| My dissertation investigates how firms, operating in different industries and facing various organizational and legal constraints, respond to three types of externalities. In economics, an externality is the uninternalized impact (positive or negative) on any party not involved in a given economic transaction. Since third parties are affected by these transactions, the actual outcomes may not be socially optimal and, thus, pose a challenge for free-market advocates. In each of the three chapters of my dissertation, I highlight empirically a different approach adopted by firms to either minimize the effect of negative externalities they face, or alternatively, to take advantage of positive externalities. The combination of the three chapters offers a better understanding of the role of externalities and sheds light on the potential impact of policy intervention.;The first chapter (co-authored with Oren Rigbi) explores how chains control prices at their franchised outlets and the role of positive demand externalities in maintaining the reputation of fast-food chains. The presence of positive demand externalities is driven by the different incentives of franchisees and the franchisor with respect to the chain's overall reputation and implies that franchisees set too high (from the chain's point of view) prices. Our idea is that through advertising, the chain informs consumers about a desired behavior for franchisees, such as setting low prices. Consequently, franchisees find it optimal to adopt the chain's desired behavior. We demonstrate this idea using McDonald's Dollar Menu advertising campaign in 2002. We exploit McDonald's dual organizational structure, operating both corporate-owned and franchised restaurants to test changes in prices of advertised and non-advertised items. We find that price differences between franchised and corporate-owned outlets decreased substantially only for items with good substitutes in the Dollar Menu. Second, prices at franchised outlets were higher and the change in the price differential was larger in outlets located near highways, where the incentive of franchisees to free-ride on the chain's reputation is greater.;In the second chapter, I examine the relationship between an airport level of congestion and the airport market structure. I investigate whether airlines schedule their flights taking into account the congestion cost a flight inflicts on flights operated only by the same airline rather than by other airlines. More specifically, this chapter focuses on the contribution of flight banks, time periods in which hub carriers cluster their flights to achieve short connecting periods for their passengers, to the level of congestion at hub airports.;The third chapter deals with negative demand externalities or business stealing among retailers, and how exclusive dealing arrangements between a shopping mall landlord and hamburger restaurants can mitigate these concerns. Using a unique dataset of Israeli shopping malls and data on exclusive dealing arrangements, I explore when exclusivity contracts are formed. The main findings are: (1) In large shopping malls there are no exclusive dealing arrangements; (2) Binding arrangements are obtained in intermediate size malls. These findings suggest that exclusive dealing arrangements in shopping malls limit consumers' choice set and are likely to reduce social welfare. |
