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?

Number of households in the United States Signup and view all the answers

What does the “second choice” data refer to?

Consumer surveys regarding alternative products consumers would consider Signup and view all the answers

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

By using a different instrumental variable Signup and view all the answers

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

Average household income Signup and view all the answers

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

2SLS with RXR as an instrumental variable Signup and view all the answers

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

All of the above Signup and view all the answers

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

Differences in assembly locations for different models of the same make Signup and view all the answers

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

Positive Signup and view all the answers

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

The instrumental variable is strong Signup and view all the answers

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

0.117 Signup and view all the answers

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

Prices are correlated with unobserved demand shocks Signup and view all the answers

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

The IV coefficient is expected to be smaller than the OLS coefficient Signup and view all the answers

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

All of the above Signup and view all the answers

What is the maximum horsepower recorded for cars?

645.00 Signup and view all the answers

Which vehicle type has a higher average curb weight?

SUVs Signup and view all the answers

Which value represents the minimum MPG for SUVs?

18.01 Signup and view all the answers

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

$35.85 to $72,750.83 Signup and view all the answers

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

55.76 Signup and view all the answers

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

Vehicle style Signup and view all the answers

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

Unobservable taste heterogeneity is significant Signup and view all the answers

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

Shift toward less price sensitivity with higher incomes Signup and view all the answers

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

-5.06 Signup and view all the answers

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

Smoothed kernel regression Signup and view all the answers

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

Parameters were fixed over the time period Signup and view all the answers

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

Flexibility in parameters, including price sensitivity 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?

It shifted towards less price sensitivity Signup and view all the answers

What was the mean markup for the 1980 baseline?

0.42 Signup and view all the answers

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

Top 5 + Nissan Signup and view all the answers

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

3,724 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?

Antitrust authorities' scrutiny Signup and view all the answers

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

Markups decreased from 1980 to 2018 Signup and view all the answers

Which exogenous force can change markups in the model?

Changes in consumer demographics or preferences Signup and view all the answers

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

Increased coordination of pricing decisions Signup and view all the answers

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

Fiat is the parent company of Chrysler Signup and view all the answers

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

Prices are set independently of all other products Signup and view all the answers

What is the HHI for the 1980 baseline?

2,661 Signup and view all the answers

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

The markups as a function of elasticity Signup and view all the answers

What methodology is suggested to improve estimates of price sensitivity?

Adding restrictions to increase precision Signup and view all the answers

What do the average prices in the model represent?

Average prices in 2015 US$ Signup and view all the answers

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

When products manufactured by the same parent are not strong substitutes Signup and view all the answers

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

Changes in global market trends Signup and view all the answers

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

The role of price elasticities as key estimands for determining markups Signup and view all the answers

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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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.