STRUCTURAL ECONOMETRICS FOR INDUSTRIAL ORGANIZATION

Barcelona Microeconometrics Summer School

Barcelona Graduate School of Economics (BGSE)
Dates: 4-8 July, 2011

Victor Aguirregabiria
Department of Economics
University of Toronto

E-mail: victor.aguirregabiria@utoronto.ca
Web page: http://individual.utoronto.ca/vaguirre

COURSE DESCRIPTION
This course deals with methods and applications of structural econometrics in industrial
organization (IO). We will study techniques for the estimation of static and dynamic structural
models of demand, price competition, market entry-exit, inventories, store location, patent
renewal and transfer, investment, product positioning, and network competition in oligopoly
industries. The course emphasizes the importance of combining economic theory and
econometric techniques to answer empirical questions in Industrial Organization. Using
empirical applications, we will illustrate how these models and techniques can be used to
evaluate the effects of factual and counterfactual policies such as mergers, new products, taxes,
environmental policies, or land policies.
PREREQUISITES: Econometrics, IO, and dynamic programming at advanced undergraduate
level. The required knowledge of these subjects is at the level of Introductory Econometrics: A
Modern Approach by J. M. Wooldridge (2002, South-Western) for econometrics, Industrial
Organization: Contemporary Theory and Practice (with Economic Applications) by Lynne
Pepall, Daniel J. Richards and George Norman (2002, South-Western) for IO, and Dynamic
Economics, by J. Adda and R. Cooper (2003, MIT Press) for dynamic programming.

TOPICS
1.
2.
3.
4.
5.
6.

Introduction
Static Models of Market Entry and Market Structure
Dynamic Single-Agent Models of Investment, Capacity, and Patents
Dynamic Demand of Differentiated Products
Estimation of Dynamic Games
Structural Models of Oligopoly Industry Dynamics
1

OUTLINE AND REFERENCES

(The symbol * means a required reading)

1. INTRODUCTION
1.1. Measuring and explaining market power
1.2. Explaining market power
1.3. Structural models in empirical IO
1.4. A simple example
1.5. An overview of the rest of the course
READINGS:
! Bresnahan, T. (1982): The Oligopolistic Solution Concept is Identified, Economic
Letters, vol. 10, issue 1-2, pages 87-92.
! Bresnahan, T. (1989): Empirical Studies of Industries with Market Power, Handbook of
Industrial Organization, vol. II., Schmalensee, R. and Willig, R. (eds.), North-Holland.
! Bresnahan, Timothy (1992): Suttons Sunk Costs and Market Structure: Price
Competition, Advertising and the Evolution of Concentration, RAND Journal of
Economics, 23, 1, 137-152.
! Genesove, D. and W. P. Mullin (1998): Testing static oligopoly models: Conduct and cost
in the sugar industry, 1890-1914. Rand Journal of Economics, 29 (2), 355377.
! Perloff, J., L. Karp, and A. Golan (2007): Estimating Market Power and Strategies.
Cambridge University Press. Chapter 1.
! * Reiss, P., and Wolak, F. (2007): Structural Econometric Modeling: Rationales and
Examples from Industrial Organization, Handbook of Econometrics, volume 6.
! Schmalensee, R. (1989): Inter-industry Studies of Structure and Performance, Handbook
of Industrial Organization, vol. II., Schmalensee, R. and Willig, R. (eds.), North-Holland.
! Sutton, John (1991): Sunk Costs and Market Structure: Price Competition, Advertising
and the Evolution of Concentration, Cambridge, Mass., MIT Press.

2. STATIC MODELS OF MARKET ENTRY AND MARKET STRUCTURE

2.1. Bresnahan-Reiss model.
2.2. Estimation of models with multiple equilibria.
2.3. Product differentiation with endogenous quality and product characteristics.
2.4. Market entry with incomplete information.
2.5. Static games of store location.
READINGS:
! Bajari, P., H. Hong, and S. Ryan (2010): Identification and Estimation of Discrete Games
of Complete Information, Econometrica.

