This project consists of several distinct, but related studies. The first study aims to model and predict entry decisions in the generic pharmaceutical industry, and in particular to determine how firms make entry decisions when costs are sunk and competitors act simultaneously. A model of a plausible equilibrium for the simultaneous game is presented and tested using a dataset of all generic entry from 1984 to 1994. Initial entry regressions using a probit model indicate that firms enter markets where they have therapeutic or marketing experience due to products that already are in their portfolios. The years after generic regulators were found to have taken bribes was a period of upheaval in the industry. New priorities at the FDA affected firm decision-making, which resulted in new entry patterns. Initial results indicate that entry decisions of individual firms become harder to predict; achieving the equilibrium number of entrants for any particular market will become less likely, and social surplus may be lost as firms fail to coordinate on an equilibrium strategy. Empirical analysis of the game being played in the generic pharmaceutical market can give researchers a better understanding of what decisions firms make in practice in complex entry games of this type. The central premise of the second study is that owners of private firms maximize utility, and that some of these owners get utility from features of the firm other than profits, such as product quality or the number of consumers of the product. The existence of firms with non-profit objectives affects industry outcomes, such as scale of production and equilibrium prices. In addition, competition between the two types of firms will be different than it would be if their objectives were the same. In particular, a simple model and initial results show that owners pursuing non-profit objectives charge more for their wine on a quality-adjusted basis and locate their product at the higher-quality end of the market. Existing data on the California wine industry is supplemented with winery-level production data and information on acreage available in the different appellations. Scale of production, price, specialization, and entry are related to the preferences of the owners for profits versus other non-monetary returns to see if utility-maximizers differ from profit-maximizers. Additionally, survey information on how preferences are affected by the number of generations and years the winery has been in the family are used to explain the effect of hobbyists on the industry. Privately-owned firms form a large part of the US economy; it is important to improve our understanding of owner motivations since these motivations affect firm behavior and impact other firms in the industry. The final study's hypothesis is that an increase in social and institutional ties between executives reduces the intensity of price competition in duopoly airline markets. Theory would predict fewer price wars when executives set prices and process the same information in the same way because fewer mistakes are made in interpreting a rival's action. This may allow firms to avoid inadvertent price wars, which would cause prices to be higher on average. Sociologists would expect higher prices if the executives feel they are friends. The specification uses standard determinants of airline prices as well as measures of social and institutional ties. These variables test and distinguish between the two theories mentioned above using a data set of duopoly airline routes in the US. The results of this project can broaden our understanding of the price-setting process and may have interesting antitrust policy implications. Empirical researchers who find that concentration positively affects prices will be able to refer to two mechanisms of action: the externality caused by deviation from cooperation falls as concentration rises (e.g. Cournot), and the number of inter-firm social ties increases as concentration increases. If prices were higher due to the existence of social and institutional ties, such ties may negatively affect social welfare. However, an antitrust agency trying to increase welfare cannot instruct managers as to whom they may be friends with nor direct the career paths of managers so as to avoid social ties.
