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Competing with Menus of Tariff Options

Competing with Menus of Tariff Options. Eugenio J. Miravete University of Texas at Austin & CEPR. IESE Business School, 06 / 14 / 2007. Motivation: Economic Theory. Firms rarely offer the fully nonlinear tariff predicted by theoretical models.

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Competing with Menus of Tariff Options

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  1. Competing with Menus of Tariff Options Eugenio J. Miravete University of Texas at Austin & CEPR IESE Business School, 06 / 14 / 2007

  2. 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.

  3. 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.

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

  5. 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).

  6. 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.

  7. 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.

  8. 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.

  9. Model • Double Poisson:

  10. Straightforward estimation:

  11. Continuation of count variables:

  12. Gaussian copula:

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

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