Three Essays On Product Quality And Sequential Auctions

Author : Diwakar Mithila Raisingh
Publisher :
ISBN 13 :
Total Pages : 116 pages
Book Rating : 4.:/5 (125 download)

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Download or read book Essays in Industrial Organization written by Diwakar Mithila Raisingh and published by . This book was released on 2021 with total page 116 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on industrial organization. The first two chapters study the role of information on the behavior of economic agents and the resulting market outcomes. The third chapter examines how market size misspecification affects estimates of price elasticities in a commonly used discrete choice demand model. The first chapter studies how pre-announcements of future period auctions affect participation and bidding strategies in a sequential auction environment. When bidders are forward looking and capacity constrained, pre-announcing upcoming auctions will impact their current period strategies. I use data from Michigan highway procurement auctions to demonstrate that participation and bidding are responsive to pre-announcements, which provides strong evidence that bidders are forward looking. To measure the effect of pre-announcements on participation and bidding strategies, I develop and estimate a dynamic auction model. I show that bidders observing pre-announcements of low expected cost contracts have significantly lower participation probabilities and modestly less aggressive bids. Based on the model estimates of costs, I quantify the impact of pre-announcements on efficiency and government expenditures. Counterfactual simulations show that when the government ceases pre-announcing future auctions, efficiency falls because the reduction in information weakens the bidders' ability to match to contracts for which they are likely to have lower costs. While the less efficient matching of bidders to contracts raises bidders' total costs by 0.4%, the reduced information increases participation by 5.7%. This increased participation strengthens competition and reduces government expenditures by 0.6%. The second chapter (joint with Kenneth Hendricks and Jean-Francois Houde) tests for the presence of asymmetric information about loan quality in the originate-to-distribute supply chain for Ginnie Mae mortgages. In this supply chain, a mortgage specialist originates a loan that she sells to a bank which securitizes the loan into a mortgage-backed security (MBS) that he sells to investors. Using a novel data set on auctions through which mortgage specialists sell loans to banks, we show that the mortgage specialists have private information about loan quality. Using data on mortgage securitization, we show that banks have more information about loan quality than the MBS investors and that the banks use this to their advantage. The presence of asymmetric information should put downward pressure on the resale price of mortgages in the supply chain, and thus raise the costs to consumers seeking mortgages. The third chapter (joint with Elan Segarra) analyzes how price elasticity estimates, which capture substitution patterns, are biased by misspecification of the market size in the discrete choice logit demand model. The market size, the number of agents who consider purchasing a product in the market, is often misspecified because it is unobserved. We decompose the bias in price elasticity estimates into a direct effect, from the misspecified market size, and an indirect effect, from bias in the structural parameter estimates induced by the misspecification. These effects can go in opposite directions so removing the bias from the indirect channel will have an indeterminate effect on the total bias in the elasticity. We prove that market size is not identified so correcting for both sources of bias by estimating market sizes is not feasible. We provide a complete characterization of when correcting for the indirect effect will mitigate versus exacerbate the elasticity bias. Using this characterization, we provide prescriptions for empiricists that dictate when removing bias from the indirect effect will reduce total bias in price elasticity estimates. Our results suggest that price elasticity estimates will be more precise if the misspecified market sizes are larger than the truth.