Pasquale Schiraldi

Automobile replacement: a dynamic structural approach

This paper specifies and estimates a structural dynamic model of consumer demand for new and used durable goods. Its primary contribution is to provide an explicit estimation procedure for transaction costs, which are crucial to capturing the dynamic nature of consumer decisions. In particular, transaction costs play a key role in determining consumer replacement behavior in both primary and secondary markets for durable goods. The unique data set used in this paper has been collected by the Italian Motor Registry and covers the period from 1994 to 2004. It includes information about sales dates for individual cars over time as well as the initial stock of cars in the sample period. Identification of transaction costs is achieved from the variation in the share of consumers choosing to hold a given car type each period, and from the share of consumers choosing to purchase the same car type that period. Specifically, I estimate a random coefficients discrete choice model that incorporates a dynamic optimal stopping problem in the spirit of Rust (1987). I apply this model to evaluate the impact of scrappage subsidies on the Italian automobile market in 1997 and 1998. (This abstract was borrowed from another version of this item.)

Automobile Replacement: A Dynamic Structural Approach

This paper specifies and estimates a structural dynamic model of consumer demand for new and used durable goods. Its primary contribution is to provide an explicit estimation procedure for transaction costs, which are crucial to capturing the dynamic nature of consumer decisions. In particular, transaction costs play a key role in determining consumer replacement behavior in both primary and secondary markets for durable goods. The unique data set used in this paper has been collected by the Italian Motor Registry and covers the period from 1994 to 2004. It includes information about sales dates for individual cars over time as well as the initial stock of cars in the sample period. Identification of transaction costs is achieved from the variation in the share of consumers choosing to hold a given car type each period, and from the share of consumers choosing to purchase the same car type that period. Specifically, I estimate a random coefficients discrete choice model that incorporates a dynamic optimal stopping problem in the spirit of Rust (1987). I apply this model to evaluate the impact of scrappage subsidies on the Italian automobile market in 1997 and 1998.

Buying Frenzies in Durable-Goods Markets

We explain why a durable-goods monopolist would like to create a shortage during the launch phase of a new product. We argue that this incentive arises from the presence of a second-hand market and uncertainty about consumers׳ willingness to pay for the good. Consumers are heterogeneous and initially uninformed about their valuations but learn about them over time. Given demand uncertainty, first period sales may result in misallocation and lead to active trading on the secondary market after the uncertainty is resolved. Trading on the second-hand market will generate additional surplus. This surplus can be captured by the monopolist ex-ante because consumers are forward-looking, and the price they are willing to pay incorporates the product׳s resale value. As a consequence, when selling to uninformed consumers, the monopolist faces the trade-off between more sales today and a lower profit margin. Specifically, because the product׳s resale value is negatively related to the stock of the good in the second-hand market, selling more units today will result in a lower equilibrium price of the product. Therefore, the monopolist may find it optimal to create a shortage and ration consumers to the second period. We characterize conditions under which the monopolist would like to restrict sales and generate buying frenzies.

The Flexible Coefficient Multinomial Logit (FC-MNL) Model of Demand for Differentiated Products

We show FC-MNL is flexible in the sense of Diewert (1974), thus its parameters can be chosen to match a well-defined class of possible own- and cross-price elasticities of demand. In contrast to models such as Probit and Random Coefficient-MNL models, FC-MNL does not require estimation via simulation; it is fully analytic. Under well-defined and testable parameter restrictions, FC-MNL is shown to be an unexplored member of McFadden’s class of Multivariate Extreme Value discrete-choice models. Therefore, FC-MNL is fully consistent with an underlying structural model of heterogeneous, utility-maximizing consumers. We provide a Monte-Carlo study to establish its properties and we illustrate the use by estimating the demand for new automobiles in Italy.

Internet and the Efficiency of Decentralized Markets: Evidence from Automobiles

We estimate the effect of Internet on volume of trade in a major distributed marketplace. From 1997 to 2007, a period during which residential Internet use tripled, Internet increased the volume of used cars traded in California by 7.2 percent. This implies a substantial welfare gain due to reductions in market frictions. Additional gains may accrue when externalities are associated with the rate of vehicle fleet turnover (e.g. with respect to greenhouse gas emissions from fuel economy standards).

