Essays on industrial organization

The first two essays in this dissertation analyze two key elements of firms' marketing strategies: bundling and advertising. The third essay (joint with Bharat Anand) asks whether the differences in firms' overall mix of tactics, strategy and resources translate into systematic (as opposed to temporary) differences in performance. In the first essay, I develop an empirical model of demand for large bundles, and use it to analyze bundling of channels in cable television. I model consumers' choice of cable packages (bundles of channels) and their viewing choices. I estimate the model using individual-level data on cable/satellite subscriptions and viewership. Following recent policy debates, in counterfactuals I analyze the short-run effects of breaking up the cable bundles. I find that unbundling is not an attractive policy option: it does not benefit consumers but it severely hurts the cable networks. In the second essay, I focus on another key element of firms' marketing strategies: advertising. Advertising may increase sales through two distinct channels: (1) it may increase consumers' tendency to include the promoted product in their consideration set, and (2) it may increase their perceived utility from the product. I show how these effects can be distinguished from each other empirically. I use individual-level Nielsen data to analyze the effects of tune-in ads for television shows. I find that the consideration set effect of advertising is significant and large in my data, while other effects of advertising are minor, with important implications for firms' advertising strategies. In the third essay (joint with Bharat Anand), we focus on systematic heterogeneity in firms' valuations. We decompose overall variation in firms' excess values into diversification discount, systematic heterogeneity (firm random effects) and temporary shocks. We find that the magnitude of systematic heterogeneity is large in absolute terms, and large relative to the mean diversification discount. This highlights the importance of understanding the fundamental drivers of such systematic differences in performance, and suggests that the value consequences of diversification (which have attracted a lot of attention in the literature) are relatively minor compared to other systematic determinants of firm value.