News
26.02.2024: Our paper "The Network Origins of Entry" has been accepted at the Journal of Political Economy. In this paper we study how and when new firms enter the markets where fixed costs of entry are small (e.g. the market of smartphone apps). The key factor of a new firm's success is that potential customers become aware of the new product through the word of mouth (WOM). We use random network techniques and site-percolation analysis to study the role of network density in the market outcome. An informed consumer passes the information about the new product further iff she purchased that product herself. Hence, incumbent firms have room for strategic entry deterrence through simply reducing their prices, which leads to a shrinking number of informed consumers purchasing the new product. This may (or may not, depending on the communication network density) preclude the emergence of a ``giant component'' in a network of informed consumers, which is a necessary and sufficient condition of the entrant's positive market share. We find that a denser WOM network of customers facilitates entry but not necessarily leads to higher aggregate welfare.To describe the WOM network and to sensibly define the very concept of network density suitable for our purpose, we work with a flexible non-parametric class of mixed Poisson degree distributions, which encompasses the standard parametric families of degree distributions used in the literature: Poisson, exponential, and (asymptotically) power.
10.01.2024: Our paper "Towards a General Theory of Peer Effects" has been accepted at Econometrica. In this paper, we depart from linear-quadratic functional form of the local average model describing peer effects, by pursuing the idea that, depending on the activity in question, one may have different ``role models''. Consider a student who is moderately interested in music, cares a lot about sports, and does not care at all about studies :) In this case, my ``role models'' in these three types of activities will be my peers with different relative levels of achievement. In music, my reference point is the average guy; in sports - the best sportsman on campus; in academic performance - the worst guy who passes. This corresponds to using different types of averages I use to form a ``norm'': it's linear arithmetic average in the first case, the max in the second case, and the min in the third case. The whole spectrum between these three is covered with the parametric family of non-linear power averages. We develop a local-average model based on that idea which departs from the linear local average model which is ubiquitous in peer effects literature. The model nests two behavioral mechanisms of peer effects: spillovers and conformity. These two mechanisms are far from being isomorphic (even though the folk wisdom suggests they are). In the theory part, we prove existence and uniqueness of equilibria, and characterize the utilitarian social optimum. In the empirical part, we do structural estimation of the power average parameter for various activities of high school kids, using data on teenagers in the United States from the National Longitudinal Sur-vey of Adolescent Health (AddHealth). We also develop an identification strategy which allows us to tell apart spillover-driven behavior and conformity behavior.
01.10.2023: New position! Professor of Information Economics, Regulation, and Public Policy (with tenure) at ULB
24.01.2022: Online version of ``Destabilizing Effects of Market Size in the Dynamics of Innovation'' (with K. Matsuyama) is now available: The paper will be available online for free until March 15, 2022:
https://authors.elsevier.com/a/1eTT750waWCIx
23.01.2022: I am on the Program Committee of the European UEA Meeting 2022. Second year in a row. Looking forward to see the submissions, which are very strong every year. Chances are that this year the meeting will be held in person. Fingers crossed!
14.01.2022: My paper ``Destabilizing Effects of Market Size in the Dynamics of Innovation'' (with K. Matsuyama) has been accepted to Journal of Economic Theory. In this paper, we want to capture the idea that larger markets tend to be more volatile. We build on the Judd model of endogenous innovation cycles in which waves of innovation may arise because innovations today saturate the market in the future through the delayed impact. We introduce the procompetitive effect in the Judd model with HSA (homothetic with a single aggregator) class of demand systems, which contains CES as a limit case. We show that waves of innovations are more likely to occur in larger markets under some sufficient conditions. The HSA class of the demand systems in general, and its two parametric families, “generalized translog” and “constant pass-through”, in particular, are tractable and yet flexible enough to be useful for many other applications.
27.01.2021: I am on the Program Committee of the European UEA Meeting 2021. I was both flattered and honored to receive an invitation to be a member of the Program Committee of the European UEA Meeting 2021. My past experiences of attending this annual meeting were a remarkable source of intellectual inspiration and helpful feedback. I believe this year's edition is not going to be any less exciting, despite the online format. Happy to start giving back!
21.11.2020: Paper ``Constant Pass-Through'' available as CEPR DP 15475. In much of applied work on exchange rate pass-through in international macro, tariff pass-through in international trade, etc., the pass-through rate is implicitly assumed to be constant across firms. Indeed, it is standard to regress the log price against (a proxy of) the log marginal cost, and to estimate the pass-through rate as the corresponding regression coefficient. However, this is only valid if one believes that the pass-through rate is constant across the population of firms, which otherwise may feature substantial heterogeneity in various dimensions. This invites the question whether (and how) this feature of the market outcome can be reconciled with profit-maximizing nature of firm behavior.
We provide three alternative microeconomic foundations for the assumption of constant pass-through rate (CoPaTh) under monopolistic competition: the first one within a class of Homothetic Single Aggregator (HSA) demand systems, the second one within a class of Homothetic Directly Implicitly Additive (HDIA) demand systems, and the third one within a class of Homothetic Indirectly Implicitly Additive (HDIA) demand systems. See our earlier papers on these three classes per se, and their application to monopolistic competition. The parametrizations we suggest are flexible, and yet tractable, extensions of the CES demand system. The CES itself is too restrictive for the empirical analysis of the pass-through rate, simply because it implies complete pass-through. Also, the three CoPaTh parametric families of demands allow for various dimensions of heterogeneity across firms (e.g., in product quality, price elasticity, market size, etc.). In addition, even if we forget about firm heterogeneity, the CoPaTh demand systems provide an interesting alternative to the Klenow-Willis parametric family, hence they can be used in quantitative general-equilibrium analyses. This makes us hope that the CoPaTh demand systems will find many applications in applied work.
16.10.2020: Paper ``Specialization vs competition: an anatomy of increasing returns to scale'' (with A. Bucci) forthcoming in The Journal of Economic Geography
Any interest in interdependence between toughness of competition among firms and agglomeration economies? If so, please check out my paper with Alberto Bucci ``Specialization vs competition: an anatomy of increasing returns to scale'', forthcoming in the Journal of Economic Geopgraphy. Online version is now available.
In that paper, we study the relative role of (i) non-pecuniary production externalities and (ii) market competition in generating endogenous increasing returns to scale, which most of us fellow-economists believe to be the key factor of why we like it so much to live in cities.