Richard Schmalensee

Inter-industry studies of structure and performance

Publisher Summary This chapter discusses inter-industry studies of the relations among various measures of market structure, conduct, and performance. It discusses that tradition has indeed uncovered many stable, robust, and empirical regularities. Inter-industry research has taught much about the way markets look, especially within the manufacturing sector in developed economies, even if it has not shown exactly the way markets work. Work in some areas has produced no clear picture of the important patterns in the data, and non-manufacturing industries have not received attention commensurate with their importance. But cross-section studies are limited by serious problems of interpretation and measurement. Future inter-industry research should adopt a modest, descriptive orientation and aim to complement case studies by uncovering robust empirical regularities that can be used to evaluate and develop theoretical tools. Much of the most persuasive recent work relies on nonstandard data sources, particularly panel data that can be used to deal with disequilibrium problems and industry-specific data, which mitigate the problem of unobservable industry-specific variables.

Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry

This paper presents an analysis of the ready-to-eat breakfast cereal industry based on and related to the current antitrust case involving its leading producers. A spatial competition comparison framework is employed, with brands assumed relatively immobile. It is argued that the industrys conduct, in which price competition is avoided and rivalry focuses on new brand introductions, tends to deter entry and protect profits. Entry into a new segment of the market in the 1970s is discussed. Relevant welfare-theoretic issues are analyzed, and it is argued that the remedy proposed by the FTC is likely to improve performance.

Advertising and aggregate consumption: an analysis of causality

This paper is concerned with testing for causation, using the Granger definition, in a bivariate time-series context. It is argued that a sound and natural approach to such tests must rely primarily on the out-of-sample forecasting performance of models relating the original (non-prewhitened) series of interest. A specific technique of this sort is presented and employed to investigate the relation between aggregate advertising and aggregate consumption spending. The null hypothesis that advertising does not cause consumption cannot be rejected, but some evidence suggesting that consumption may cause advertising is presented.

World Carbon Dioxide Emissions: 1950–2050

Emissions of carbon dioxide from the combustion of fossil fuels, which may contribute to long-term climate change, are projected through 2050 using reduced-form models estimated with national-level panel data for the period of 19501990. Using the same set of income and population growth assumptions as the Intergovernmental Panel on Climate Change (IPCC), we find that the IPCCs widely used emissions growth projections exhibit significant and substantial departures from the implications of historical experience. Our model employs a flexible form for income effects, along with fixed time and country effects, and we handle forecast uncertainty explicitly. We find clear evidence of an inverse U relation with a within-sample peak between carbon dioxide emissions (and energy use) per capita and per-capita income.

Is There a Role for Benefit-Cost Analysis in Environmental, Health, and Safety Regulation?

Benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving health, safety, and the natural environment. Although formal benefit-cost analysis should not be viewed as either necessary or sufficient for designing sensible public policy, it can provide an exceptionally useful framework for consistently organizing disparate information, and in this way, it can greatly improve the process and, hence, the outcome of policy analysis. If properly done, benefit-cost analysis can be of great help to agencies participating in the development of environmental, health, and safety regulations, and it can likewise be useful in evaluating agency decision-making and in shaping statutes.

The Political Economy of Market-Based Environmental Policy: The U.S. Acid Rain Program

The U.S. acid rain program enacted in 1990 gave valuable tradable sulfur dioxide emissions permits—called “allowances”—to electric utilities. We examine the political economy of this allocation. Though no Senate or House votes were ever taken, hypothetical votes suggest that the actual allocation would have beaten plausible alternatives. While rent‐seeking behavior is apparent, statistical analysis of differences between actual and benchmark allocations indicates that the legislative process was more complex than simple models suggest. The coalition of states that produced and burned high‐sulfur coal both failed to block acid rain legislation in 1990 and received fewer allowances than in plausible benchmark allocations. Some of these states may have received additional allowances to cover 1995—99 emissions by giving up allowances in later years, and some major coal‐producing states seem to have focused on benefits for miners and on sustaining demand for high‐sulfur coal.

Advertising and entry deterrence : an exploratory model

In this model, the effects of advertising are infinitely durable, fixed (and sunk) costs give rise to economies of scale, post-entry behavior is noncooperative, and pre-entry expectations are rational. Despite the obvious resemblance to work on the use of investment in production capacity to deter entry, here the incumbent monopolist never finds it optimal to advertise more if entry is possible than if it is not. This result and other features of this model indicate the dangers of analyzing advertising with analogies to other sorts of investments. The results make clear the need for more theoretical work on advertising and entry deterrence.

Household gasoline demand in the United States

Supported by the MIT Center for Energy and Environmental Policy Research, the U.S. Dept. of Energy and the National Science Foundation.

Competitive advantage and collusive optima

Cost differences may often be important in real oligopolies. If side payments are impossible the standard cartel objective, total industry profits, lacks plausibility when costs differ. This essay considers plausible alternatives. Four different technologies for effecting collusion, which are essentially identical when costs are equal, define sets of possible profits. Axiomatic bargaining models are used to select unconstrained optima from among these possibilities. Simple functional forms are employed. Low-cost firms with large shares in Cournot equilibrium may have little to gain from collusion. If collusion is effective, low cost firms will have relatively low estimated conjectural variations.

Economies of Scale and Barriers to Entry

Dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry. Entry deterrence in a slight modification of this model involves the classical limit-price output. Under linear or concave demand, however, the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry. It is argued that this suggests the general unimportance of entry barriers erected by scale economies.