Essays on Aggregate Demand Shocks and Dynamic Games

Abstract

This thesis studies how considering competition among firms in long-run, repeated settings can alter policy welfare evaluations relative to single-period static models. I explore this issue through empirical and computational methods in dynamic games applied to different industries. My first chapter studies whether legalized price coordination in the form of joint operating agreements (JOAs) in the U.S. local daily print newspaper industry from 1932 to 1992 could have improved long-run consumer welfare. I modify dynamic game models and estimation methods involving market entry and market exit to include endogenous decisions among firms whether to coordinate and efficient transfers negotiated over discounted stream payoffs. With respect to the newspaper industry, I find that JOA gains were insufficient to both incentivize the more financially sound firm to coordinate and increase the less financially sound firm’s ability to remain in the market. My second chapter on Malaysian oil palm farm size composition notes that the observed slowdown in oil palm land expansion following the E.U. restrictions on palm oil imports complicates long run assessments of farmer welfare. This is because the change in supply from differences in net exit and entry probabilities also changes equilibrium prices. I use data on aggregate regional land use obtained from the Malaysian government and a single agent dynamic model with restrictions on agent beliefs about price equilibria to estimate long run losses to small farms. My third chapter (co-authored with Ran Zhuo) discusses how subsidies targeted at a specific technology generation in an industry with innovation following a quality ladder can generate competitive spillovers. Using novel and proprietary data on the semiconductor industry, we provide evidence that firms in this setting do follow a quality ladder and of differences in market power across technology generations. We then argue that a policymaker considering subsidies should account for how subsidies affecting entry and competition in one generation also affect firm incentives to innovate.