Essays on Industrial Organization

Abstract

This dissertation consists of three essays in the area of Industrial Organization. The first essay established the theoretical motivations for, and implications of, exclusive contracts, with an application to smartphones. Why would Apple choose to distribute its smartphone through only one carrier, and why would AT&T bid the most for exclusivity? I develop a model which shows that if upstream handset manufacturers face a relatively low price elasticity for their good compared to downstream wireless carriers, exclusive contracts can maximize their joint profits. An exclusive contract reduces price competition in the final good market but also increases returns to innovation for parties outside the contract, such as Google’s Android. Different price elasticities among downstream firms due to network quality differences lead to different valuations of the exclusive contract. The second essay estimates the relative elasticities of smartphone and carrier demand using simulation and MCMC methods on a detailed monthly dataset of consumer decisions over 2008-2010. Counterfactual simulations show the importance of recomputing the price equilibrium to understanding the observed market structure. Accounting for price effects, AT&T had the highest value of exclusivity with Apple, and was willing to compensate Apple $148 per unit sale foregone. Apple’s exclusivity increased entry incentives for Android handset makers by approximately $1B. The third essay uses data on US newspapers from the early 20th century to study the economic incentives that shape ideological diversity in the media. My co-authors and I show that households prefer newspapers whose political content agrees with their own ideology, that newspapers with the same political content are closer substitutes than newspapers with different political content, and that newspapers seek both to cater to household tastes and to differentiate from their competitors. We estimate a model of newspaper demand, entry, and affiliation choice that captures these forces. We show that competitive incentives greatly enhance the extent of ideological diversity in local news markets, and we evaluate the impact of policies designed to increase such diversity.