Demand Manifolds for Empirical Industrial Organization

University Of Texas At Austin, Austin TX

Investigators

Abstract

There has been a public debate over the effect of increased industrial concentration on income inequality and price increases, inspiring a more interventionist antitrust policy that prevents further market consolidation. This approach ignores the role of the nature of demand in producers’ ability of producers to shift cost increases unto consumers. This research will use three projects to study what role the curvature of the demand plays in firms’ ability pass increasing cost unto consumers in the form of higher consumer prices. This research will show that the degree to which producers can shift cost increases on to consumers depends on the shape of the demand curve. The research also provides a new and better way of measuring the shape of the demand curve as well as under what conditions producers can shift cost increases to consumers. The results of this research project will provide a better understanding of how supply chain disruption affect price changes and inflation dynamics. The results also provide a better guide to US anti-trust policies as well as help to establish the US a global leader in anti-trust policies. This research uses three projects to address demand curvature in discrete choice models. Economists have favored the use of mixed logit to accommodate idiosyncratic preferences over product attributes and price because it allows for unrestricted substitution patterns. However, the curvature properties of this model remain unknown. The first project explores how different elements of consumer preferences condition demand curvature and shows that only price random coefficient has any influence, and that the distribution of price random coefficients is key to expanding the range of estimable curvature in discrete choice models. The results show that the key to identifying demand curvature is the pass-through rates of common cost shifts at different price levels for multi-product firms. These results can be extended to accommodate demographic- and other price interactions in quasi-linear preferences models. The second project applies this methodology to study the impact of updating alcohol taxes on the noncompetitive liquor industry to show how the methodology leads to more accurate predictions of the effects of supply chain disruptions. The third project applies the flexible modelling in the first project to evaluate whether changing preferences affect demand curvature, hence secular markups. The results of this research project will provide a better understanding of how supply chain disruption affect price changes and inflation dynamics. The results also provide a better guide to US anti-trust policies as well as help to establish the US a global leader in anti-trust policies. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.