Three essays in empirical industrial organization

There are many differentiated product industries in which firms offer multiple products in the same market. In making strategic decisions regarding entry, quality and quantity to be supplied for their multiple products firms must consider the competition with rivals as well as cannibalization of their own products that are close substitutes. In this setting, understanding the relationship between the behavior of consumer demand and firms decisions' regarding product characteristics and strategic variables like advertising are fundamental issues in industrial organization. This dissertation empirically explores these fundamental issues in the pharmaceutical and airline industries. The first paper of my dissertation estimates consumer demand for different anti-cholesterol drugs using panel data on a nationally representative sample of individuals who were diagnosed with cholesterol problems in the period 1996-2002. The data provides detailed information on individuals' medical conditions, medical and drug insurance coverage, drug purchases (if any), and other demographic and medical information. Individuals choose whether to purchase an anti-cholesterol rug and, if so, which drug to buy. The model permits flexible substitution patterns among drug choices and persistence in those choices by incorporating both observed and unobserved consumer heterogeneity. The estimates suggest that lower income patients without prescription drug insurance are very price sensitive: they are less likely to use drugs and, if they do use them, they tend to purchase the less expensive drugs. I find that roughly 500 thousand individuals without drug insurance who are currently not purchasing anti-cholesterol drugs would do so in the counterfactual world in which they are given the standard co-payment plan. The second paper also looks at consumer demands for anti-cholesterol drugs. While the first paper focused on the differentiated products, this paper explores the market expansion effects of direct-to-consumer advertising (DTCA). The study combines the individual data used in the first paper with monthly expenditure data on DTCA for the period 1996-2002. The dynamic demand model estimated in this paper explores the heterogeneous effects of DTCA. Overall, I find a positive effect from DTCA with short term elasticity of 0.107. Through persistence in consumer demand this effect lasts over multiple time periods. I find that individuals not taking a cholesterol drug respond more to advertising than those on the drug. In addition, I find that less educated individuals, those that may be unaware of their health condition, and those without health insurance are most responsive to DTCA. Finally, the third paper studies the effect of product ownership and quality on entry in the airline industry. Specifically, this paper empirically examines the decision of an airline to offer high quality nonstop service between cities given that the airline may or may not be offering lower quality one-stop service. I find that airlines that offer one-stop service through a hub are less likely to enter that same market with nonstop service than those that do not. In addition, the quality of the one-stop service is another determinant of entry. Airlines are more likely to enter a market with nonstop service if their own or their rival's one-stop service in the market are of lower quality.