Three Applications of Structural Estimations in Oligopolistic and Auction Markets
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University of California Los Angeles Three Applications of Structural Estimations in Oligopolistic and Auction Markets A dissertation submitted in partial satisfaction of the requirements for the degree Doctor of Philosophy in Economics by Hisayuki Yoshimoto 2012 c Copyright by Hisayuki Yoshimoto 2012 Abstract of the Dissertation Three Applications of Structural Estimations in Oligopolistic and Auction Markets by Hisayuki Yoshimoto Doctor of Philosophy in Economics University of California, Los Angeles, 2012 Professor Ichiro Obara, Chair This dissertation investigates empirical perspectives on strategic interactions in oligopolistic and auction markets. To support my claims, I structurally estimate, test, and simulate economic hypotheses regarding post-merger market prices (Chapter 1) and the effects of regret-averse attitudes in auction markets (Chapter 2). I also propose a structural estimation method for experimental auction data (Chapter 3). ii The dissertation of Hisayuki Yoshimoto is approved. Connan A. Snider Jinyong Hahn Raphael Thomadsen Daniel A. Ackerberg Ichiro Obara, Committee Chair University of California, Los Angeles 2012 iii Table of Contents 1 Reliability Examination in Horizontal-Merger Price Simulations: An Ex- Post Evaluation of the Gap between Predicted and Observed Prices in the 1998 Hyundai–Kia Merger ............................... 1 1.1 Introduction.................................... 1 1.1.1 Literature ................................. 4 1.1.2 SettingsandOrganizationofPaper . 5 1.2 Description of the Automobile Market in Korea . 6 1.2.1 The Asian Economic Crisis and Imported Car Sales . 7 1.2.2 Oligopoly with Five Domestic Automobile Manufactures . 8 1.2.3 The Hyundai-Kia Merger (November 1998) and Samsung Motors En- try(February1998)............................ 10 1.2.4 Post-Merger Vehicle Price Increases . 11 1.2.5 DataSource................................ 14 1.3 DemandSideModelandEstimations . 15 1.3.1 DemandModel .............................. 15 1.3.2 Automobile Brand Nesting Group Categorizations . 16 1.3.3 Price Elasticities . 17 1.3.4 Descriptive Statistics . 17 1.3.5 Choice of Instrumental Variables . 18 1.3.6 Demand Estimation Results and Estimated Elasticities . 19 1.4 SupplySideModel ................................ 22 1.4.1 Firms’ Optimization Problem . 23 1.5 Post-Merger Price Benchmark Simulation . .. 24 iv 1.5.1 SimulationFramework .......................... 25 1.5.2 Benchmark (Conventional) Simulation Assumptions . 25 1.5.3 Benchmark Simulation Results . 26 1.6 Potential Causes in Long-Run Simulation Discrepancies . .... 27 1.7 Counterfactuals: Accounting for Long-Run Post-Merger Price Discrepancies, APartialContributionApproach . 33 1.7.1 A Ceteris Paribus (Partial Contribution) Evaluation inPost-MergerChanges ......................... 35 1.8 ConclusionandFutureExtensions. 38 1.8.1 Categorizations for Estimation and Construction of Instrumental Vari- ables.................................... 41 References ......................................... 51 2 Risk- & Regret-Averse Bidders in Sealed-Bid Auctions ........... 55 2.1 Introduction.................................... 55 2.1.1 Motivation: Discrepancies in Observed Bids and Risk-Averse Model Predictions ................................ 56 2.1.2 Contributions ............................... 61 2.1.3 Literature ................................. 62 2.1.4 OrganizationofPaper .......................... 63 2.2 Regrets: Simple First-Price Auction Example . 64 2.3 A Decision Model of Anticipated (Expected) Regret . .... 67 2.3.1 Definition ................................. 67 2.4 Auction Games with Risk- & Regret-averse Bidders and Empirical Hypotheses 69 2.4.1 GeneralAuctionSettings. 69 v 2.4.2 Equilibrium Concepts . 70 2.4.3 Understanding Regret Minimizing BNE . 70 2.4.4 EmpiricalHypotheses........................... 73 2.5 Symmetric Private-Value Auctions . 76 2.5.1 Second-PriceAuction(SPA) . 77 2.5.2 First-PriceAuction(FPA) . 78 2.5.3 All-PayAuction(APA).......................... 80 2.6 Regrets in Independent Private Value Auctions: Experimental Evidence . 83 2.6.1 Datasets.................................. 83 2.6.2 EstimationMethod............................ 85 2.6.3 Estimation Results and Hypothesis Tests . 88 2.6.4 HypothesisTestings............................ 88 2.7 Counterfactual Analysis: Calibrations and Revenue Rankings . ....... 90 2.7.1 Calibrating Equilibrium Bidding Functions . 90 2.7.2 Calibration Results and Revenue Rankings . 91 2.8 ConclusionsandExtensions ........................... 95 2.8.1 Third-PriceAuction(TPA) . 100 References ......................................... 105 3 Structural Estimations Using Experimental Auction Data: An Approach in the Absence of Closed-Form Bidding Functions ................ 