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Bajari, P., H. Hong, J. Krainer and D. Nekipelov (2009): Estimating Static Models of
Strategic Interactions, Journal of Business and Economic Statistics.
Berry, S. (1992): Estimation of a Model of Entry in the Airline Industry, Econometrica,
60(4), 889-918.
Berry, Steven and Reiss, Peter (2007): Empirical Models of Entry and Market Structure
Chapter for Volume III of the Handbook of Industrial Organization.
Berry, S. and J. Waldfogel (2006): Product Quality and Market Size, Working Paper.
Yale University.
Bresnahan, T., and P. Reiss (1990): "Entry in Monopoly Markets", Review of Economic
Studies, 57, 531-553.
* Bresnahan, T., and P. Reiss (1991): "Empirical Models of Discrete Games, Journal of
Econometrics, 48, 57-81.
* Bresnahan, Timothy and Peter Reiss (1991): Entry and Competition in Concentrated
Markets, Journal of Political Economy, 99, 977-1009.
Ciliberto, F. and E. Tamer (2009): Market Structure and Multiple Equilibria in Airline
Markets, Econometrica.
Ellickson, P., and S. Misra (2007): Supermarket Pricing Strategies, Marketing Science.
* Jia, P. (2009): What Happens when Wal-Mart comes to town? Empirical Analysis of the
Discount Retailing Industry, Econometrica.
Mazzeo, M. (2002): Product Choice and Oligopoly Market Structure, The RAND Journal
of Economics, 33(2), 221-242.
Reiss, P. (1996): "Empirical Models of Discrete Strategic Choices", American Economic
Review, 86(2), 421-426.
* Seim, K. (2006): An Empirical Model of Firm Entry with Endogenous Product-Type
Choices, forthcoming, RAND Journal of Economics.
* Sweeting, A. (2009): Coordination Games, Multiple Equilibria and the Timing of Radio
Commercials, RAND.
Tamer, E. (2003): Incomplete Simultaneous Discrete Response Model with Multiple
Equilibria, Review of Economic Studies, 70(1), 147-165.
Toivanen, O. and Waterson, M. (2005): Market structure and entry: Wheres the Beef?
RAND Journal of Economics.

3. DYNAMIC SINGLE-AGENT MODELS OF INVESTMENT AND CAPACITY

3.1. Machine Replacement Models
3.2. Patent Renewal and Transfer
3.3. Sales Promotions and (S,s) inventories
3.4. Dynamic Labor Demand
3.5. Store Location by a Monopolist

READINGS:
! * Aguirregabiria, Victor and Mira, Pedro (2010): Dynamic Discrete Choice Structural
Models: A Survey, Journal of Econometrics.
! * Aguirregabiria, V. (1999): "The Dynamics of Markups and Inventories in Retailing
Firms," Review of Economic Studies, 66(2), 275-308.
! Aguirregabiria, V., and C. Alonso-Borrego (2009): Labor Contracts and Flexibility:
Evidence from a Labor Market Reform in Spain, Manuscript. University of Toronto.
! Hong, H., and M. Shum (2009): Pairwise-Difference Estimation of a Dynamic
Optimization Model, Review of Economic Studies.
! Kasahara, H. (2009): Temporary Increases in Tariffs and Investment: The Chilean Case,
Journal of Business and Economic Statistics.
! * Pakes, A. (1986): "Patents as Options: Some Estimates of the Value of Holding European
Patent Stocks," Econometrica, 54(4), 755-84.
! Rota, P. (2004): Estimating Labor Demand with Fixed Costs, International Economic
Review, 45, 25-48.
! * Rust, J. (1987): "Optimal replacement of GMC bus engines: An empirical model of
Harold Zurcher," Econometrica, 55, 999-1033.
! Rust. J., and G. Rothwell (1995): "Optimal Response to a Shift in Regulatory Regime: The
Case of the US Nuclear Power Industry," Journal of Applied Econometrics, 10, S75-S118.
! Serrano, C. (2006): The Market for Intellectual Property: Evidence from the Transfer of
Patents," Manuscript. University of Toronto.

4. DYNAMIC DEMAND OF DIFFERENTIATED PRODUCTS

4.1. Sales and Consumer Inventories
4.2. Uncertainty and Learning in Demand
4.3. Advertising and Brand Loyalty
READINGS:
! Ackerberg, D. (2003): Advertising, Learning, and Consumer choice in experience good
markets: A structural empirical examination, International Economic Review, 44, 1007
1040.
! Carranza, J. (2006): Consumer Heterogeneity, Demand for Durable Goods and the
Dynamics of Quality, Manuscript. University of Wisconsin-Madison.
! Crawford, G. and M. Shum (2005): Uncertainty and Learning in Pharmaceutical
Demand, Econometrica, 73(4), 1135-1174.
! Erdem, T., S. Imai, and M. Keane (2003): Brand and Quantity Choice Dynamics under
Price Uncertainty, Quantitative Marketing and Economics, 1, 564.

