Essays in applied econometrics

• Main Author: Huse, Cristian
• Published: London School of Economics and Political Science (University of London) 2008
• Subjects: 330.01
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645740

This thesis is divided in three essays. The first essay examines the reactions by incumbent airhnes to the threat and actual entry of the low-cost carrier Gol in the Brazilian domestic air transport market. By estimating the reactions in prices, quantities and supply variables, it investigates the plausibility of theories of entry deterrence and accommodation. The second essay proposes and implements a parsimonious three-factor model of the term structure whose dynamics is driven uniquely by observable state variables. The method allows comparing alternative views on the way state variables - macroeconomic variables, in particular - influence the yield curve dynamics, avoids curse of dimensionality problems commonly appearing in traditional models, and provides more reliable inference by using both the cross-sectional and the time series dimension of the data. I conduct in- and out-of-sample studies using a comprehensive set of US data. I show that even a parsimonious model where the level, slope and curvature factors of the term structure are driven by, respectively, measures of inflation, monetary policy and economic activity consistently outperforms the (latent-variable) benchmark model out-of-sample, when considering the five NBER-dated recessions of the last three decades. In the third essay I empirically evaluate the incentives to tacitly collude in differentiated product markets. Tacit collusion plays an important role in merger policy: competition agencies sometimes block mergers on the grounds that they will generate 'coordinated effects', an increased likelihood of collusion. I thus propose an approach to coordinated effects merger simulation in markets where multi-product firms operate in differentiated product markets. To the best of my knowledge, this is the first full empirical implementation of a coordinated effects merger simulation model in a differentiated product market. I use the model to study the network server market and, specifically, examine the effect of the merger between HP and Compaq on their and their rivals' collective incentives and ability to sustain tacit collusion. The results suggest that the incentives to collude in the network server market are substantial, but actively decreased following the merger between HP and Compaq. In addition to exploring the incentives for collusion on one market I also examine the impact of (i) multi-market contact on firms' incentive and ability to sustain tacit coordination and (ii) a competitive fringe of smaller players who co-exist with a subset of the larger players in an industry who tacitly collude. By taking the economic theory of tacit collusion seriously in an empirical example, I show that the intuition many economists have for the effect of mergers on the incentives to tacitly collude is actually wrong.