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1 ECON7012/ECON8012 Topics in Applied Microeconomics / Applied Microeconomics Topics Take-Home Test 2 Due Wednesday 13 May at 6pm, 2020 INSTRUCTIONS: 1. This take-home test must be completed alone and submitted electronically via the link provided on iLearn. Please note Macquarie University uses ‘Turnitin’ plagiarism detection software for all electronic submissions. Any evidence of collusion will be considered in breach of the University’s policies relating to Academic Integrity. 2. The test is ‘open book’ meaning that you may consult the relevant papers that have been studied in class. However, you should use your own language to answer the questions. Paraphrasing sections from the paper is not acceptable and is also in breach of University policies relating to Academic Integrity unless due acknowledgment has been made, e.g. use of quotation marks and reference to page number(s). 3. The test will be open for 24 hours from Tuesday 12 May from 6pm until Wednesday 13 May 6pm. You must submit prior to this time or you will receive a mark of zero. 4. Answer all questions on the formatted Microsoft Word document provided on iLearn (test2_answer_template.docx). Note that you should NOT restate the questions in the new document. You do not need to provide a reference list for this test. 5. Please take note of word limit for each question. You do not have to write this many words, but this is an upper limit of what you can write. Any additional words beyond the word limit will not be considered as part of the answer. 6. There are six questions. Each question is worth 10 marks. 7. The entire test is worth 60 marks and counts towards 25% of your final mark in this unit. 2 Question 1 This question relates to the following paper: Carpenter, C. S., & Warman, C. (2019), ‘What do bicycle helmet laws do? Evidence from Canada’, Economic Inquiry, 57(2), 832-854. With respect to models (6)-(10) in Table 5, explain how each of the robustness checks support or reject the main findings of the paper. Comment on the differences between the results with respect to all- age laws versus youth laws. (10 marks) [Word limit 200 words] Question 2 This question relates to the following paper: Luo R. (2018), ‘Store brands and retail grocery competition’, Journal of Economics & Management Strategy, 27, 653–668. In conceptual terms, what advantages does the random coefficients logit model have over the logit and logit-IV models of demand? Beyond simply introducing random coefficients, the author also allows correlation between some of these parameters. Explain the economic intuition of the estimated covariance parameters reported in Table 4. (10 marks) [Word limit 200 words] Question 3 This question relates to the following paper: Genakos, C., Koutroumpis, P., & Pagliero, M. (2018), ‘The impact of maximum markup regulation on prices’, The Journal of Industrial Economics, 66(2), 239-300. Explain how the results reported in Tables XII and XIII support or reject the authors’ claim that the decrease in retail prices observed after removal of mark-up regulation was the result of collusion in the wholesales market. (10 marks) [Word limit 200 words] Question 4 This question relates to the following paper: Hao, Z., & Cowan, B. (2019), ‘The cross-border spillover effects of recreational marijuana legalization’, Economic Inquiry (forthcoming). According to the results presented in the paper, how did recreational marijuana legalisation in Colorado and Washington affect: 1) marijuana sale and manufacture arrests, 2) DUI arrests, and 3) opium and cocaine possession arrests. What role do state-specific linear time trends play in these results? (10 marks) [Word limit 200 words] Question 5 This question relates to the following paper: Rojas, C., & Briceño, A. (2019), ‘The effects of piracy on competition: Evidence from subscription TV’, International Journal of Industrial Organization, 63, 18-43. Conceptually, explain the steps involved in deriving the Lerner indices and marginal costs reported in Table 6. Also, explain the relationship with the elasticity estimates reported in Table 5. Explain how the counterfactual reveals that the Lerner indices change when illegal alternatives are not considered. (10 marks) [Word limit 200 words] Question 6 This question relates to the following paper: Marti, J., Buckell, J., Maclean, J. C. & Sindelar, J. (2019), ‘To “vape” or smoke? Experimental evidence on adult smokers’, Economic Inquiry, 57, 705-725 With respect to simulations D, E, F, G, H and I considered in Table 12, discuss how the simulated proportions of ‘E-cig considered to be healthier than T-cig’ and ‘E-cig considered as effective for smoking cessation’ compare to the base case for dual users. (10 marks) [Word limit 200 words] Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 Instructions ECON7012/8012 – Topic 7b Relationships between legal and illegal markets A/Prof Jordi McKenzie, Department of Economics Paper Details • Rojas, C., & Briceño, A. (2019), ‘The effects of piracy on competition: Evidence from subscription TV’, International Journal of Industrial Organization, 63, 18-43. Abstract Competition studies that focus on antitrust issues (e.g. market definition, market power) are typically conducted in markets where all firms are assumed to operate legally (competitors are tax-abiding entities, pay