Research

(Research Statement)

“Capacity and Utilization Choice in the US Oil Refining Industry” [Job Market Paper]

(Revised 11/3/2008)

This paper presents a new dynamic model of the operating and investment decisions of US oil refiners. The model enables me to predict how shocks to crude oil prices and refinery shutdowns (e.g., in response to hurricanes) affect the price of gasoline, refinery profits, and overall welfare. There have been no new refineries built in the last 32 years, and although existing refineries have expanded their capacity by almost 13% since 1995, the demand for refinery products has grown even faster. As a result, capacity utilization rates are now near their maximum sustainable levels, and when combined with record high crude oil prices, this creates a volatile environment for energy markets. Shocks to the price of crude oil and even minor disruptions to refining capacity can have a large effect on the downstream prices of refined products. Due to the extraordinary dependence by other industries on petroleum products, this can have a large effect on the US economy as a whole.

I use the method of moments to estimate a dynamic model of capacity and utilization choice by oil refiners. Plants make short-run utilization rate choices to maximize their expected stream of profits and may make costly long-term investments in capacity to meet the growing demand and reduce the potential for breaking down. I show that the model fits the data well, in both in-sample and out-of-sample predictive tests, and I use the model to conduct a number of counterfactual experiments. My model predicts that a 20% increase in the price of crude oil is only partially passed on to consumers, resulting in higher gasoline prices, lower profits for the refinery, and a 45% decrease in total welfare. A disruption to refining capacity, such as the one caused by Hurricane Katrina in 2005, raises gasoline prices by almost 16% and has a small negative effect on overall welfare: the higher profits of refineries partially offsets the reduction in consumer surplus. As the theory predicts, these shocks have a smaller effect on downstream prices when consumer demand is more elastic, resulting in a larger share of total welfare going to the consumer.

Slides: PDF

Data: Plant Capacity, Utilization Rates,

Prices: Gasoline, Distillate, Crude Oil

“An Analysis of Consumer Search Behavior for Online Drug Information” [work in progress, joint with Ginger Jin]

Consumers are increasingly turning to the internet and using search engines to find information on prescription drugs. Between 2001 and 2007, the number of adults using the internet as an alternative source of health information doubled, so understanding how consumers use the internet to search for drug information and what information is provided is an important economic and public health question.

This paper utilizes a database of organic and sponsored search results from four large search engines for a selection of drug-related queries and user click-through data from America Online. We show that the information available on the internet varies significantly across search engines, domain extensions, and between organic and sponsored links. Compared with other queries, users are more likely to click on more than one result in a search session, and when they do, they click more rapidly through the results and tend to migrate away from dot-com sites and toward those ending in dot-org and dot-net. Offline advertising on a drug serves to increase the frequency and intensity of these searches.

“The Market for Online Drug Information: The Role of Organic and Sponsored Links” [work in progress, joint with Ginger Jin]

Sponsored links, or paid query-specific ads that appear alongside organic results, are a growing form of online advertising accounting for 40% of total ad spending. While these links are popular for many consumer products, understanding how consumers treat them in drug-related searches is particularly important because they may complicate a consumers’ search for unbiased information about a drug. Regulators, like the FDA, also have an interest in making sure that consumers are receiving accurate drug-related information.

This paper will analyze how consumers substitute between organic and sponsored links when performing drug-related searches. We will utilize organic and sponsored search results from 4 large search engines and click-through data potentially provided by Yahoo. The key to the analysis will be understanding how the informational content of organic search results affects the click-through rate of sponsored links, and vice versa.