Essays in Industrial Organization and Applied Microeconomics

Abstract

This dissertation consists of three self-contained essays that explore industrial organization of the advertising agency and airline markets, as well as the role of local political environment in identification of treatment effects in minimum wage studies. In the first chapter, “Competitor Avoidance and the Structure of the Advertising Agency Industry in the United States,” co-authored with Sylvia Hristakeva, we develop an applied theory model to show that the tendency of advertisers to avoid sharing their agencies with product-market competitors may have led to creation of a unique organizational structure in the advertising agency market, known as a holding company (HC). HCs control multiple agencies and coordinate their bidding choices when competing for new clients. Although many other professional service markets, such as markets for legal and accounting services, feature competitor avoidance, HCs are forbiddingly costly in these markets due to restrictions on outside ownership. Using a theoretical model, we show that HC structure helps agencies manage client conflicts by allowing them to choose an unconflicted agency to bid for a client. We collect a novel dataset on identities of bidding agencies and estimate that serving an advertiser's competitor reduces an agency's odds to compete for the advertiser by 91.6 percent. We predict that the market concentration would increase by 35 percent if competitor avoidance was not a factor in this market. We also predict that banning bid coordination within HCs would increase the average number of bidders in an account review from four to nine. Auction theory predicts that an increase in the number of bidders would create a downward pressure on the mark-ups charged by agencies, however some of this pressure may be counteracted by increased costs of winning a client due to entering multiple bids. In the second chapter, “’Use It or Lose It,’ or ‘Cheat and Keep?’ The Effects of Slot Restrictions on Airline Incentives,” co-authored with Ratib Ali, we investigate the impact of slot control on competition in the domestic airline market. The Federal Aviation Administration manages congestion in high-density airports by capping the number of flights permitted in any given hour and allocating the rights (or slots) to a take-off or landing among airlines. Airlines must use their slots at least 80% of the time to keep them for the next season. This rule creates a perverse incentive for airlines to hold on to underutilized slots by operating unprofitable flights instead of forfeiting these slots to a rival. Using exogenous removal of slot control at the Newark Airport in 2016, we investigate the lengths at which airlines go to meet the minimum requirements that let them keep the slots while violating what a neutral observer might call the “spirit” of the regulation. In the third chapter, “Political Trends in Minimum Wage Policy Evaluation Studies,” co-authored with Andrew Copland and Jean-François Gauthier, we explore the role of local political environment in identification of treatment effects in minimum wage studies. The effects of minimum wage on employment in low-wage sectors have long been debated in the literature. Some economists find small disemployment effects, whereas others argue that these effects are close to zero and statistically insignificant. The core of the debate lies in establishing adequate control groups for areas that experience minimum wage changes. At the same time, minimum wage changes are almost always a consequence of a political vote. Our paper adds to the debate surrounding control group identification by highlighting the importance of accounting for underlying political trends. Failure to do so may result in a violation of the standard “parallel trends” assumption maintained in most of the literature. We illustrate this possibility by re-estimating Dube et al. (2010) on a sample of politically aligned and unaligned counties and controlling for state expenditures that may be used to finance confounding policies. We document that the sample of never politically aligned county pairs produces a positive and significant estimate of elasticity of employment (0.245), suggesting that the restaurant industry labor market may be non-competitive. In contrast, when we restrict the Dube et al. (2010) sample to perfectly politically aligned counties, we obtain a marginally significant estimate of employment elasticity of -0.145. These two estimates explain the seminal result in Dube et al. (2010) that the elasticity of employment with respect to minimum wage is zero.