Cristian Huse

Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of Flexible-Fuel Technology

Brazil is the only sizable economy to date to have developed a home-grown ubiquitously-retailed alternative to fossil fuels in light road transportation: ethanol from sugar cane. Perhaps unsurprisingly, the uptake of flexible-fuel vehicles (FFVs) has been tremendous. Five years after their introduction, FFVs accounted for 90% of new car sales and 30% of the circulating car stock. We provide a stylized model of the sugar/ethanol industry which incorporates substitution by consumers, across ethanol and gasoline at the pump, and substitution by producers, across domestic regional and export markets for ethanol and sugar. We argue that the model stands up well to the empirical co-movement in prices at the pump in a panel of Brazilian states. The paper offers a case study of how agricultural and energy markets link up at the very micro level.

Does Product Differentiation Soften Price Reactions to Entry? Evidence from the Airline Industry

We examine the effects of entry on the pricing of legacy airlines facing a rapidly expanding low-cost newcomer. We estimate the timing and the determinants of responses allowing for asymmetry and product differentiation. We propose a decomposition procedure of time fixed-effects to control for unobserved heterogeneity, accounting for time-varying route-, city-, and carrier-specific unobservables. We find that incumbents do price-respond to actual but not to potential entry. The lack of preemption is due to financial distress, which precluded costly deterrence against a deep-pocketed newcomer. Our model also uncovers product differentiation stemming from more convenient flights.

Using Demand Systems to Evaluate Risky Projects: An Application to the Automobile Industry

We examine how the risk-return profiles of carmakers BMW and Porsche depend on whether car models are produced in the US or Europe. Using data from the US car market we combine a demand system for differentiated products with counterfactual paths to macroeconomic variables. We let prices and quantities respond to counterfactual values of exchange rates and consumer confidence. This allows us to generate counterfactual profit distributions at different horizons for alternative domestic and foreign production configurations. For plausible costs of building a plant, production in the US is attractive for BMW, but not for Porsche.