Cutting Edge Economic Tools

Abstract

The words “cutting edge” suggest something new and on the frontier of our understanding. Although, when applied to economic tools, the word “new” has to be understood within the context of the development of economic theory, for which change tends to take place over years or decades rather than months. “Cutting edge” also suggests something sophisticated, but some of the most powerful economic insights are also the most simple.

Cutting edge economics tools can be broken down into cutting edge theoretical and empirical tools. For theoretical tools, this paper focuses on vertical merger theories of harm, which have risen to prominence over the last few years. For cutting edge empirical tools, the paper considers machine learning techniques applied to big data, which have started to gain mainstream application. The paper finishes with a cautionary example of how apparently cutting edge econometric analysis can go wrong based on the Westpac bank bill swap rate (BBSW) manipulation case in Australia.

Keywords: Cutting Edge, VGUPPI, Bargaining, Machine Learning, Algorithmic Collusion, LASSO, Classification and Regression Trees, Random Forests, Circularity

JEL Classification: L4, C1, G1