The course also aims to deliver a higher level understanding of predatory pricing, cartel stability, the role of non-price competition, and the evolution of high technology industries. A long-standing commitment to remaining at the cutting edge of developments in the field has ensured the lasting impact of its work on the discipline as a whole. It is a leading research department, consistently ranked in the top 20 economics departments worldwide. This is reflected in the Research Assessment exercise which recognised the Department's outstanding contribution to the field.
Industrial Organization Program
Request a prospectus Name. Register your interest Name. Speak to Admissions Content to be supplied. The explosion of available data from private sector firms and markets has paralleled and facilitated this expansion. On the demand side, there has been a large shift in many markets, such as electricity and health care, toward regulated competition. Some of these changes have grown out of changes in U. At the same time, there has been an increasing appreciation of the importance of market power in a wide range of industries, such as health care, financial services, retailing, and media.
Industrial Organisation & Introduction to Competition Policy
Indeed, these changes continue to be some of the most significant in the U. We have chosen these examples to underscore the broadening spectrum of industries and topics addressed by program members and the variety of approaches and tools being used to study competition and markets. These examples are not meant to be a summary of the much broader scope of research by program affiliates. All of the recent working papers by program affiliates may be found at www.
- Everything is Everything.
- Industrial Organisation & Introduction to Competition Policy.
In each case, private insurers compete under market rules that regulate contract features, pricing, and risk adjustment. Larger employers frequently also sponsor health plan choice, again creating an environment of managed competition.
These developments raise important questions about market power, market design, and asymmetric information. Competition has been a central concern because health insurance markets are heavily concentrated. In the California Health Insurance Exchange, four insurers have 95 percent of the market. Insurer concentration is even higher in many state exchanges and Medicare Advantage regions. In traditional markets, market power raises consumer prices. This point is sometimes contested in health insurance markets because hospitals and health care providers similarly enjoy considerable market power, and a dominant health insurer may enjoy the ability to negotiate favorable prices, lowering costs for consumers.
Many recent papers by IO program members have studied this situation. Their analysis highlights the importance of both traditional market power and bargaining power following a hypothetical merger. Holding hospital prices fixed, a merger raises consumer premiums, but in some markets, greater leverage in bargaining not only counteracts this direct effect but leads to overall lower consumer prices.
Ho and Lee show how the magnitude of the competing effects varies across cities and market configurations. Community rating protects individuals with pre-existing conditions, and in a forward-looking sense protects healthy individuals who might in the future become sick, insuring them against what is sometimes called "reclassification risk.
Liran Einav , Program Director
Much of the debate around the ACA has centered on these dynamics and how best to address them. Handel, Hendel, and Whinston develop an elegant model that allows them to study this situation empirically, combining the classic adverse selection theory with detailed plan choice and claims data from a large private employer to estimate the key demand and supply parameters. Among many interesting findings, their results suggest that higher-income employees would do better under health-based pricing, although not by that much, while community rating, as under the ACA, is hugely important for lower-income workers or for workers on something resembling a fixed income, which may be more representative of the current mix of ACA enrollees.
Both of these studies illustrate the power of using quantitative models. The theoretical trade-offs are well understood, but there is no clear idea of which effect is more important, so detailed data and an econometric model can help. Our second example is drawn from financial markets and again illustrates the breadth of industry focus among NBER IO members and the diversity of methodological approaches. The last 15 years or so have seen a big shift in financial markets toward electronic trading.
One of the phenomena associated with this has been the emergence of high-frequency trading and the associated race for speed, with large financial firms making large investments in network infrastructure to procure a speed advantage in getting their orders to the electronic exchange. Eric Budish, Peter Cramton, and John Shim have studied this development and analyzed the potential consequences of shifting from continuous trading to trading in discrete, albeit closely spaced, intervals.
The securities move together with near-perfect correlation on a second-by-second time scale. But at a finer resolution of milliseconds the correlation breaks down, because when there is a trade on one contract that moves its price up or down, it takes several milliseconds for quotes on the other contract to adjust. During that interval, an arbitrage opportunity exists and, with sufficient speed, a trader may be able to see a trade in one market and execute a trade against a "stale" quote in the other market.
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Remarkably, the time for these arbitrage gaps to close has narrowed dramatically as firms have invested in increasingly fast communication technology, but the dollar magnitude of the opportunities has remained constant. The reason is that if the price in Chicago ticks up one index point, and the trader's buy order gets to New York before the price change, the profit is one index point, regardless of how fast this happens.
So the incentive to be fastest does not go away as everyone gets faster. Budish, Cramton, and Shim develop a simple model to analyze this speed race in public equity markets and organize the empirical facts described above. In their model, HFTs endogenously play two roles. First, they compete to create liquidity — to post bids and asks — which is good for regular traders. The researchers argue that the problem is not HFTs per se. Rather, it is the market rules that foster competition on speed by prioritizing trades based on their arrival time rather than their price.
They analyze alternative market design rules and suggest that moving from continuous time trading to what they call fre-quent batch auctions auctions that run at frequent, fixed intervals — for example, every tenth of a second might improve the efficiency of public equity markets. This possibility has attracted attention from the Securities and Exchange Commission and other regulators. One example of research in this area concerns the market for internet search advertising.
Google and Facebook have become two of the world's largest companies on the strength of their advertising sales. Relative to traditional advertising, such as television commercials, a common argument for internet advertising, and especially search advertising, is that it solves the fundamental problem in the industry — the problem that half the money is wasted and no one knows which half. Internet advertising, so the argument goes, can be measured and targeted. As the industry has grown, researchers have focused on trying to assess just how much value is created in digital advertising, how effective it is in swaying people's behavior, and how any resulting surplus is divided between consumers, advertisers, and internet platforms.
This project got started when Tadelis and Nosko were on leave at eBay and Blake was a full-time economist there, with the project presumably generating value or at least interest for eBay, while also being of significant academic interest. The study begins with the observation that it is not necessarily easy to measure the value of search advertising.
Related Mergers, Markets and Public Policy (Studies in Industrial Organization)
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