Essays on market dynamics, regulation and advertising.

Abstract

This dissertation is a collection of three essays that deal with a number of different topics in Industrial Organization. Mainly, they are concerned with market dynamics, regulation policies and advertising. Chapter 1 develops and estimates a dynamic oligopoly model of advertising in the cigarette industry. With this estimated model, I evaluate the impact of the 1971 TV/Radio advertising ban on the cigarette industry. A puzzling fact about this ban is that, while industry advertising spending decreased sharply immediately following its passage, spending then recovered and actually exceeded its pre-ban level within five years. While simple static models cannot account for such a turn of events, the rich dynamic model developed in this paper can. This chapter exploits new previously confidential micro data, now made public through tobacco litigation. In addition, the chapter uses a new concept of Oblivious Equilibrium to handle intractable state space and accelerate equilibrium computation. Chapter 2 studies how advertising influences firms' incentives to invest in R&D. The link between advertising and industry innovation is important, not only because advertising can spur R&D by spreading product knowledge, but also because advertising can discourage new innovative firms from entering the industry. This chapter finds that a worse advertising technology can result in local improvements in industry innovation rates. Globally, however, a complete ban on advertising always reduces industry growth. This result is significant because industry advertising spending is quantitatively significant and there are potential connections between public policy towards advertising and R&D. In chapter 3, we study the performance of the New-Deal sugar manufacturing cartel that existed from 1934 to 1974. We show that the cartel led to major distortions in both how sugar produced at a given factory, and in where the industry was located. The setup of this legal cartel involved four important provisions: sale quotas, land restriction, side payments, and government negotiated factory-farm contracts. We argue that all four provisions distorted how sugar was produced and led to significant loss in productivity measured by sugar recovery rate. Furthermore, we present extensive evidence from industry, company and factory records to support these conclusions.