Essays on the Analysis of High-Dimensional Dynamic Games and Data Combination By Carlos Andrew Manzanares Dissertation Submitted to the Faculty of the Graduate School of Vanderbilt University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY in Economics August, 2016 Nashville, Tennessee Approved by: Tong Li Yanqin Fan Andrea Moro Alejandro Molnar Patrick L. Bajari ACKNOWLEDGMENTS I thank Tong Li for graciously serving as my co-advisor. I also thank my co-advisor Yanqin Fan, whose men- torship and tireless concern on my behalf have played a central role in my formation as a scholar. Additionally, I thank Patrick Bajari for his extensive and conscientious advising and professional support, which far exceeded his formal role as a dissertation committee member. I also thank my dissertation committee members Andrea Moro and Alejandro Molnar for their invaluable contributions of time, insight, and advice. I thank the Departments of Economics at Vanderbilt University and the University of Washington for coordinating an extensive and rewarding visit to the University of Washington, as well as the eScience Institute at the University of Washington (especially, Bill Howe and Andrew Whitaker), which introduced me to cloud computing and connected me to the broader data science community. This experience greatly enhanced my research program. My research has benefited considerably from conversations with Benito Arrunada,˜ Gregory Duncan, Martin Gaynor, Panle Jia, Phillip Leslie, Chris Nosko, Alberto Abadie, Valentina Staneva, Rahul Biswas, Charles Romeo, Fahad Khalil, Yu-chin Chen, Andrew Daughety, Jennifer Reinganum, Gregory Leo, Federico Gutierrez, Irene Botosaru, and others too numerous to mention. Funding from the National Science Foundation, Vanderbilt University, and the Mercatus Center, as well as an internship at Amazon, are gratefully acknowledged. To my parents, Carlos and Deborah, I thank you for your unwavering love, support, and encouragement and for being the best role models and mentors I could hope for. To Christina, I thank you for being my best friend and for sharing these experiences with me daily. To Chris, I thank you for being the best brother anyone could ask for, for always being with us in spirit, and for watching over us. We love you and miss you everyday. Finally, I thank and praise my Lord and Savior Jesus Christ for allowing me to draw upon His faithfulness and strength throughout this journey. ii TABLE OF CONTENTS Chapter Page ACKNOWLEDGMENTS.............................................. ii LIST OF TABLES ................................................. v LIST OF FIGURES................................................. vii 1 New Entry and Mergers in Network Industries: Evidence from U.S. Airlines ................ 1 1.1 Background................................................ 7 1.2 Model................................................... 11 1.2.1 Preliminaries........................................... 12 1.2.2 Network-Wide Capacity Game ................................. 12 1.2.3 Price Competition ........................................ 18 1.3 Data.................................................... 22 1.3.1 Sources.............................................. 22 1.3.2 Sample Selection......................................... 23 1.3.3 Data Summary .......................................... 24 1.4 Identification and Estimation....................................... 27 1.4.1 Overview............................................. 27 1.4.2 First Stage: Profits and Strategies ................................ 30 1.4.3 Second Stage: Capacity Game.................................. 33 1.5 Results .................................................. 40 1.5.1 Model Estimates ......................................... 40 1.5.2 Value of Defense......................................... 48 1.6 Conclusion ................................................ 54 2 Improving Policy Functions in High-Dimensional Dynamic Games ..................... 56 2.1 Method Characterization ......................................... 60 2.1.1 Model .............................................. 60 2.1.2 Policy Function Improvement ............................... 65 2.2 Empirical Illustration........................................... 72 2.2.1 Institutional Background and Data ............................... 72 2.2.2 Model Adaptation ........................................ 73 2.2.3 Policy Function Improvement .................................. 76 2.2.4 Results .............................................. 78 2.3 Conclusion................................................ 86 3 Partial Identification of Average Treatment Effects on the Treated via Difference-in-Differences . 89 3.1 Partial Identification of the Average Treatment Effect on the Treated.................. 