Essays on Strategic Investment

97 Pages·2017·0.79 MB·English

by  Tedi Skiti

Essays on Strategic Investment
by
Tedi Skiti
Department of Economics
Duke University
Date:
Approved:
Daniel Yi Xu, Supervisor
Allan Collard-Wexler
James W. Roberts
Christopher Timmins
Dissertation submitted in partial fulfillment of the requirements for the degree of
Doctor of Philosophy in the Department of Economics
in the Graduate School of Duke University
2017
Abstract
Essays on Strategic Investment
by
Tedi Skiti
Department of Economics
Duke University
Date:
Approved:
Daniel Yi Xu, Supervisor
Allan Collard-Wexler
James W. Roberts
Christopher Timmins
An abstract of a dissertation submitted in partial fulfillment of the requirements for
the degree of Doctor of Philosophy in the Department of Economics
in the Graduate School of Duke University
2017
Copyright (cid:13)c 2017 by Tedi Skiti
All rights reserved except the rights granted by the
Creative Commons Attribution-Noncommercial Licence
Abstract
My dissertation explores the implications of strategic investment on market struc-
ture, new firm entry and technology diffusion. In particular, I build on existing
theoretical models and empirical methods and develop new ones to identify strate-
gic investment and empirically measure its implications. This dissertation aims to
provide a framework of how firms strategically invest to deter entry and what is the
optimal entry policy in these markets. Although there is a significant theoretical
literature on strategic investment, there is only limited empirical work.
In the first chapter of my dissertation, I present a simple theoretical model of
technology adoption to illustrate why firms may have incentive to excessively invest
in the case of entry threat.
In the second chapter of my dissertation, I present a model of strategic entry
deterrence and study how internet service providers’ interactions affect their tech-
nology deployment at local markets. The goal is to capture an important trade-off:
cable firms adopt a new cable system to provide higher speeds, but the adoption
has a preemptive effect on fiber firms’ entry. I collect and combine unique firm-level
data on broadband technology deployment and exogenous city-firm level franchise
agreements data for potential fiber entrants for New York State. I provide evidence
of strategic investment by cable incumbents to deter fiber entry. Counterfactual sce-
narios suggest that the industry has experienced 16% excessive investment in cable
adoption and 12% underinvestment in fiber entry both of which are explained by
iv
these deterrence strategies. In addition, subsidies to cable incumbents in small mar-
kets reduce fiber entry rate by 50%. I also find that policies that promote statewide
entry as opposed to existing subsidy programs mitigate the effects from these de-
terrence strategies and increase fiber entry rate by 30%. These results have wide
implications for technology diffusion, quality provision and optimal subsidy policy
in markets under entry threat.
In the third chapter of my dissertation, I investigate the effect of entry barriers
for municipal providers on incumbents’ strategic investment in the US broadband
industry. I use a spatial regression discontinuity design by examining incumbents
strategic behavior across the exogenous entry barriers. I collect and combine unique
firm-level data on incumbents’ investment decisions and state-level data about legal
entry barriers. I find that technology diffusion is slower and internet service quality
is lower in markets with entry barriers. In particular, I find that entry threat leads
to an increased cable investment of 10%. This article contributes to the limited
empirical literature that uses quasi-experimental methods to identify firms’ strategic
behavior and the role of entry barriers in equilibrium product quality. In addition,
it contibutes to the literature that examines the effect of competition, entry barriers
and entry threat on technology adoption as well as the role of public investment.
v
Lamachus But I propose always to war with the Peloponnesians, both at sea, on
land and everywhere to make them tremble, and trounce them soundly.
Dicaeopolis For my own part, I make proclamation to all Peloponnesians, Megar-
ians and Boeotians, that to them my markets are open; but I prohibit Lamachus
from entering them.
Chorus Convinced by this man’s speech, the folk have changed their view and
approve him for having concluded peace.
Acharnians, Aristophanes, 425 BC
vi
Contents
Abstract iv
List of Tables ix
List of Figures xi
List of Abbreviations and Symbols xii
