Alexander MacKay is an assistant professor of business administration in the Strategy Unit. His research focuses on matters of competition, including pricing, demand, and market structure. Previously, he was a postdoctoral scholar at Harvard Business School and at Harvard Kennedy School.
Alexander MacKay is an assistant professor of business administration in the Strategy Unit. His research focuses on matters of competition, including pricing, demand, and market structure. Previously, he was a postdoctoral scholar at Harvard Business School and at Harvard Kennedy School.
Professor MacKay earned his Ph.D. in economics from the University of Chicago. Prior to his doctoral degree, he worked at a consulting firm that specialized in the design and analysis of business experiments. He has a B.A. in economics from the University of Virginia.
We show that, in general, consistent estimates of cost pass-through are not obtained from reduced-form regressions of price on cost. We derive a formal approximation for the bias that arises even under standard orthogonality conditions. We provide guidance on the conditions under which bias may frustrate inference.
This article discusses the empirical challenges that researchers face when demonstrating the existence and effects of resale price maintenance (RPM). We outline three approaches for finding price effects of RPM and the corresponding hurdles in data and methodology. We show that the quantity test that was suggested by Posner (1977; 1981) does not identify the change to welfare when demand-enhancing effects are considered generally. Finally, we present some solutions to the challenge of identifying welfare effects, and we suggest guidelines for future research.
We study the pricing decision of firms in the presence of consumer inertia. Inertia can arise from habit formation, brand loyalty, switching costs, or search, and it has important implications for the interpretation of equilibrium outcomes and counterfactual analysis. In particular, consumer inertia affects the scope of market power. We show that the effects of competition on prices and profits are non-monotonic in the degree of inertia. Further, a model that omits consumer inertia tends to overstate the marginal effect of competition on price, relative to a benchmark that accounts for consumer dynamics. We develop an empirical model to estimate consumer inertia using aggregate, market-level data. We apply the model to a hypothetical merger of two major retail gasoline companies, and we find that a static model predicts price increases greater than the price increases predicted when accounting for dynamics.
We consider the identifying power of supply-side assumptions in the estimation of models of supply and demand. Pairing supply with demand expands the set of restrictions that identify a general class of models. As is well known, the problem of price endogeneity is resolved with an instrument that shifts supply. We show that, even with imperfect competition, an instrument that shifts demand also obtains identification. Our analysis establishes a fundamental link between the (endogenous) price coefficient and the covariance of unobservable cost and demand shocks. Thus, a covariance restriction on unobserved shocks can achieve identification, even in the absence of instruments. Further, it can be possible to bound the structural parameters using the supply and demand assumptions alone. We develop an estimator based on the covariance restriction that is efficiently estimated by the output of ordinary least squares regression and performs well in small samples. We illustrate the methodology with applications to ready-to-eat cereal, cement, and airlines.
Economic theory suggests that demand is more elastic in the long run relative to the short run, but evidence on the empirical relevance of this phenomenon is scarce. We study the dynamics of residential electricity demand by exploiting price variation arising from a natural experiment: the introduction of an Illinois policy that enabled communities to select electricity suppliers on behalf of their residents. Using a flexible difference-in-differences matching approach, we estimate a one-year price elasticity of -0.16 and three-year elasticity of -0.27. We also present evidence that consumers increased usage ahead of these announced price changes. Finally, we project that the price elasticity converges to a value between -0.30 and -0.35 after ten years. Our findings highlight the importance of accounting for consumption dynamics when evaluating energy policy.
The duration of a vertical relationship depends on two types of costs: (i) the transaction costs of re-selecting a supplier and (ii) the cost of being matched to an inefficient supplier when the relationship lasts too long. For commodified goods and services, this tradeoff can be the primary determinant of the duration of supply contracts. I develop a model of optimal contract duration that captures this tradeoff, and I provide conditions that identify underlying costs. Latent transaction costs are identified even when the exact supplier selection mechanism is unknown. I estimate the model using federal supply contracts and find that transaction costs are a significant portion of total buyer costs. I use the structural model to estimate the value of the right to determine duration to the buyer, compared to a standard duration. Finally, a counterfactual analysis illustrates why quantifying transaction costs is important for the accurate analysis of welfare.
