Essays on Market Entry and Competion

Chapter 1: This chapter studies the advertising response of incumbents to the entry of craft brewers in the U.S. beer industry. Exploiting changes in local beer legislation and spatial variation across TV markets, I document two facts: mass-producing brewers respond by raising local advertising, and this reduces consumers' price sensitivity. I then evaluate the implications for market power, using a structural model with persuasive advertising. The empirical model establishes that mass-producing brewers indeed had a profit incentive to respond to entry by raising advertising. Furthermore, the empirical results imply that (i) own and rival advertising can reduce price sensitivity; (ii) markups for flagship domestic brands increased from 2.6 to 3.4 for 2011-2016; and (iii) about 20% of the rising markups can be attributed to the observed increase in advertising stock. Chapter 2: This paper analyzes (i) how changes in market structure affect welfare and consumer choices, and (ii) how the overall effect can be decomposed into two components: the price effect and the product variety effect. I address this analysis in the context of the Internet services market in Colombia and exploit the entry of a large telecom operator in 2007. I estimate a discrete-choice demand model and use a two-stage model with endogenous product and pricing decisions to conduct various counterfactual predictions. The empirical findings indicate that market entry increased the take-up of Internet services by 7.3 percentage points and raised consumer surplus by $10.3 million (32% of the post-entry sales). The decomposition of the overall effect reveals that, on average, the price effect accounts for 61% of the total effect whereas the remainder of the overall effect can be attributed to the change of the menu of products offered by incumbent firms. Chapter 3: Almost half of world households are not yet connected to the internet - with the majority of those offline in poorer countries. Finding strategies to narrow the digital divide is on the forefront of public policy. We examine the impact of a pricing subsidy in Colombia to learn about what hinders low-income populations from adopting internet services. Our model allows take-up to depend on the types of plans offered as well as the rate of diffusion in the neighborhood. Pricing subsidies reduce the digital divide by about 7 percentage points but a large portion of that is due to the impact on the diffusion rate. We find that increasing the diffusion rate (via internet literacy programs) is more beneficial to takeup among households in the lowest socioeconomic markets relative to a pricing subsidy. Our results suggest that non-price policies are equally important to bridge the digital divide.