COMPETING WITH MENUS OF TARIFF OPTIONS Eugenio J. Miravete - PowerPoint PPT Presentation

COMPETING WITH MENUS OF TARIFF OPTIONS Eugenio J. Miravete University of Texas at Austin, CEPR, and S.T. Lee Fellow at ISCR

Motivation: Economic Theory � Firms rarely offer the fully nonlinear tariff predicted by theoretical models. � Offering a menu of few two-part tariffs may respond to commercialization costs exclusively… � … or alternatively to the existence of discrete types. 2

� More interestingly, the number of options offered may also respond to strategic considerations: � Attempt to segment the market. � Attempt to differentiate products/services that are otherwise homogeneous. � To take advantage of any bounded rationality limitation of consumers. 3

� Competing views: � Symmetric equilibrium – minimal product differentiation. � Armstrong and Vickers (2001). � Rochet and Stole (2002). � Asymmetric equilibrium – differentiation through pricing. � Yang and Ye (2006). 4

� What is the question of economic interest? Are the pricing policies of competing firms strategic substitutes or strategic complements? � Of course we need to control for observed heterogeneity (and ideally by unobserved heterogeneity as well). 5

Motivation: Econometrics � Ideally we want to estimate a SUR count data model… � … not such model exists, or at least not one with the following properties: � Accommodate both over and underdispersion of counts. � Allow for positive and negative correlations of the errors. � Dispersion and correlation determined by different parameters. 6

� This paper develops such flexible econometric model. � Ingredients: � Efron’s (1986) Double Poisson distribution. � Sklar’s (1959) copula result. � Gaussian copula specification. � Advantages: � Straightforward generalizations to n-dimensions. � Very fast computation. 7

Data � 50 U.S. local cellular monopolist (1984-1988). � Temporary monopoly of the wireline carrier. � Exogenous entry of the second firm. � No need to model entry or entry deterrence strategies. � Largest SMSA markets. � All tariff plans offered by the incumbent: � Focus on the lower envelope of the peak tariff. � Include the first and last quarter in the sample. � Complemented with data from: � Census, FBI, and U.S. HCN. 8

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� Double Poisson: Model 13

� Straightforward estimation: 14

� Continuation of count variables: 15

� Gaussian copula: 16

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More to Come… � A more formal paper on this double Poisson – Gaussian copula method. � An alternative Gamma – Sarmanov copula. � Some other application. 18