Essays on strategic behavior in government-designed markets

Abstract

This thesis studies consumer behavior and strategic interactions between firms in markets that were actively designed by governments. In such settings, government intervention is frequent, firms are often constrained in their actions, and consumer behavior may depart from what is predicted by the standard set of assumptions. The chapters of this thesis study how the current set of regulations is affecting market outcomes in different settings and what can be done to improve them. Chapter 1 studies the Chilean pension system, where workers' mandatory contributions are administered by private companies. This market exhibits fee dispersion and low switching rates, which could be explained by firm differentiation or by switching costs. Using a novel combination of revealed preference inequalities and latent variable integration techniques, I find evidence of large switching costs, and that if these costs did not exist prices would fall to around one-half of currently observed levels. Chapter 2 is a pre-cursor to Chapter 1, studying what would be learned from estimating demand in this market using a more standard set of techniques. I find that ignoring switching costs, individual-level heterogeneity, and endogeneity will lead to implausible demand estimates. These results are the key motivation for the use of the more sophisticated methods used in Chapter 1. Finally, Chapter 3, written with Sarah Moshary, studies the privatization of liquor sales in Washington state. It focuses on a natural experiment induced by privatization, which creates exogenous variation in the number of elegible licensees in local liquor markets, generated by a licensure threshold requirement on store size: only stores larger than 10,000 square feet are allowed to sell liquor. We find that this regulation does not alter the total number of liquor outlets within each market. Instead, it shifts the composition of stores. Also, we find that in markets with an additional potential entrant the product mix is shifted towards cheaper products. This confirms concerns that competition in liquor markets leads to greater availability of cheap alcohol, and suggests that regulation has an effect in limiting the availability of those types of products.