Essays on Market Structure and Product Quality

Abstract

In three essays, this dissertation examines market structure, firm investments in product quality, and how the interplay between them can affect households.

Chapter 1 measures the effect of horizontal mergers in the broadband industry when content providers can invest in product quality. I estimate a structural model of dynamic multilateral bargaining between U.S. broadband internet service providers (ISPs) and Netflix over how to split the surplus from investments Netflix makes to improve the quality of its streaming video. Unlike previous studies of firm bargaining, I find ISP scale---independent of ISP market power---influences how much surplus ISPs extract. Allowing the two largest U.S. cable internet providers to merge would have increased the magnitude of aggregate consumer welfare loss by 4.3% due to a longer period of degraded Netflix quality, and reduced the probability of Netflix making the quality investments by between 0% and 5.1%.

In Chapter 2, I investigate how broadband ISPs provide quality in the form of faster or slower download speeds. Using a dataset of actual broadband internet speeds and the speeds advertised, I find that an additional broadband competitor raises the ratio of actual to advertised speeds for incumbents by between 23% and 32%, although the increase is temporary. This increase is due to improvements in the actual speed, and not just reductions in the claimed speed. I provide suggestive evidence that the reduction in firms' strategic misrepresentation of their products led to reduced misallocation of consumers across internet plans.

Finally, in Chapter 3, my co-author Alexander Rodnyansky and I focus on how firm cost shocks affect consumer welfare when firms can adjust the composition of qualities of their products. Using a uniquely granular online retail dataset that spans Russia's currency depreciation in late 2014, we document that firms lower product qualities in response to a positive cost shock instead of raising prices. A structural model of the apparel industry that endogenizes the distribution of costs and qualities can rationalize the quality reductions. Compared to a model that features only cost heterogeneity, our model predicts larger drops in welfare after a positive cost shock.