for all inputs used in their production process, have paid the proper government licenses to do so, etc.). We investigate competition issues in a market characterized by widespread piracy: subscription TV in Perú. Estimates suggest that 50% of subscription TV users in Perú (30% in Latin America) use an illegal provider. We make use of a unique dataset in which households provided crucial in- formation regarding the (il)legality of their paid TV supplier. Using quantitative antitrust tools based on demand estimation techniques, we study the impact that the presence of the ‘informal’ sector has on competition. Our estimates suggest that the illegal operators constitute a close substitute for (and henceforth significantly constrain the pricing power of ) legal operators. This finding can have important antitrust implications: the failure to account for piracy could lead to erroneous conclusions regarding market power measurement and the delineation of the relevant (antitrust) market. This may b e particularly important in several industries (especially in the developing world) where the leading operator may be cataloged as “dominant” only in the absence of illegal providers. Introduction • Empirical IO and antitrust studies have propagated in many industries and across the world, but use has been limited in developing countries • This paper focuses on one important that can have important implications for empirical analyses of markets: the presence of illegal competitors • Examine a market where service itself is legal (TV subscription), but there are a number of providers that sell through different illegal means (piracy) • Piracy in Perú is rampant: 50% of subscription TV users are estimated to obtain their subscription TV signal through an illegal provider • Data for other countries in developing world suggest problem is widespread Introduction • Central feature of study is the availability of data on illegal TV subscriptions • Make use of a representative household survey administered by the Peruvian telecom regulator in which households provided information that allows us to determine whether the TV content supplier is illegal • Survey contains information regarding the service, including price paid as well as several characteristics (e.g. basic v. premium; cable v. satellite; etc.) Introduction • Official statistics (which exclude illegal connections) indicate that 63% of subscription TV users served by the leading operator (Telefónica) • Employing approach using market share to proxy for market power, authorities might deem company as dominant (or significant market power) • However, if include illegal connections as part of the relevant market, Telefonica’s market share falls by more than half, to 34% • This suggests that (ignoring usual pitfalls of using market share as proxy for market power) antitrust authorities may obtain an erroneous conclusion about the existence of a dominant firm in the market Preview of Results • Estimates suggest that, after controlling for all product characteristics that drive demand (as well as endogeneity), not accounting for piracy leads to erroneous conclusions regarding the determination of substantial market power and the delineation of the relevant (antitrust) market • Specifically, mark-ups of three leading (legal) operators (92% of market) are relatively modest and similar across firms (between 33.5% and 39.7%) ― Interestingly, the largest firm, Telefónica seems to have limited market power as it registers the lowest Lerner Index (33.5%) • Telefónica’s diversion ratio to illegal providers (13.1%) is of similar magnitude than that observed towards its next two largest legal competitors (11.7% to 14.7%) Preview of Results • Analysis re-estimates demand and Lerner Indices removing pirate connections from choice set (i.e. ignoring their existence) ― Find that, under this (incorrect) counterfactual, leading operator would register highest mark-up of three leading operators reversing finding obtained when piracy is accounted for in analysis • Intuition for result is if an important competitor is not accounted for in the analysis (fringe of illegal providers), estimation fails to capture the competitive pressure that the removed competitor exerts over other firms Subscription TV Market in Perú • As of 2013, approx. 20% of Perú’s households subscribed to a legal operator ― When considering illegal providers, this share was 40.2% • Three main legal operators are Telefónica (under the Movistar brand), América Móvil (under the Claro brand) and DirecTV ― All three companies belong to telecom multinationals • Two largest operators (Telefónica and América Móvil) are multiproduct operators, providing telecommunication services throughout the country Subscription TV Market in Perú • Also over 90 companies with license to operate as subscription TV providers ― Main requirement for license-holder (including three largest firms) is to pay fees equivalent to 2% of gross revenues on regular basis ― These companies only operate at regional scale throughout country • While smaller-scale license holders may be considered legal, also suspected to be contributors to illegal provision through under-reporting (declaring smaller number of subscribers reducing their regulatory fee payment) or illegal retransmission of other operators’ signals • Also a number of outright illegal providers