Essays on industrial and societal organization

Abstract

In this dissertation I report three doctoral research projects: the application of imperfect certification in markets with asymmetric information, the impact of elastic demand on market supplied product variety in differentiated product markets and a microeconomic analysis of gift giving when individuals are concerned with social approval (face). It consists of six chapters including a general introduction, four research papers and an outlook for further projects.

Chapter 2 proposes a model for a certification market with an imperfect testing technology. Such a technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one. When only one certifier with such testing technology is present in the market, it is found that this monopoly certifier can be completely ignored in equilibrium, in contrast to the prediction of a model with perfect testing technology. A separating equilibrium is also supported in which only relatively high quality types (products) choose to pay for the certification service. It is true that in such an equilibrium having a certificate is better than not. The exact value of a certificate, however, depends both on the prior distribution of product quality and the nature of the testing technology. Welfare accounting shows that the monopoly certifier's profit maximizing conduct can lead to under or over supply of certification service depending on model specification. Socially optimal certification fee is always positive and such that it makes all positive types choose to test. In the case of two competing certifiers with identical testing technologies, the intuition of Bertrand competition does not necessarily hold. Segmentation equilibrium wherein higher seller types choose the more expensive certification service and not so high types choose the less expensive service can be supported. As an application, we argue that the fee differentiation between major and non-major auditing firms need not be a result of any differences in their auditing technologies.

Chapter 3 revisits the excess entry theorem in spatial models a la Vickrey (1964) and Salop (1979) while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity. We find that the excess entry theorem does only hold when demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function. Chapter 4 generalizes on Chapter 3. We introduce consumers with a generic quasi-linear utility function in the framework of the Salop (1979) model. In addition to the results found in Chapter 3, we are able to pin down conditions for efficient variety in entry cost and transportation cost. A proof for the existence and uniqueness of symmetric equilibrium when price elasticity of demand is increasing in price is also provided.

Chapter 5 studies further into the warm-glow that donors may benefit from their act of giving. Within the framework of concern for social approval, we emphasize an individual's relative position in social network and introduce the concept of face. When individuals are concerned with face, the wealthier will need to contribute more than the poorer in order to gain an equal level of social approval. In aggregate, other things being equal, the more individuals are concerned with face, the more they tend to donate. While this approach is proposed in the context of social acceptance, it is also applicable in morally motivated situations.