Essays on Empirical Industrial Organization

Abstract

This dissertation consists of two essays in the field of empirical industrial organization. In the essays, I analyze the economic policies of a government's treasury department, and firms’ strategies in the franchise industry by respectively using structural models and real data. In chapter 1, I examine the effectiveness of a hybrid treasury auction mechanism in terms of government revenue and efficiency. Most countries issue treasury securities using traditional mechanisms, such as uniform pricing or discriminatory pricing. On the other hand, Korea has implemented a unique `Korean-style' auction that has the characteristics of both uniform-price and discriminatory auctions, a switch from a simple uniform-price mechanism. I use individual bid level data from Korean treasury auctions before and after the issuance mechanism changes. Based on these bid data, I construct the distribution of market-clearing prices and estimate each bidder's underlying marginal valuations under each auction mechanism, uniform-price, and hybrid format respectively. I estimate the total surplus of a hypothetical benchmark auction calculated on the assumption that bidders bid truthfully without shading their demand by the estimated marginal valuation. By comparing the revenue and efficiency of each realized mechanism with the hypothetical benchmark, I indirectly measure the performance of a hybrid auction against that of a uniform-price auction. I find that the hybrid method works more effectively than the uniform-price auction in terms of government revenue and efficiency. The government's additional absorption of bidders' surplus and the limited bidders’ bid shading in hybrid auctions outweigh the effects of possible aggressive bidding in uniform-price auctions. In chapter 2, by using Korean burger chain market data, I analyze the effects of ownership and revenue-cost sharing contracts on how franchise firms determine their stores' locations. I extend firms' static entry models in the oligopolistic market by setting up franchise headquarters' profit functions reflecting stores' ownership. By using equilibrium conditions linking the firms' observable actions and their profits, I construct a probability equation which generates a certain market equilibrium status. Using maximum likelihood estimation, I find the profit functions' parameters that maximize the probability of the observed market status. The greater the extent to which the headquarters take franchisees' variable revenues and the less that fixed costs are covered by franchisees, the more likely it is that headquarters allocate franchised stores in a manner similar to their company-owned stores. On the other hand, if franchise headquarters take less in variable revenues from franchised stores and focus on reducing fixed costs more, their location choices for franchised stores are quite different from those for company-owned stores. When it comes to the effect of other stores’ presence on location choices, the cannibalization effect from the same brand stores is bigger than the competition effect from other brands’ stores. Market characteristics such as population and housing prices also affect the burger chains’ preferred store locations.