Essays in industrial organization: Switching costs in an evolving industry price structure in two-sided markets

Chapter 1 investigates beneficiary and firm behavior in the Medicare prescription drug program. The Medicare Modernization Act of 2003 established government-subsidized prescription drug coverage for eligible beneficiaries beginning in January 2006. Beneficiaries choose from benefit packages offered by competing private firms. The program is characterized by persistent market shares and substantial changes in the behavior of beneficiaries and firms between the first and second years. Demand becomes less elastic in 2007. Firms that successfully enrolled beneficiaries in 2006 raised premiums and altered other features of their benefits to increase the out-of-pocket costs to beneficiaries. These facts suggest that switching costs are an important feature of the industry. I use data on aggregate enrollment along with detailed data on plan characteristics to estimate a discrete choice model of demand. Using the parameter estimates from this model, I find that mean switching costs exceed the premiums paid by beneficiaries. I then estimate two models of firm behavior, one of which treats firm strategies as static while the other allows for dynamic pricing strategies. By comparing the estimated margins from the two models to actual margins reported by firms, I assess the extent to which firms respond to consumer switching costs. A simple two-period model of firm behavior better approximates actual firm behavior, suggesting that firms behave strategically in the presence of switching costs.; Chapter 2 examines the effect of interchange fees in payment card networks. Recent theoretical literature emphasizes the role of the price structure in two-sided markets. Price structure can be an important mechanism used by profit-maximizing firms to coordinate demand on either side of the market. I exploit recent changes to interchange fees for offline debit cards to examine the effect on transaction volume. The results are consistent with the hypothesis that there was a small decline in the growth of offline debit card transactions relative to credit card transactions. Some issuers responded to the lower interchange fees by reducing the value of rewards on offline debit, but not eliminating such rewards. The results suggest that the price structure for offline debit may not be neutral.