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Erdem, Tulin and M. Keane (1996): Decision-Making Under Uncertainty: Capturing

Dynamic Brand Choice Processes in Turbulent Consumer Goods Markets, Marketing
Science, 15(1),1-20.
Gowrisankaran, G., and M. Rysman (2009): Dynamics of Consumer Demand for New
Durable Goods, Manuscript. University of Arizona.
* Hendel, I. and A. Nevo (2006): Measuring the Implications of Sales and Consumer
Stockpiling Behavior, Econometrica, 74(6), 1637-1673.
Schiraldi, P. (2009): Automobile Replacement: a Dynamic Structural Approach,
Manuscript. London School of Economics

5. ESTIMATION OF DYNAMIC GAMES

5.1. Multiple Equilibria and Curse of Dimensionality
5.2. One-step methods
5.3. Nested Pseudo Likelihood estimation
5.4. Models with persistent unobserved firm and market heterogeneity
5.5. Multiple equilibria in the data
5.6. Counterfactual experiments
READINGS:
! Ackerberg, D., L. Benkard, S. Berry, and A. Pakes (2006): Econometric Tools for
Analyzing Market Outcomes, Handbook of Econometrics, volume 6.
! Aguirregabiria, V. (2004): Pseudo Maximum Likelihood Estimation of Structural Models
Involving Fixed-Point Problems, Economics Letters, 84, 335-340.
! * Aguirregabiria, V. and P. Mira (2007): Sequential Estimation of Dynamic Discrete
Games, Econometrica, 75, 1-53.
! * Aguirregabiria, Victor and Mira, Pedro (2010): Dynamic Discrete Choice Structural
Models: A Survey, Journal of Econometrics.
! Aguirregabiria, V. and P. Mira (2008): A Genetic Algorithm for the Structural Estimation
of Games with Multiple Equilibria, Manuscript. University of Toronto.
! Aguirregabiria, V., H. Roman, and P. Mira (2007): An Estimable Dynamic Model of
Entry, Exit and Growth in Oligopoly Retail Markets, American Economic Review, 97(2),
449-454.
! * Bajari, P., L. Benkard, and J. Levin (2007): Estimating Dynamic Models of Imperfect
Competition, Econometrica, vol. 75, issue 5, pages 1331-1370.
! Doraszelski, U. and M. Satterthwaite (2007): Foundations of Markov-Perfect Industry
Dynamics: Existence, Purification, and Multiplicity, manuscript, Harvard University.
! Kasahara, H. and K. Shimotsu (2007): Nonparametric Identification of Finite Mixture
Models of Dynamic Discrete Choices, Manuscript. The University of Western Ontario.

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Kasahara, H. and K. Shimotsu (2008): Pseudo-likelihood Estimation and Bootstrap-based

Inference for Structural Discrete Markov Decision Models, Journal of Econometrics.
Pakes, A., M. Ostrovsky, and S. Berry (2007): Simple estimators for the parameters of
discrete dynamic games (with entry / exit examples), RAND Journal of Economics.
Pesendorfer, M. and P. Schmidt-Dengler (2008): Least Squares Estimators for Dynamic
Games, Review of Economic Studies.

6. STRUCTURAL MODELS OF OLIGOPOLY INDUSTRY DYNAMICS

6.1. Models of Industry Dynamics: Perfect Competition
6.2. Models of Industry Dynamics: Oligopoly
6.3. Explaining Cross-Industry Heterogeneity in the Dynamics of Market Structure
6.4. Environmental Regulation of an Oligopoly Industry
6.5. Strategic Adoption of a New Technology
6.6. A Dynamic Game of Store Location by Retail Chains
6.7. Dynamic Network Competition in the Airline Industry.
READINGS:
! Aguirregabiria, V. and C. Ho (2008): A Dynamic Oligopoly Game of the US Airline
Industry: Estimation and Policy Experiments, Manuscript. The University of Toronto.
! Aguirregabiria, V., P. Mira, and H. Roman (2007): Entry, Survival and Growth in
Oligopoly Retail Markets: Explaining Cross-Industry Heterogeneity, Manuscript. The
University of Toronto.
! Benkard, L. (2004): A Dynamic Analysis of the Market for Wide-Bodied Commercial
Aircraft Market, Review of Economics Studies.
! Collard-Wexler, A. (2006): Demand Fluctuations and Plant Turnover in the Ready-mix
Concrete Industry, manuscript. Stern School of Business.
! Dunne, T., M. Roberts and L. Samuelson (1988): Patterns of Entry and Exit in U.S.
Manufacturing, Rand Journal of Economics, 19, 495-515.
! Dunne, T., S. Klimek, M. Roberts and Y. Xu (2006): Entry and Exit in Geographic
Markets, Manuscript. Penn State University.
! Ericson, R. and A. Pakes (1995): Markov-Perfect Industry Dynamics: A Framework for
Empirical Work, Review of Economic Studies, 62, 53-82.
! * Holmes, T. (2010): Diffusion of Wal-Mart and Economies of Density, Econometrica.
! Jovanovic, B., (1982): Selection and the Evolution of Industry, Econometrica, 50, 649670.
! Klepper, S. and K. Simons (2000): "The Making of an Oligopoly: Firm Survival and
Technological Change in the Evolution of the U.S. Tire Industry," Journal of Political
Economy, 108(4).

