Trucks without bailouts: Equilibrium product characteristics for commercial vehicles JOB MARKET PAPER

In differentiated product markets, the entry and exit of individual product models— rather than of firms—often serve as the main equilibrating force. Market structure changes that lead to high prices also tend to encourage entry, partially offsetting the effects. Thus, accurately predicting changes from a merger or bankruptcy should incorporate this behavior. I develop a model of equilibrium product characteristics in oligopoly and show how inequalities can identify the sunk costs of offering them. I apply these methods to an original dataset of all US commercial vehicles from 1987 to 2012 and assess their importance in the context of the $85 billion bailout of the automotive industry in 2009. In the case where GM and Chrysler are liquidated rather than rescued, estimated sunk costs are low enough to induce product entry by rivals, and this has a dramatic effect on prices and purchases. Markup increases for the most affected products drop by two-thirds when I account for model-level entry and exit. The decrease in total output is also moderated by about one-half. Acquisitions are an alternative to liquidation. I show that although the policy choice, including who the acquiring firm is, matters a lot when model-level entry and exit are ignored, it matters little when they are accounted for. ∗Harvard University, Department of Economics, Littauer Center, Cambridge, MA 02138 (email: [email protected]). I am grateful to my advisors, Ariel Pakes, Juan Alcacer, Greg Lewis, and Dennis Yao, for their guidance and encouragement. This paper benefited from conversations with Richard Sweeney, whom I have worked closely with on related work, and Thomas Covert, James Lee, Robin Lee, Julie Mortimer, Daniel Pollmann, Mark Shepard, Michael Sinkinson, Haris Tabakovic, Eli Tamer, Che-Lin Su, Ali Yurukoglu, workshop participants at Harvard, and seminar participants at Chicago, Northwestern, Yale, NYU, UCLA, Columbia, HBS, and numerous other institutions. I also thank Mike Landry of Span Alaska for his help with vehicle data and Steve Matsil, who was very generous in sharing his knowledge of commercial vehicle production and demand.