Essays On Theoretical Industrial Organization

Author : Sangwoo Choi
Publisher :
ISBN 13 :
Total Pages : 282 pages
Book Rating : 4.:/5 (125 download)

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Download or read book Essays on Theoretical Industrial Organization written by Sangwoo Choi and published by . This book was released on 2021 with total page 282 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters in theoretical industrial organization with focus on consumer search and strategic firm behavior. More precisely, we study strategic firm behavior in an environment where an imperfectly informed consumer searches for sellers to buy a product from. Each chapter considers a distinct strategy for firms: implementing a product return policy, disclosing information about the product, and choosing product design. In the first chapter, we study how the presence of a monopoly platform affects the return fee in online retail markets. Specifically, we ask whether a monopoly platform has an incentive to set the return fee below the cost of processing returns. A seller on the platform can reduce their cost of returns by outsourcing some of the return process to the platform itself. By absorbing some of the expense of the return process, the platform requires sellers to set the return fee at a level determined by the platform. The platform charges each member seller a lump sum fee which makes them indifferent between joining the platform and selling directly to consumers. The main result compares equilibrium return fees in two different market settings: with a monopoly platform, and without a monopoly platform. Sellers without the platform compete with each other on return fees as well as on product prices, and thus lower their return fees to attract consumers. However, the sellers' incentive to recoup the cost of returns dominates the effect of competition. As a result, the competitive return fee without the platform is higher than the marginal cost of processing returns, which would be the socially optimal return fee. The platform internalizes the competition on return fee between the sellers, and imposes an even higher return fee on the sellers than the competitive one. There are two main takeaways from this result: first, the current trend of ``easy returns" is inconsistent with a monopoly platform maximizing profits in the short-run. Second, by setting a higher return fee, a monopoly platform decreases both consumer and social welfare compared to the market without a monopoly platform. The second chapter examines how a seller's ability to reveal product match information affects equilibrium price and welfare in a duopoly market. Without any product information provided, a consumer must search for and check a product before buying it. Revealing pre-search information allows a seller to segment a market into two parts: consumers who are matched to the revealing seller, and those who are not. We characterize conditions when the equilibrium prices feature an inverted U-shape in search cost for both sellers who reveal and sellers who don't. We also discuss the welfare consequences of three different information disclosure rules: voluntary disclosure, mandatory disclosure, and mandatory concealment. Under a mandatory disclosure rule, social waste from excessive search and mismatch is minimized, but the inefficiency caused by under-provision through an increased equilibrium price is maximized. In contrast, under a mandatory concealment rule, social waste from excessive search and mismatch is maximized. However, a consumer may be better off under a mandatory concealment rule due to a lower equilibrium price. The third chapter studies the effect of ``prominence" on sellers' optimal product design decisions when a consumer must visit each seller in order to learn the cost and matching value of their product, while incurring search costs in the process. Consumers first search for prominent sellers with no recall, and then search for infinitely many “non-prominent” sellers. When the quality distribution of a prominent seller is identical to that of a non-prominent seller, the optimal product design and the optimal price of a seller is unaffected by whether the seller is prominent or not. In other words, all of the sellers share a common quality threshold, above which a seller chooses broad product design, and below which a seller chooses niche product design. We show that the quality threshold of a prominent seller increases when a prominent seller is from a ``better" quality distribution. Improved quality distribution makes a consumer pickier when searching for a prominent seller, which in turn makes the competition more intense in the market. With a higher level competition, only a seller with a higher quality can survive in a market of broad design products