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Pakes, Ariel and Paul McGuire (1994): Computing Markov-perfect Nash Equilibria:
Numerical Implications of a Dynamic Differentiated Product Model, Rand Journal of
Economics, 25, 555-589.
Pakes, A. and R. Ericson (1998): "Empirical Implications of Alternative Models of Firm
Dynamics," Journal of Economic Theory, 79, 1-45.
* Ryan, S. (2006): The Costs of Environmental Regulation in a Concentrated Industry,
manuscript. MIT. http://econ-www.mit.edu/files/1166
Schmidt-Dengler, P. (2005): The Timing of New Technology Adoption: The Case of
MRI, manuscript, Yale University.
Snyder, C. (2009): Predatory Incentives and Predation Policy: The American Airlines
Case, Manuscript. University of Minnesota.
Suzuki, J. (2009): Land Use Regulation as a Barrier to Entry: Evidence from the Texas
Lodging Industry, Manuscript. University of Toronto.
* Sweeting, A. (2007): Dynamic Product Repositioning in Differentiated Product
Industries: The Case of Format Switching in the Commercial Radio Industry, NBER WP
13522. http://www.nber.org/papers/w13522

LIST OF REQUIRED READINGS

1. Reiss, P., and Wolak, F. (2007): Structural Econometric Modeling: Rationales and
Examples from Industrial Organization, Handbook of Econometrics, volume 6.
2. Bresnahan, Timothy and Peter Reiss (1991): Entry and Competition in Concentrated
Markets, Journal of Political Economy, 99, 977-1009.
3. Jia, P. (2008): What Happens when Wal-Mart comes to town? Empirical Analysis of the
Discount Retailing Industry, Econometrica, forthcoming.
http://econ-www.mit.edu/files/1090
4. Seim, K. (2006): An Empirical Model of Firm Entry with Endogenous Product-Type
Choices, forthcoming, RAND Journal of Economics, vol. 37, issue 3, 619-640.
5. Aguirregabiria, Victor and Mira, Pedro (2008): Dynamic Discrete Choice Structural
Models: A Survey, Journal of Econometrics, forthcoming.
http://individual.utoronto.ca/vaguirre/wpapers/survey_annalsje.pdf
6. Aguirregabiria, V. (1999): "The Dynamics of Markups and Inventories in Retailing Firms,"
Review of Economic Studies, 66(2), 275-308.
7. Pakes, A. (1986): "Patents as Options: Some Estimates of the Value of Holding European
Patent Stocks," Econometrica, 54(4), 755-84.
8. Rust, J. (1987): "Optimal replacement of GMC bus engines: An empirical model of Harold
Zurcher," Econometrica, 55, 999-1033.
9. Holmes, T. (2007): Diffusion of Wal-Mart and Economies of Density, NBER Working
Paper #13783.

http://www.nber.org/papers/w13783
10. Hendel, I. and A. Nevo (2006): Measuring the Implications of Sales and Consumer
Stockpiling Behavior, Econometrica, 74(6), 1637-1673.
11. Aguirregabiria, V. and P. Mira (2007): Sequential Estimation of Dynamic Discrete
Games, Econometrica, 75, 1-53.
12. Bajari, P., L. Benkard, and J. Levin (2007): Estimating Dynamic Models of Imperfect
Competition, Econometrica, vol. 75, issue 5, pages 1331-1370.
13. Ryan, S. (2005): The Costs of Environmental Regulation in a Concentrated Industry,
manuscript. MIT. http://econ-www.mit.edu/files/1166
14. Sweeting, A. (2007): Dynamic Product Repositioning in Differentiated Product Industries:
The Case of Format Switching in the Commercial Radio Industry, NBER WP #13522.
http://www.nber.org/papers/w13522