I describe a model of entry with endogenous product-type choices. These choices are formalized as the outcomes of a game of incomplete information in which rivals' differentiated products have nonuniform competitive effects on profits. I estimate the model for location choices in the video retail industry using a nested fixed-point algorithm solution. The results imply significant returns to product differentiation. Simulations illustrate the tradeoff between demand and intensified competition and the extent to which markets with more scope for differentiation support greater entry. Disciplines EconomicsThis working paper is available at ScholarlyCommons: http://repository.upenn.edu/bepp_papers/86 An Empirical Model of Firm Entry with Endogenous Product-Type ChoicesKatja Seim * February 23, 2004Abstract This paper presents a model of entry with endogenous product-type choices. These choices are formalized as the outcomes of a game of incomplete information in which rivals' differentiated products have non-uniform competitive effects on firms' profits. The model is estimated for location choices in the video retail industry using a nested fixed-point algorithm solution. The results imply significant payoffs to product differentiation. Simulations illustrate the tradeoff between demand and intensified competition and the extent to which markets with larger product spaces, and thus more scope for differentiation, support greater entry.

We use data from highway procurement auctions subject to California's Small Business Preference program to study the effect of bid preferences on auction outcomes. Our analysis is based on an estimated model of firms' bidding and participation decisions, which allows us to evaluate the effects of current and alternative policy designs. We show that incorporating participation responses significantly alters the assessment of preferential treatment policies.Keywords: Bid preference programs, auction participation, asymmetric bidders. JEL Classification: D44, L10, H11, H571 Introduction Public-sector procurement accounts for over 10% of U.S. GDP. Across levels of government, preferential treatment programs are extensively used in procurement auctions. For example, in 2006, the federal government awarded 20% of its procurement dollars to favored firms. 1One commonly used preference mechanism, a bid discount or credit, improves the bids of favored firms by a pre-established rate when determining the winner, but uses the actual amount of the winner's bid in the contract. 2Prominent examples include a 25% bid credit granted to small firms in FCC spectrum auctions and a 50% bid penalty added to foreign bids on defense contracts. 3The aim of this paper is to improve our understanding of the effects of such preference programs on the government's cost of procurement and the distribution of profits between participants, as well as to provide an assessment of the likely magnitudes of these effects in practice. We do so empirically in the context of the California Small Business Preference program that grants small firms a 5% bid discount. 4The stated goal of most preference programs is to facilitate the integration of favored participants into the market place. These are often groups historically discriminated against, or groups considered disadvantaged due to entry barriers, or both. They are also often considered to be less cost efficient. As preference programs result in such high-cost companies performing a larger share of work, one may expect the cost of procurement to increase. At the same time, however, these programs also provide incentives to non-favored firms to bid more aggressively against the strengthened favored group, which mitigates the upward pressure on the cost of procurement. For some discount levels, this last effect is sufficiently strong for the cost of procurement to actually decrease (McAfee and McMillan (1989) and Corns and Schotter (1999) show this theoretically and in experiments, respectively, for assumed numbers of bidders and cost distributions).The key insight of this paper is that there is a third effect neglected in the literature. Bid preference programs have potentially strong effects on firms' incentives to participate in 1 See the Federal Procurement Report 2007, available at https://www.fpds.gov/. 2 With a 10% bid discount, for example, a bid by a favored firm of $440,000 is treated as a bid of $400,000 in comparing it to the remaining, non-favored, firms' bids. If the favor...

In communication, information, and other industries, three-part tariffs are increasingly popular. A three-part tariff is defined by an access price, an allowance, and a marginal price for any usage in excess of the allowance. Empirical nonlinear pricing studies have focused on consumer choice under two-part tariffs. We show that consumer behavior differs under three-part tariffs and assess how consumer demand uncertainty impacts tariff choice. We develop a discrete/continuous model of choice among three-part tariffs and estimate it using consumer-level data on Internet usage. Our model extends prior work in accommodating consumer switching to competitors, thereby capturing behavior in competitive industries more accurately. Our empirical work shows that demand uncertainty is a key driver of choice among three-part tariffs. Consumers' expected bill increases with the variation in their usage, steering them toward tariffs with high allowances. Consequently, demand uncertainty decreases consumer surplus and increases provider revenue. A further analysis of consumers' responsiveness to the different elements of a three-part tariff under the provider's current pricing structure reveals that prices affect a consumer's tariff choice more than her usage quantity and that the allowance plays a strong role in consumer tariff choice. Based on our results, we derive implications for pricing with three-part tariffs.pricing, nonlinear pricing, discrete/continuous choice model, Internet access, three-part tariffs, uncertainty, choice

This paper investigates empirically the product assortment strategies of oligopolistic firms. We develop a framework that integrates product choice and price competition in a differentiated product market. The present model significantly improves upon the reduced-form profit functions typically used in the entry and location choice literature, because the variable profits that enter the product-choice decision are derived from a structural model of demand and price competition. Given the heterogeneity in consumers' product valuations and responses to price changes, this is a critical element in the analysis of product assortment decisions. Relative to the literature on structural demand models, our results show that incorporating endogenous product choice is essential for policy simulations and may entail very different conclusions from settings where product assortment choices are held fixed. Electronic copy available at: http://ssrn.com/abstract=1077441 AbstractIn this paper, we take a first step toward exploring empirically the product assortment strategies of oligopolistic firms. Our starting point is a discretechoice demand model for differentiated products. We incorporate the demand model into an equilibrium supply model, in which firms compete by first choosing which products to offer and then by setting prices. We show how modeling joint product assortment and pricing decisions enriches standard product choice models by allowing insights into how demand characteristics affect firms' product offerings in a competitive environment. We furthermore demonstrate that incorporating endogenous product choice into demand models is essential for policy simulations (e.g., mergers) as it entails at times dramatically different welfare assessments than the common assumption that product assortments are exogenous.

This paper investigates empirically the product assortment strategies of oligopolistic firms. We develop a framework that integrates product choice and price competition in a differentiated product market. The present model significantly improves upon the reduced-form profit functions typically used in the entry and location choice literature, because the variable profits that enter the product-choice decision are derived from a structural model of demand and price competition. Given the heterogeneity in consumers' product valuations and responses to price changes, this is a critical element in the analysis of product assortment decisions. Relative to the literature on structural demand models, our results show that incorporating endogenous product choice is essential for policy simulations and may entail very different conclusions from settings where product assortment choices are held fixed. Electronic copy available at: http://ssrn.com/abstract=1077441 AbstractIn this paper, we take a first step toward exploring empirically the product assortment strategies of oligopolistic firms. Our starting point is a discretechoice demand model for differentiated products. We incorporate the demand model into an equilibrium supply model, in which firms compete by first choosing which products to offer and then by setting prices. We show how modeling joint product assortment and pricing decisions enriches standard product choice models by allowing insights into how demand characteristics affect firms' product offerings in a competitive environment. We furthermore demonstrate that incorporating endogenous product choice into demand models is essential for policy simulations (e.g., mergers) as it entails at times dramatically different welfare assessments than the common assumption that product assortments are exogenous.