109 3.1 Introduction.................................... 109 3.2 EstimationMethod................................ 111 3.3 Application: Asymmetric Auctions with Risk-Averse Bidders . .... 115 3.3.1 ExperimentalSetting . .. .. .. 116 vi 3.3.2 HypothesesandMomentConditions . 118 3.3.3 Descriptive Statistics and Estimation Result . 120 3.3.4 Counterfactual Simulations . 121 3.4 Conclusion..................................... 122 References ......................................... 123 vii List of Figures 1.1 Left figure: Research with a blocked/retreated merger, Right figure: This research(outline) ................................. 3 1.2 Roadmapofthispaper ............................. 6 1.3 Korea’s automobile market: Domestically produced versus imported car sales 7 1.4 Left figure: Monthly sales quantities by firm, Right figure: Percentage market sharesbyfirm................................... 8 1.5 Left figure: Sales-weighted aggregate price, Right figure: Sales-weighted prices byfirm....................................... 11 1.6 Left figure: Compact car prices, Right figure: Mid-size car prices....... 12 1.7 Left figure: Hyundai Sonata prices in the United States versus in Korea, Right figure: Hyundai Avante/Elantra prices in the United States versusinKorea. 13 1.8 Left figure: Pre-merger regime (1991-1998) own-price elasticities, Right figure: Post-merger regime (1999-2007) own-price elasticities. ...... 21 1.9 Left figure: Merger simulations versus observed prices, Right figure: Merger simulation versus average of observed prices (Short term 1999–2003, and Long run2004–2010) .................................. 27 1.10 Material Cost Proxy: Importer Price Index in Korea (inflation adjusted) . 32 1.11 Left figure: Applying post-merger income, Right figure: Applying post-merger preference ..................................... 38 1.12 Left figure: Applying marginal cost reduction, Right figure: Applying post- mergerproductline................................ 38 1.13 Left Figure: Indexed aggregate price, Right Figure: Indexed prices by firms . 43 1.14 Left figure: City-/Small-size car prices, Right figure: Subcompact car prices . 44 1.15 Left figure: Compact crossover SUV prices, Right figure: Crossover SUV prices 44 viii 1.16 Left figure: Compact-minivan prices, Right figure: Minivan prices ...... 45 1.17 Left figure: Bank-to-firm loan rates in Korea, Right figure: Manufacturing sectorhourlywageinKorea ........................... 50 2.1 Kagel and Levin (1993): Frist-Price Auction Experiments . ...... 57 2.2 Noussair and Silver (2006) - (a) Six Bidder All-Pay Experiment (b) Calibrated Risk-AverseBNE ................................. 57 2.3 Kagel and Levin (1993): Third-Price Auction Experiments Results - Compar- isonstoRisk-AverseBNEs............................ 59 2.4 Kagel and Levin (1993): Second-Price Auction Experiments . ...... 60 2.5 RoadmapofthePaper .............................. 63 2.6 Regret in a Second-Price Auction: (1) b < x + J (left figure), (2) b = x + J (center figure),and (3) b > x + J (right figure). Thin-dashed lines are realized payoffs, and thick-dashed lines are ex-post best payoffs . We define regrets as the differences between these two lines in each figure; we plot regrets as the solidlines...................................... 78 2.7 EstimationOutline ................................ 84 2.8 First-Price and Second-Price Auction Calibrations . .... 92 2.9 Third-Price Auction Calibrations . 93 2.10 All-Pay Auction Calibrations . 93 3.1 ComparisonofEstimationMethods . 113 3.2 Left figure: 1st stage Bids among Becoming-Weak-in-2nd-Stage Bidders, Right figure: 1st Stage Bids Among Becoming-Strong-in-2nd-Stage . ...... 117 3.3 Left figure: 2nd Stage Bids among Weak Bidders, Right figure: 2nd Stage StrongBidsamongStrongBidders . 117 ix 3.4 Left figure: Calibrated Equilibrium Bidding Function for Weak Bidders, Right figure: Calibrated Equilibrium Bidding Function for Weak Strong Bidders. 121 x List of Tables 1.1 Ownershiptransitions .............................. 9 1.2 Korean economic crisis, merger, and acquisition timeline . ... 9 1.3 Automobile nesting groups for instrumental variable nested-logit estimation . 16 1.4 Descriptive statistics: Variables in the pre-merger regime (left table), Vari- ables in the post-merger regime (right table) . 18 1.5 Estimationresults................................. 20 1.6 Recovered markups and marginal costs in pre-merger regime (January 1991– November1998).................................. 24 1.7 AveragemonthlywageKorea(1991-2010) . ... 28 1.8 Pre- and Post-merger marginal cost comparison . ..... 29 1.9 Left figure: Bands supplied by Hyundai and Kia Motors in November 1998 (merger announcement month), Right figure: Brands supplied by Hyundai- KiagroupsinNov. 2003(fiveyearsaftermerger) . .. 31 1.10 Using