Alexander MacKay  

Current Papers

An Empirical Model of Consumer Affiliation and Dynamic Price Competition
with Marc Remer
We study the pricing decision of firms when consumers may become "affiliated" with previously purchased products. Affiliation can arise from habit formation, brand loyalty, and switching costs, and it has important implications for the interpretation of equilibrium outcomes and counterfactual analysis. We analyze the effect of affiliation in the context of mergers, and we show that a (misspecified) static model will predict price effects larger than those generated by the dynamic model. The dynamic incentive to invest in future demand tends to suppress post-merger price increases. We develop an empirical model of dynamic demand that can be estimated independently from supply-side assumptions and uses only market-level data. By estimating the model without supply-side assumptions, we are able to test for forward-looking behavior by firms. Using a hypothetical merger of two major retail gasoline companies that anticipate habit formation by their consumers, we find that a static model predicts a 5.9 percent price increase, whereas the predicted price increase is only 2.1 percent after accounting for dynamics.
Identification of Demand Parameters Using Ordinary Least Squares
with Nathan H. Miller
Work in progress.
The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation
with Tatyana Deryugina and Julian Reif
[NBER Working Paper 23483]
Understanding the response of consumers to electricity prices is essential for crafting efficient energy market regulations, evaluating climate change policy, and investing optimally in infrastructure. 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. Participating communities experienced average price decreases in excess of 10 percent in the two years following adoption. Using a flexible difference-in-differences matching approach, we estimate a one-year price elasticity of -0.14 and three-year elasticity of -0.29. We also present evidence that consumers increased usage in anticipation of the price changes. Finally, we estimate a forward-looking demand model and project that the price elasticity converges to a value between -0.30 and -0.35 after ten years. Our findings demonstrate the importance of accounting for long-run dynamics in this context.
Transaction Costs and the Duration of Contracts
[Job Market Paper] 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.
The Empirical Effects of Minimum Resale Price Maintenance
with David Aron Smith
This study is the first to estimate the empirical effects of minimum resale price maintenance (RPM) across a broad variety of products. We analyze conflicting theories using an exogenous state-level law change resulting from the 2007 Leegin Supreme Court decision. In states where RPM contracts are treated under the more relaxed rule-of-reason standard, prices increased. Through a series of tests, we find little support for the broad application of any particular theory.


Challenges for Empirical Research on RPM
with David Aron Smith
Review of Industrial Organization, Vol. 50, No. 2 (2017), 209–220. 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.
Bias in Reduced-Form Estimates of Pass-Through
with Nathan H. Miller, Marc Remer, and Gloria Sheu
Economics Letters, Vol. 123, No. 2 (2014), 200-202. This paper addresses the conditions under which cost pass-through can be estimated accurately with reduced-form regressions of price on cost. Our main result is that a reduced-form regression of price on costs - the standard methodology for pass-through estimation - does not guarantee a consistent estimate under the usual assumption that observed cost measures are uncorrelated with other determinants of cost. We provide sufficient conditions for consistency, and we derive a formal approximation for the asymptotic bias under the standard assumption of orthogonality. We provide guidance on the conditions under which bias may frustrate inference.

Work in Progress

Contracts as a Barrier to Entry: Evidence from a Newly Deregulated Market In a newly deregulated market for retail electricity, suppliers offer a discount for signing two-year contracts compared to one-year contracts. The discount anticipates entry in the market; greater entry during the first year of the contract corresponds to a larger discount for a two-year term. The market experiences an expansion phase followed by a maturation phase in which unsuccessful firms exit. As the number of suppliers falls, firms no longer offer a discount on the two-year contract; instead, they charge a premium. The observed pricing behavior is consistent with an incentive to discourage entry, as in Aghion and Bolton (1987).