This dissertation consists of three chapters on theoretical and empirical industrial organization. The first chapter highlights a previously unnoticed property of commonlyused discrete choice models, which is that they feature parallel demand curves. The second chapter studies how a behavioral consumer preference with “price reference effect” can overturn the standard intuition of vertical integration. The last chapter identifies the effect of improved product information on demand and prices in the context of an online retail market. Chapter 1 (which is joint work with Kory Kroft, Ren´e Leal-Vizca´ıno, and Matthew J. Notowidigdo) highlights a previously unnoticed property of commonly-used discrete choice models, which is that they feature parallel demand curves. Specifically, we show that in additive random utility models, inverse aggregate demand curves shift in parallel with respect to variety if and only if the random utility shocks follow the Gumbel (Type 1 Extreme Value) distribution. Using results from Extreme Value Theory, we provide conditions for other distributions to generate parallel demands asymptotically, as the number of varieties increases. We establish these results in the benchmark case of symmetric products, illustrate them using numerical simulations and show that they hold in extended versions of the model with correlated tastes and asymmetric products. Lastly, we provide a “proof of concept” of parallel demands as an economic tool by showing howto use parallel demands to identify the change in consumer surplus from an exogenous change in product variety. 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 Junyan Guan), we first show theoretically that when this price reference effect is sufficiently large, it can overturn the standard textbook result that vertical integration improves joint profits. The key intuition is that the increase in quantity is dampened when consumers update their expectations. To test whether this force is large in a real-world setting, we develop a model of a downstream retailer who faces behavioral consumers and bargains with an upstream producer. We estimate this model using a novel dataset from a large online book retailer, where we observed retail prices, quantities sold and wholesale prices. Counterfactual simulations show that vertical integration would reducejoint profits by 11%. These findings highlight the importance of incorporating consumer expectations in the analysis of optimal pricing and vertical integration. In E-Commerce, the shopping process is accompanied by numerous information of a single product. Researchers in Economics and Marketing have documented experimental evidence of how information affects consumers’ behaviors. In Chapter 3, I first show a model with demand uncertainty and predict that the probability of returning products is decreased when consumers have less biased prior beliefs about product quality. To provide empirical evidence on this prediction, I use a novel data set from a large book retailer to identify the changes in return rates from an exogenous shock in the level of information provision. Estimation results suggest that the increased amount of information reduces return rates by 18%-19% and it is mainly driven by less popular books.

Creator

• Wang, Ting

DOI

• https://doi.org/10.21985/n2-9cjd-s573

Subject

• Economics

Language

• en

Alternate Identifier

• etdadmin_upload_985596
• http://dissertations.umi.com/northwestern:16562

Date created

• 2023-01-01

Resource type

• Dissertation

Rights statement

• In Copyright