Equilibrium Transition from Loss-Leader Competition: How Advertising Restrictions Facilitate Price Coordination in Chilean Pharmaceutical Retail
Job Market Paper | Resubmitted to The RAND Journal of Economics
This paper examines how regulation can push an oligopoly from one pricing regime to another. It uses rich data from Chilean pharmacy chains to study a ban on comparative price advertising. Before the ban, ads created demand spillovers across products, making aggressive loss-leader pricing profitable. Once these spillovers were removed, selling below cost became unattractive for any firm, and prices quickly shifted to a coordinated, higher level. A structural demand model shows that the ban reduced both price elasticity and cross-product spillovers, and counterfactuals indicate that the loss of spillovers, rather than just lower elasticity, mainly explains the move to the new coordinated pricing regime. The results show how well intentioned regulation can unintentionally promote price coordination by weakening the mechanisms that support competitive outcomes.
This paper develops the likelihood ratio-based test of the null hypothesis of a M0-component model against an alternative of (M0 + 1)-component model in the normal mixture panel regression by extending the Expectation-Maximization (EM) test of Chen and Li (2009a) and Kasahara and Shimotsu (2015) to the case of panel data. We show that, unlike the cross-sectional normal mixture, the first-order derivative of the density function for the variance parameter in the panel normal mixture is linearly independent of its second-order derivatives for the mean parameter. On the other hand, like the cross-sectional normal mixture, the likelihood ratio test statistic of the panel normal mixture is unbounded. We consider the Penalized Maximum Likelihood Estimator to deal with the unboundedness, where we obtain the data-driven penalty function via computational experiments. We derive the asymptotic distribution of the Penalized Likelihood Ratio Test (PLRT) and EM test statistics by expanding the log-likelihood function up to five times for the reparameterized parameters. The simulation experiment indicates good finite sample performance of the proposed EM test. We apply our EM test to estimate the number of production technology types for the finite mixture Cobb-Douglas production function model studied by Kasahara et al. (2022) used the panel data of the Japanese and Chilean manufacturing firms. We find the evidence of heterogeneity in elasticities of output for intermediate goods, suggesting that production function is heterogeneous across firms beyond their Hicks-neutral productivity terms.
This paper investigates how the discount factor and payoff functions can be identified in stationary infinite-horizon dynamic discrete choice models. In single-agent models, we show that common nonparametric assumptions on per-period payoffs -- such as homogeneity of degree one, monotonicity, concavity, zero cross-differences, and complementarity -- provide identifying restrictions on the discount factor. These restrictions take the form of polynomial equalities and inequalities with degrees bounded by the cardinality of the state space. These restrictions also identify payoff functions under standard normalization at one action. In dynamic game models, we show that firm-specific discount factors can be identified using assumptions such as irrelevance of other firms' lagged actions, exchangeability, and the independence of adjustment costs from other firms' actions. Our results demonstrate that widely used nonparametric assumptions in economic analysis can provide substantial identifying power in dynamic structural models.
Heterogeneous Diffusion of a New Technology: Subsidies, Reallocation, and the Rise of China’s Electric-Vehicle Market, 2015–2024
The battery-electric and plug-in share of new passenger-vehicle sales in urban China rose from 1.0% to 44.0% between 2015 and 2024. This paper studies what drove that transition, and in particular whether direct purchase subsidies shifted the market broadly or mainly reallocated adoption across segments. I estimate a random-coefficient discrete-choice demand system and use a counterfactual-equilibrium decomposition to separate the roles of product improvement, product entry, macro demand conditions, and policy. The central result is that China’s EV subsidy regime is best understood as a reallocation instrument, not a broad-based demand shifter. Product entry and battery improvement account for most of the increase in EV share, whereas the direct subsidy effect is concentrated in a narrow part of the market: budget vehicles, private domestic firms, and lower-tier cities. The paper therefore argues that the Chinese EV transition was broad, but the direct subsidy margin was
Coming Soon
A Generalized Finite Dependence Framework for Dynamic Discrete Choice Models
This paper extends the finite dependence framework of Arcidiacono and Miller (2011, 2020) for dynamic discrete choice models. For dependence horizons ρ ≥ 2, the joint weight over a future path is a product of per-step decision weights, making the search for valid weighting schemes a nonlinear problem. We introduce a flow parameterization that linearizes this product structure, reducing the problem to a linear optimization with linear constraints—a convex quadratic program solvable via a single sparse linear system. This linearization enables algorithmic discovery of finite dependence representations, extending the framework beyond models with renewal actions to environments with persistent state variables, including capital accumulation, dynamic games, and models with high-order state dependence.
Coming Soon
Work in Progress
Regulating the Traffic Economy: Salary Caps and Vertical Integration in Streaming
with Yele Ma
Coming Soon
This paper studies how the 2018 actor salary-cap regulation reshaped competition in the Chinese long-form video streaming industry. We model the pre-regulation equilibrium as a prisoner's dilemma in which platforms bid aggressively for a small set of traffic-generating stars, driving up costs and eroding profits. We interpret the salary cap as a public and enforceable constraint that limited bidding competition and shifted the market toward a lower-cost equilibrium. To quantify these effects, we develop and estimate a unified structural model of consumer demand, actors' dynamic career choices, and platform sourcing decisions. The model implies a shift away from advertising-driven traffic acquisition and toward subscription-oriented competition based more heavily on content quality, with implications for production incentives, vertical integration, and bargaining outcomes. The model also matches key post-regulation patterns in the data, including changes in actors' career choices and in the relationship between quality and viewership. More broadly, our results show how a targeted wage constraint in a key upstream input market can reshape business models, bargaining outcomes, and the basis of competition in a digital media industry.
Dual Network Competition and the Self-Sustained EV Market
with Hyuk-soo Kwon, Jinge Li
Using Euler equation to estimate non-finite-dependent dynamic discrete choice model with unobserved heterogeneity
Dynamic Decision Models with Continuous-Discrete Mix Choices
This paper develops a framework for estimating dynamic decision models in which agents simultaneously make continuous and discrete choices. We derive identification conditions and propose an estimation strategy that accommodates mixed choice sets in a unified dynamic programming framework.
Older Working Papers
Losing Market Share in a Growing Industry: BYD Company and Electric Vehicles in China