Review of Industrial Organization 23: 193–215, 2003.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
Common Sense and Simplicity in Empirical
Department of Economics, Harvard University, Cambridge MA 02138, USA
Abstract. This paper is a revised version of a keynote address delivered at the inaugural International
Industrial Organization Conference in Boston, April 2003. I argue that new econometric tools have
facilitated the estimation of models with realistic theoretical underpinnings, and because of this, have
made empirical I.O. much more useful. The tools solve computational problems thereby allowing us
to make the relationship between the economic model and the estimating equations transparent. This,
in turn, enables us to utilize the available data more effectively. It also facilitates robustness analysis
and clariﬁes the assumptions needed to analyze the causes of past events and/or make predictions
of the likely impacts of future policy or environmental changes. The paper provides examples illus-
trating the value of simulation for the estimation of demand systems and of semiparametrics for the
estimation of entry models.
What I want to argue is that advances in econometrics, in combination with at
least the basics of a theoretical structure, and greatly facilitated by the parallel and
interrelated growth of better data and computing facilities, have made
sensible things simple
and that, as a result, empirical industrial organization has become much more
I will argue this through two examples. They are designed to show how new
econometric tools enable us to dramatically improve our estimates of objects which
are of fundamental importance to the analysis of market outcomes: demand func-
tions and entry costs. The econometric tools used in these examples, simulation
and semiparametrics, are also the two tools that have been most intensively used of
late in empirical industrial organization.