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THREE ESSAYS on EMPIRICAL INDUSTRIAL ORGANIZATION and TIME SERIES FORECASTING by WENXING SONG a Dissertation Submitted in Partia

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THREE ESSAYS on EMPIRICAL INDUSTRIAL ORGANIZATION and TIME SERIES FORECASTING by WENXING SONG a Dissertation Submitted in Partia THREE ESSAYS ON EMPIRICAL INDUSTRIAL ORGANIZATION AND TIME SERIES FORECASTING By WENXING SONG A dissertation submitted in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY WASHINGTON STATE UNIVERSITY School of Economic Sciences JULY 2017 © Copyright by WENXING SONG, 2017 All Rights Reserved © Copyright by WENXING SONG, 2017 All Rights Reserved To the Faculty of Washington State University: The members of the Committee appointed to examine the dissertation of WENXING SONG find it satisfactory and recommend that it be accepted. Vicki A. McCracken, Ph.D. T. Randall Fortenbery, Ph.D. Jia Yan, Ph.D. Mark J. Gibson, Ph.D. ii ACKNOWLEDGMENT I would like to express my deepest gratitude to my committee chair Dr. Vicki A. McCracken and my committee members Dr. T. Randall Fortenbery, Dr. Jia Yan, and Dr. Mark J. Gibson for their excellent guidance, caring, and patience throughout my dissertation. They not only patiently give insightful feedback on my dissertation, but also guide me when I encounter difficulties. Thank you to School of Economic Sciences. It’s been a great experience for me. Without the support I received from the department, I would not be able to achieve my goal. I would also like to thank all the faculty I took classes from. Thank my fellow colleagues. It’s been wonderful studying with them. Lastly, I would like to say thank you to my parents and siblings. They always understand and support me. iii THREE ESSAYS ON EMPIRICAL INDUSTRIAL ORGANIZATION AND TIME SERIES FORECASTING Abstract by Wenxing Song, Ph.D. Washington State University July 2017 Chair: Vicki A. McCracken This dissertation consists of three chapters on empirical industrial organization and time series forecasting. In the first chapter, I evaluate the price effects of the 2010 United-Continental (UA-CO) merger in the U.S. airline industry. I first estimate air travel demand using a nested logit model, assuming travelers are homogenous. Then marginal costs are recovered. Based on demand estimates and recovered constant marginal costs, I employ a standard merger simulation method to predict post-merger prices, assuming a Bertrand-Nash equilibrium. The results suggest that this methodology underpredicts the price effects of the UA-CO merger. In the second chapter, I evaluate the impact of the United-Continental merger on consumer welfare. An important assumption in this chapter is that there are two types of consumers in the U.S. airline industry. Consumers are heterogeneous-business and leisure iv travelers. A discrete mixture nested logit model is applied to estimate passengers’ heterogenous air travel demand. Then air travel demand is used to measure the welfare effects of the merger on business and leisure travelers separately. I find both business and leisure travelers in the merger- affected markets suffer welfare loss in the post-merger time period, comparing to those in the merger-unaffected markets. As of 2015, the UA-CO merger had not yet reached its expectation. In the third chapter, we first identity economic factors that influence two specific classes of wheat: hard red winter (HRW) and soft white (SWW) wheat, and develop models to improve the forecast performance of wheat basis in Washington State. The models we estimate include: 1) a simple three-year moving average model to serve as benchmark; 2) an econometric fundamental model; 3) an ARMA time series model; and 4) an ARMAX hybrid model. An econometric fundamental model and an ARMAX model include supply/demand factors suggested by economic theory and literature. We find the best model for both HRW and SWW is a function of forecast horizon. In addition, the ARMAX models perform better than the ARMA models in most cases, except SWW in Odessa, WA. v TABLE OF CONTENTS Page ACKNOWLEDGMENTS ............................................................................................................. iii ABSTRACT ................................................................................................................................... iv LIST OF TABLES ...........................................................................................................................x LIST OF FIGURES ...................................................................................................................... xii CHAPTER ONE: EVALUATE THE PRICE EFFECTS OF THE 2010 UNITED- CONTINENTAL MERGER ............................................................................................................1 1. INTRODUCTION .....................................................................................................................1 2. BACKGROUND .......................................................................................................................3 3. LITERATURE REVIEW ..........................................................................................................6 4. MODEL .....................................................................................................................................9 4.1. STEP 1: OBTAIN DEMAND PARAMETERS ESTIMATES ..........................................9 4.2. STEP 2: RECOVER MARGINAL COSTS .....................................................................14 4.3. STEP 3: PREDICT POST-MERGER PRICES ................................................................16 5. DATA ......................................................................................................................................17 5.1. SAMPLE SELECTION ....................................................................................................18 5.2. VARIABLE DEFINITION ..............................................................................................19 5.3. DATA SUMMARY..........................................................................................................20 5.4. INSTRUMENTAL VARIABLES ....................................................................................23 6. RESULTS ................................................................................................................................24 6.1. DEMAND PARAMETERS ESTIMATES ......................................................................24 6.2. RECOVERED MARGINAL COSTS ..............................................................................27 vi 6.3. PREDICTED POST-MERGER PRICES .........................................................................28 6.4. MARKET CONCENTRATION ......................................................................................31 7. CONCLUSIONS......................................................................................................................32 8. APPENDIX ..............................................................................................................................34 8.1. DESCRIPTIVE STATISTICS OF MERGER-UNAFFECTED MARKETS ..................34 8.2. HHI ..................................................................................................................................35 REFERENCES ..............................................................................................................................37 CHAPTER TWO: ROUGH LANDING: THE EFFECT OF THE UNITED-CONTINENTAL MERGER ON CONSUMER WELFARE .....................................................................................40 1. INTRODUCTION ...................................................................................................................40 1.1. BACKGROUND ..............................................................................................................42 1.2. LITERATURE REVIEW .................................................................................................44 2. MODEL ...................................................................................................................................47 2.1. THEORETIC MODEL .....................................................................................................47 2.2. EMPIRICAL MODEL......................................................................................................48 3. DATA ......................................................................................................................................53 3.1. SAMPLE SELECTION ....................................................................................................54 3.2. VARIABLE DEFINITION ..............................................................................................55 3.3. DATA SUMMARY..........................................................................................................57 3.4. INSTRUMENTAL VARIABLES ....................................................................................61 4. RESULTS ................................................................................................................................62 4.1. ESTIMATION RESULTS................................................................................................62 4.2. ELASTICITIES ................................................................................................................66 vii 4.3. WELFARE ANALYSIS ...................................................................................................68 5. CONCLUSIONS......................................................................................................................70 6. APPENDIX ..............................................................................................................................72
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