Essays in empirical industrial organization.

Abstract

This thesis consists of two essays. The first essay "Land Use Regulation as a Barrier to Entry: Evidence from the Texas Lodging Industry" examines the impacts of land use regulation on the intensity of competition among hotels. In the U.S., local governments regulate private land use mainly through zoning. By creating a barrier to entry and lessening competition in local business markets, their regulation has the potential to generate a distortion. This paper assesses the empirical relevance of this hypothesis using microdata on midscale Texas chain hotels and land use regulation data collected from their local municipalities. I construct a dynamic entry-exit model of midscale hotel chains. By endogenizing their entry decisions, the model explicitly considers hotel chains' reactions to the stringency of land use regulation. Reduced form regressions indicate that local markets under stringent regulation tend to undergo fewer entries. To identify the extent to which high entry cost due to stringent land use regulation explains this negative correlation, I estimate structural parameters of the entry model by using a recently developed simulation-based algorithm. To verify the robustness of my results, I also employ a bound estimator that is consistent under weak conditions. Estimation results indicate that imposing stringent regulation increases cost enough to affect hotel chains' entry decisions. Although they are the immediate payers of the increased entry cost, incumbents shift about the half of their cost increase onto consumers by exploiting their increased market power. The second essay "Does the Threat of Entry Matter?: Case of the Texas Lodging Industry" examines the impacts of the mere threat of entry on entry decisions of hotel chains. Despite large theoretical literature studying at firms' reaction when the threat of entry exists, there has been few empirical studies looking at this topic. In this essay, I attempt to quantify the importance of the threat of entry on firms' behavior in the case of the Texas lodging industry. My approach is to implement counterfactual experiments based on the structural dynamic entry-exit model of hotel chains that are presented and estimated in the previous chapter. To isolate the impacts of the threat of entry from the impacts of real entry, I simulate the entry-exit decisions of hotel chains under the following three distinct environments: (1) pure monopoly, (2) expost monopoly, and (3) pure duopoly. While pure monopoly and pure duopoly consider their decisions under realistic environments, the expost monopoly let hotel chains make entry decisions as if they were in duopoly while real entry never occurs. By comparing these three environments, I attempt to identify the impacts of the threat of the entry separately.