Multi-Category Competition and Market Power: A Model of Supermarket Pricing

In many competitive settings consumers buy multiple product categories, and some prefer to use a single firm, generating complementary cross-category price effects. To study pricing in supermarkets, an organizational form where these effects are internalized, we develop a multi-category multi-seller demand model and estimate it using UK consumer data. This class of model is used widely in theoretical analysis of retail pricing. We quantify cross-category pricing effects and find that internalizing them substantially reduces market power. We find that consumers inclined to one-stop (rather than multi-stop) shopping have a greater pro-competitive impact because they generate relatively large cross-category effects.

On Monotone Strategy Equilibria in Simultaneous Auctions for Complementary Goods

We explore existence and properties of equilibrium when N>1 bidders compete for L>1 objects via simultaneous but separate auctions. Bidders have private combinatorial valuations over all sets of objects they could win, and objects are complements in the sense that these valuations are supermodular in the set of objects won. We provide a novel partial order on types under which best replies are monotone, and demonstrate that Bayesian Nash equilibria which are monotone with respect to this partial order exist on any finite bid lattice. We apply this result to show existence of monotone Bayesian Nash equilibria in continuous bid spaces when a single global bidder competes for L objects against many local bidders who bid for single objects only, highlighting the step in this extension which fails with multiple global bidders. We therefore instead consider an alternative equilibrium with endogenous tie-breaking building on Jackson, Simon, Swinkels and Zame (2002), and demonstrate that this exists in general. Finally, we explore efficiency in simultaneous auctions with symmetric bidders, establishing novel sufficient conditions under which inefficiency in expectation approaches zero as the number of bidders increases.

Preferences and Performance in Simultaneous First-Price Auctions: A Structural Analysis

Motivated by the empirical prevalence of simultaneous bidding across a wide range of auction markets, we develop and estimate a structural model of strategic interaction in simultaneous first-price auctions when objects are heterogeneous and bidders have preferences over combinations. In this model, bidders have stochastic private valuations for each object and stable incremental preferences over combinations, nesting the standard separable model as the special case when incremental preferences over combinations are zero. We establish non-parametric identification of primitives in this model under standard exclusion restrictions, providing a basis for both estimation and testing of preferences over combinations. We then apply our model to data on Michigan Department of Transportation (MDOT) highway procurement auctions, quantifying the magnitude of cost synergies and evaluating the performance of the simultaneous first-price mechanism in the MDOT marketplace.Motivated by the empirical prevalence of simultaneous bidding across a wide range of auction markets, we develop and estimate a structural model of strategic interaction in simultaneous first-price auctions when objects are heterogeneous and bidders have preferences over combinations. We begin by proposing a general theoretical model of bidding in simultaneous first price auctions, exploring properties of best responses and existence of equilibrium within this environment. We then specialize this model to an empirical framework in which bidders have stochastic private valuations for each object and stable incremental preferences over combinations; this immediately reduces to the standard separable model when incremental preferences over combinations are zero. We establish non-parametric identification of the resulting model under standard exclusion restrictions, thereby providing a basis for both testing on and estimation of preferences over combinations. We then apply our model to data on Michigan Department of Transportation highway procurement auctions, we quantify the magnitude of cost synergies and assess possible efficiency losses arising from simultaneous bidding in this market. ∗We are grateful to Philip Haile, Ken Hendricks, Paul Klemperer, and Balazs Szentes for their comments and insight. We also thank seminar participants at the University of Wisconsin (Madison), the University of Zurich, University of Leuven, Cardiff University, Oxford University, Cornell University, the University of East Anglia, and Universitie Paris 1 for helpful discussion. †London School of Economics, m.l.gentry@lse.ac.uk ‡London School of Economics, t.komarova@lse.ac.uk §London School of Economics and CEPR, p.schiraldi@lse.ac.uk