Acknowledgements xiii
1 Introduction 1
2 Strategic Technology Adoption and Entry Deterrence in the U.S.
Local Broadband Markets 6
2.1 Industry Background . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.1 Literature on Strategic Investment, Technology Adoption and
Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.2 Literature on Broadband and Telecommunications . . . . . . . 18
2.3 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.3.1 ISP-level data . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.3.2 Data on Fiber Firms’ Potential Markets . . . . . . . . . . . . 21
2.3.3 Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.4 Relative Market Discussion and Definitions . . . . . . . . . . . . . . . 22
2.5 Evidence of Strategic Deterrence . . . . . . . . . . . . . . . . . . . . . 24
2.5.1 Determinants of Fiber Entry . . . . . . . . . . . . . . . . . . . 25
vii
2.5.2 Cable Adoption and Fiber Entry Threat . . . . . . . . . . . . 26
2.6 A Model of Strategic Technology Adoption . . . . . . . . . . . . . . . 28
2.6.1 State Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.6.2 Game Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.6.3 Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.7 Identification of Strategic Effects . . . . . . . . . . . . . . . . . . . . 35
2.8 Estimation and Results . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.9 Model Fit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.10 Counterfactuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.10.1 No Deterrence . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.10.2 Subsidies only to Small Markets . . . . . . . . . . . . . . . . . 39
2.10.3 Statewide Fiber Entry . . . . . . . . . . . . . . . . . . . . . . 40
2.11 Conclusion and Future Work . . . . . . . . . . . . . . . . . . . . . . . 41
2.12 Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3 When City Hall Takes the Lead: Entry barriers and Technological
Innovation in Broadband 53
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.2 Data Description and Definitions . . . . . . . . . . . . . . . . . . . . 57
3.3 Estimation Strategy and Identification . . . . . . . . . . . . . . . . . 58
3.3.1 Entry threat and Technolody Adoption . . . . . . . . . . . . . 59
3.3.2 Technology adoption and Entry Threat Distance . . . . . . . . 60
3.3.3 Spatial Discontinuity . . . . . . . . . . . . . . . . . . . . . . . 61
3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Bibliography 77
Biography 83
viii
List of Tables
2.1 Speed comparison across broadband technologies (Source: Broadband
Map). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.2 Summary Statistics. Obs. is market/t. . . . . . . . . . . . . . . . . . 44
2.3 Markets with Cable DOCSIS and Optical Fiber. Obs. is market/t.
Total TW markets: 9,542. . . . . . . . . . . . . . . . . . . . . . . . . 44
2.4 Determinants of fiber entry. Potential markets for each fiber firm
are used. Marginal effects from the logit specification are reported.
Standard errors are clustered at the census tract level. . . . . . . . . 48
2.5 Cable adoption, entry threat and predicted fiber entry likelihood.
Markets in which Time Warner is the major cable incumbent. Time
fixed effects are included. Standard errors are clustered at the census
tract level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2.6 Structural parameter estimates. . . . . . . . . . . . . . . . . . . . . . 50
2.7 Model fit: population density quartiles and number of markets with
cable adoption and fiber entry. . . . . . . . . . . . . . . . . . . . . . . 51
2.8 Model fit: aggregate income quartiles and number of markets with
cable adoption and fiber entry. . . . . . . . . . . . . . . . . . . . . . . 51
2.9 Counterfactual scenario: No Deterrence. . . . . . . . . . . . . . . . . 52
2.10 Counterfactual scenario: Subsidies to markets in the 10% of popula-
tion density distribution. Obs. is a market/t. Firms are subsidized
with the whole amount of investment. . . . . . . . . . . . . . . . . . . 52
2.11 Counterfactual scenario: Statewide Fiber Entry. I assume fiber firms
are symmetrical and each market has 5 potential entrants. . . . . . . 52
3.1 Data description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
ix
3.2 Entry barriers and technology adoption. . . . . . . . . . . . . . . . . 64
3.3 Technology adoption and entry threat distance. . . . . . . . . . . . . 65
3.4 Entry barriers and technology adoption for the neighboring local mar-
kets. I focus on ISPs that offer service across state borders with and
without entry barriers. . . . . . . . . . . . . . . . . . . . . . . . . . . 66
x