Nathan Gardner Hattersley
Research
Work in Progress
Downstream Concentration in Regulated Vertical Relationships: Car Dealerships in Texas
This paper provides the first merger retrospective of automobile dealerships, using detailed transaction and registration data from Texas to study the competitive effects of increasing downstream concentration under state franchise law. Despite large changes in local market structure when dealerships are acquired by dealer groups, I find little to no impact on prices or quantities sold. Instead, the results uncover a previously undocumented mechanism through which manufacturers discipline dealer behavior despite statutory prohibitions on many standard vertical restraints. Manufacturers use discretionary vehicle allocations to shape dealers’ product assortments, reallocating high-demand models and trims in ways that affect markups, sales, and investment incentives. Evidence from merger events, spillovers across dealerships, and a legal case study indicates that this mechanism mitigates downstream market power and alters the economic consequences of dealer consolidation. These findings challenge prevailing views of dealer consolidation and franchise regulation and imply that the manufacturer–dealer relationship may be more efficient than previously assumed.
On the Value of Sales Quotas
Job market paper
State franchise laws preclude automobile manufacturers from most classical vertical restraints, including resale price maintenance and quantity forcing, which are important ways for the parties to control the efficiency of the retail operation and maximize bilateral surplus. For this reason, the dealership system has been viewed unfavorably by economists who malign this severe restriction on contractual arrangements between manufacturers and their dealers. I argue this critique overlooks the role of the allocation process, in which manufacturers reward dealers who meet quarterly sales targets with expanded trim assortments, a practice that is de facto permitted under state franchise laws. Using the universe of Texas new-vehicle registrations from 2017–2019 and the Ford franchise network, I develop a structural dynamic model in which dealers set prices in anticipation of an expanded assortment as reward for meeting a sales target. I recover latent compliance with sales targets and the targets themselves from observed assortments, and I recover marginal costs via dealers’ observed pricing policies within the dynamic game. Roughly 80% of dealer-quarters meet their target, and dealers price below the static Nash-Bertrand benchmark because of the dynamic allocation incentive. Hence, I conclude that allocations act as a quantitatively important vertical restraint that has not been previously appreciated in the literature.
The Empirical Distribution of Marshall’s Second Law of Demand
Joint with Eugenio J. Miravete
Demand elasticity determines market power, while demand curvature governs pass-through. Most empirical demand models impose strong restrictions on the relationship between these two objects through functional-form assumptions, yet those restrictions are rarely tested against observed consumer behavior.
We estimate demand nonparametrically for a variety of consumer goods and characterize observed demand on the elasticity-curvature manifold. We then compare these estimates with the predictions of commonly used demand systems to evaluate whether standard functional forms adequately capture economically relevant features of demand. The results provide new evidence on when widely used structural demand models may mischaracterize pricing incentives, markups, and pass-through.