Empirical Studies of Auctions and Consumer Demand

Guan, Junyan

doi:https://doi.org/10.21985/n2-jk40-xd70

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Empirical Studies of Auctions and Consumer Demand

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This dissertation consists of three chapters on empirical industrial organization. The first chapter explores how a seller uses a public reserve price to signal her private info about the object’s value to the bidder. The second chapter studies how a behavioral consumer preference called “price reference effect” could overturn the standard intuition of vertical integration. The third chapter evaluates the impact of government subsidies on consumers' automobile replacement decisions in the context of cash-for-clunkers program in 2009. Chapter 1 (which is joint work with Boli Xu) considers an auction model in which a seller’s choice of reserve price signals her private information about the object’s quality. We estimate the model using a novel dataset from a large online auto auction platform. We find that the signaling incentive could cost the seller 4% of her profit and decrease the probability of sale by 15 percentage points. Counterfactual simulations suggest that a secret reserve price can improve both the seller’s profit and probability of sale, which supports the prevalent use of secret reserve prices in practice. In many settings, behavioral economists have documented a price reference effect: the fact that a consumer's willingness to pay for a good is affected by difference between the observed price and the reference price they rationally expect. In Chapter 2 (which is joint work with Ting Wang), we show that if this price reference effect is sufficiently large, vertical integration between an upstream producer and a downstream retailer can decrease joint profits, unlike in the textbook case where vertical integration improves profits. The key intuition is that the increase in quantity is dampened when consumers update their expectations. We estimate the model using a novel dataset from a large online book retailer. Counterfactual simulations show that vertical integration would reduce joint profits by 11%. Chapter 3 investigates the impact of government subsidies on consumers' automobile replacement decisions in the context of the U.S. Car Allowance Rebate System program in 2009. I develop and estimate a dynamic discrete-choice model of automobile replacement. Results show that 65% of the households would replace their vehicles even without the subsidy. To highlight the impact of subsidy design, I show that limiting the subsidies to low-income consumers would generate 85% of the sales with half amount of total government spending. These findings emphasize the importance of balancing policy stimulus with government spending and targeting consumers more efficiently in the design of subsidy programs.

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