods or services in one country compared to another, adjusted for differences in exchange rates.

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Own-Price Elasticity

The change in quantity demanded of a good in response to a change in its own price, usually expressed as a negative value.

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Pass-Through

The process by which the effect of an exogenous variable (e.g., RXR) is transmitted to the endogenous variable (e.g., price) through various channels.

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Endogeneity Bias

A bias that occurs in OLS estimates when the explanatory variable correlates with the error term, leading to an incorrect estimate of the true relationship.

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Estimating Demand

The practice of using microdata, second-choice data, and a specific instrumental variable to analyze demand in a market.

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Second-Choice Data

Information about individual consumer choices, including demographics and alternate product preferences.

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Instrumental Variable

A variable that is related to the independent variable (e.g., price) but not to the dependent variable (e.g., demand) through the same channels, and it is used to control for the influence of the independent variable on the dependent variable.

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Price Endogeneity

An approach to handle the issue of prices being influenced by demand, leading to biased estimates. It uses instrumental variables to identify the true relationship between prices and demand.

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Outside Option Value

The measure of the change in demand due to alterations in the value of the outside option (e.g., staying home instead of buying a car).

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Demand Decomposition

A systematic approach to analyzing demand that involves breaking down time effects into changes in unobservable quality and changes in the value of the outside option.

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Automobile Market Data

The collection of data about automotive market characteristics, including sales figures, MSRP, vehicle specifications, and consumer choices.

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Dataset for Auto Market Analysis

This dataset includes information about vehicle characteristics, market shares, consumer choices, demographic information, and consumer responses about alternative product preferences.

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Vehicle Style Substitution

The degree to which consumers substitute one type of vehicle for another. A higher coefficient indicates stronger substitution.

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Unobservable Taste Heterogeneity

Unmeasurable differences in consumer preferences that affect their choices.

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Price Sensitivity (αi)

The sensitivity of demand to changes in price. A higher value indicates a greater change in demand for each unit of price change.

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Distribution of Price Sensitivity Over Time

The distribution of αi (price sensitivity) changes over time due to factors like income growth and population demographics.

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BLP Model

A method for estimating the degree of competition in a market, taking into account unobserved factors that affect consumer choices, like taste for specific car features.

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Average Own-Price Elasticity

The average share-weighted own-price elasticity across the entire sample of cars is -5.06. This implies that a 1% increase in the price of cars would lead to a 5.06% decrease in demand.

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Market Power

The ability of companies to charge higher prices for their products due to factors like brand loyalty or limited competition.

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Markups

Estimates of markups indicate that companies in the automotive industry can charge prices that are higher than their production costs due to a combination of unobserved consumer taste and brand loyalty.

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Exogenous Forces

Factors outside the control of firms that can affect their pricing decisions, including consumer preferences, competition, and regulations.

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Lerner Index

A measure of a firm's pricing power, calculated as the difference between price and marginal cost divided by the price.

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Price Elasticity of Demand

The responsiveness of demand to changes in price. A high price elasticity means that demand is sensitive to price changes, while a low elasticity indicates that demand is relatively insensitive.

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Marginal Cost

The cost of producing one additional unit of a product.

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Single-Product Firm Assumption

The assumption that each product's price is set independently of all other products in the market.

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Markup Estimation

A method of estimating markups by assuming that firms set prices to maximize profits, taking into account the impact of their pricing on the demand for their products.

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Average Derivative of Share with Respect to Price

The average change in market share for a product in response to a change in its price.

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Exclusion Restriction

A type of restriction used in econometric models to improve the accuracy of estimates.

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Market Concentration

The total market share controlled by a group of companies in a specific industry, expressed as a percentage.

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Cartel

A group of competing companies that secretly collude to fix prices, limit production, or control the market.

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Herfindahl-Hirschman Index (HHI)

A measure of market concentration that considers the market share of each company and squares it.

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Nash-Bertrand Competition

A scenario where companies compete by lowering prices, assuming competitors will do the same.

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Hypothetical Cartel Membership

A hypothetical scenario where several companies form a cartel to control the market.

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1980 Baseline

The level of market concentration that existed in 1980.

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2018 Baseline

The level of market concentration in 2018.

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Study Notes

Evolution of Market Power in the US Automobile Industry

  • The study examines the US automobile industry from 1980 to 2018, focusing on technological and regulatory changes and their impact on market performance.
  • Researchers constructed measures of industry performance and welfare, including a demand model, product-level data on market shares, and consumer-level data on demographics.
  • Marginal costs were estimated based on Nash-Bertrand pricing. A connection between trends in consumer welfare and markups were observed in relation to market structure trends.
  • Real prices rose, but markups fell substantially. The share of total surplus accruing to consumers increased due to quality and production advancements.
  • Consumer welfare rose due to improvement in product quality and manufacturing technology.
  • The study contrasts its findings with recent macroeconomic literature observations, showing decreasing markups.

Data and Methodology

  • The study used data from Ward's Automotive to track new car and light truck sales in the US from 1980-2018.
  • Data includes sales, manufacturer suggested retail prices(MSRP), and vehicle characteristics.
  • Data was collected, digitized, and cross-checked from Ward's Automotive Yearbooks (before 1988 data collection).
  • Additional data from Ward's Automotive was supplemented for further data analysis to include: vehicle origins, company ownership, additional vehicle features (electronics, safety).
  • Data was aggregated to make-model level for analysis.
  • Household-level data on consumer choices and demographics from the Consumer Expenditure Survey (CEX) and MRI’s Survey of the American Consumer was collected.
  • Data on consumer's second choices was gathered from MaritzCX.

Key Findings

  • Average automobile prices rose during the study period.
  • There was a decrease in industry concentration observed in the period.
  • The increase in consumer surplus was primarily a result of improvement in product quality and manufacturing technology.
  • The increase in size and horsepower of vehicles was coupled with improvements in fuel efficiency,
  • The number of available vehicle styles increased, in particular the growth of the SUV segment.
  • The study's findings show that the decline in markups is robust to alternate specifications of the model.
  • Estimated markups are consistent, regardless of the methodology used.
  • The share of consumer surplus in total welfare rose between 1980 and 2018, increasing from 0.62 to 0.82.
  • Technological advancement in production has decreased marginal costs, which significantly contributes to consumer surplus.
  • Increased variety/product choice contributes to consumer surplus.

Comparison and Limitations

  • The study's findings contrasted with previous macroeconomic literature observations which showed rising markups.
  • Assumes static Nash-Bertrand pricing (lack of collusion).
  • Does not fully account for dealer, parts, or financing markets in the estimations; This may influence pricing and market efficiency in those sectors.
  • Consumer taste and technology changes are important, but difficult to estimate from available data.

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The Evolution of Market Power in the U.S. Automobile Industry (1980-2018) PDF

Description

This quiz delves into the methodology and data sources used in a study on demand estimation. It covers topics such as data adjustment, market size definition, and the role of instrumental variables in the analysis. Test your understanding of price endogeneity and the analytical techniques employed in this economic study.

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