91 3.1.1 Sharp bounds on ATT (x) and ATT ............................... 92 3.1.2 A Numerical Example ...................................... 95 3.2 Identification of ATT(x) and ATT Under An Exclusion Restriction................... 97 3.3 Bounds on ATT(x) and ATT When a Matched Subsample is Available . 100 3.3.1 Identification of ATT(x) and ATT When Matched Sample is Random . 102 3.3.2 Sharp Bounds on ATT(x) and ATT When Sampling Procedure for Matched Sample is Un- known ..............................................103 3.4 An Empirical Application.........................................104 3.4.1 Estimation ............................................105 3.4.2 Results ..............................................108 3.5 Conclusion................................................109 iii BIBLIOGRAPHY .................................................110 A Chapter 1 Appendix ..............................................116 A.1 Supplemental Tables...........................................116 A.2 Estimation Details ............................................121 A.2.1 First Stage: Demand Estimation.................................121 A.2.2 First Stage: Marginal Costs ...................................123 A.3 Miscellaneous ..............................................124 A.3.1 Low Cost Carrier List ...................................124 A.3.2 Original Input Model Specification ...............................124 A.4 Ongoing and Future Work........................................130 A.4.1 Summary ............................................130 A.4.2 Fixed, Entry, and Exit Costs...................................131 B Chapter 2 Appendix ..............................................132 B.1 Supplemental Tables...........................................132 B.1.1 Section 2.2.1 Tables.......................................132 B.1.2 Section 2.2.2 Tables.......................................133 B.1.3 Section 2.2.4 Table........................................135 B.2 Section Details ..............................................137 B.2.1 Section 2.2.1 Details.......................................137 B.2.2 Section 2.2.2 Details ......................................137 B.2.3 Section 2.2.4 Details.......................................141 C Chapter 3 Appendix ..............................................142 iv LIST OF TABLES 1.1 Legacy Carrier and Low Cost Carrier Flight Capacity Increases and Decreases by Merger, Proportion of Markets................................................. 11 1.2 Price Competition Variables Summary.................................. 26 1.3 Entry and Capacity Variables Summary ................................. 27 1.4 Estimated Demand and Marginal Cost Models (Two Stage GMM), 2008q1 - 2008q3 ......... 41 1.5 Estimated Reduced-Form Profit Models, 2008q1 - 2008q3 ....................... 43 1.6 Estimated Entry and Capacity Strategies................................. 45 1.7 Estimated Choice-Specific Value of Flight Capacity (Boosted Regression): Delta Airlines, 2008q2 . 46 1.8 Estimated Choice-Specific Value of Flight Capacity (Boosted Regression): Northwest Airlines, 2008q2 47 1.9 Estimated Choice-Specific Value of Flight Capacity (Boosted Regression): Delta and Northwest Merged, 2008q2.............................................. 47 1.10 Profitability of Offering 280 flights From Chicago to MSP, 2008q2, Southwest Airlines (Millions of US $) ................................................... 49 1.11 Change in Value of Defending Chicago to MSP Against Southwest Entry, Delta and Northwest, Pre- to Post-Merger .............................................. 49 1.12 Southwest Unentered Segments in 2008q1................................ 51 1.13 Value of Defense (Median and Mean) .................................. 51 1.14 Merger-Induced Changes in Characteristics Affecting Profitability (Delta and Northwest Merger, 2008q2 Data) ............................................... 53 2.1 Estimated Choice-Specific Value Function Models (Boosted Regression), Baseline Specification . 79 2.2 Simulation Results by Specification (Per-Store Average) ........................ 82 2.3 Simulation Results by Merchandise Type (Baseline Specification, Per-Store Average)......... 84 3.1 Comparison of Botosaru and Gutierrez (2015) to Fan and Manzanares (2016) . 100 3.2 Data Summary ..............................................104 3.3 Empirical Application Results ......................................108 v A.1 Timeline of Merger Events........................................116 A.3 Distribution Summary, Value of Defense.................................116 A.2 List of Southwest Flight Segments Unentered in 2008q1 ........................117 A.4 CSA Airport Correspondences......................................118