The econometrics of market structure and competition (BSc/MSc)
This short course is the econometrics unit in the CentER Honors Program. This extracurricular program is offered annually to Tilburg's 30 best BSc and MSc students in economics, econometrics, and business.
The course explores how economic models of firm entry and competition, microeconometric methods, and data on observed entry behavior in a cross-section of markets can be combined to learn about the determinants of market structure and competition in these markets. Its main goal is to make undergraduate students appreciate the structural econometric approach to empirical economics, which integrates economic theory and statistical methods to solve economic problems. Along the way, it provides students with a basic understanding of
- selected topics in microeconometrics (cross-section and panel data, binary and ordered probit models, heterogeneity, state dependence, and selection); and
- one influential approach to the empirical analysis of market structure and competition.
In the course, we first study Bresnahan and Reiss’s (1991) approach to measuring the effects of firm entry on competition in a cross-section of retail and professional markets. We first build some intuition by discussing related empirical results prepared by students in advance. Then, we present Bresnahan and Reiss’s economic model of firm entry and competition and study how this model can be estimated using standard procedures for the ordered probit model and data on the numbers of firms in a cross section of markets. Finally, we review Bresnahan and Reiss’s empirical results, with specific attention for problems caused by market heterogeneity and selection.
If time permits, we continue by considering the role of dynamics. Bresnahan and Reiss apply a static entry model to a cross section of markets. We will discuss how the interpretation of their empirical results on entry and static competition changes if firms in fact enter, compete, and exit in a dynamic and uncertain market environment. We will also briefly study how a dynamic extension of Bresnahan and Reiss’s model can be used to empirically analyze the dynamic determinants of market structure, uncertainty and sunk entry costs, using panel data on the entry and exit of firms over time in a cross section of markets.
Throughout, we will focus on intuition and ignore technicalities where possible.