College of Behavioral & Social Sciences
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Item Essays on Bundling, Compatibility and Competition(2013) Vamosiu, Adriana C.; Vincent, Daniel R; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The bundling literature has devoted much attention to the use of this pricing strategy as a deterrent to entry of a rival or the foreclosing of one. However, there are numerous industries where a two-product seller is a monopolist in one market and competes in the second, where neither entry was deterred, nor the rival was foreclosed. The first chapter makes progress in developing a framework that analyzes the profitability of bundling for such a two-product firm. Consumers are assumed to have negatively correlated valuations for the two types of products. We show that in equilibrium, the two-product seller will offer the products only in a bundle, thus preventing any consumer from forming his own bundle using the rival's product. Furthermore, he ensures himself highest profits by having all consumers interested in only the monopoly product purchase the bundle. The welfare results under this strategy show the consumers being harmed the most, as they would prefer variety in the bundle formation and/or being able to purchase only the monopoly product, should they choose to. Compatibility of products has been addressed mostly in a mix and match scenario, where a consumer must purchase two different components to form the final system. The components themselves have no individual use. In the second chapter, we further extend this type of framework, by assuming that one of the two components (the platform) does have a stand alone use. The other type of product is offered by only one of the firms in the market, has no individual use, but could enhance the utility of one's platform. Therefore, the firm offering the complement must first decide whether to make it compatible with the rival platform and, furthermore, what pricing strategy is best. There are two types of consumers in the market: new and legacies. The new consumers are interested in platforms and, depending on compatibility, the complement. Legacy consumers are those who have already purchased a platform in a previous period and, currently, are only interested, if at all, in the complement. We find that compatibility is optimal, as it reduces competition and maximizes profits. In such an outcome, the two-product seller offers the goods a la carte. If compatibility is not feasible due to exogenous factors, the legacy consumers in the market are of great importance. Our results indicate that the profit maximizing strategy depends on the mass of the two-product seller's legacy consumers in the market relative to the rival's.Item ESSAYS IN EMPIRICAL INDUSTRIAL ORGANIZATION(2009) Chesnes, Matthew William; Rust, John; Jin, Ginger; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)Chapter 1: Capacity and Utilization Choice in the US Oil Refining Industry This paper presents a new dynamic model of the operating and investment decisions of US oil refiners. The model enables me to predict how shocks to crude oil prices and refinery shutdowns (e.g., in response to hurricanes) affect the price of gasoline, refinery profits, and overall welfare. There have been no new refineries built in the last 32 years, and although existing refineries have expanded their capacity by almost 13% since 1995, the demand for refinery products has grown even faster. As a result, capacity utilization rates are now near their maximum sustainable levels, and when combined with record high crude oil prices, this creates a volatile environment for energy markets. Shocks to the price of crude oil and even minor disruptions to refining capacity can have a large effect on the downstream prices of refined products. Due to the extraordinary dependence by other industries on petroleum products, this can have a large effect on the US economy as a whole. I use the generalized method of moments to estimate a dynamic model of capacity and utilization choice by oil refiners. Plants make short-run utilization rate choices to maximize their expected discounted profits and may make costly long-term investments in capacity to meet the growing demand and reduce the potential for breaking down. I show that the model fits the data well, in both in-sample and out-of-sample predictive tests, and I use the model to conduct a number of counterfactual experiments. My model predicts that a 20% increase in the price of crude oil is only partially passed on to consumers, resulting in higher gasoline prices, lower profits for the refinery, and a 45% decrease in total welfare. A disruption to refining capacity, such as the one caused by Hurricane Katrina in 2005, raises gasoline prices by almost 16% and has a small negative effect on overall welfare: the higher profits of refineries partially offsets the large reduction in consumer surplus. As the theory predicts, these shocks have a smaller effect on downstream prices when consumer demand is more elastic, resulting in a larger share of total welfare going to the consumer. Chapter 2: Consumer Search for Online Drug Information Consumers are increasingly turning to the internet and using search engines to find information on medicinal drugs. Between 2001 and 2007, the number of adults using the internet as an alternative source of health information doubled. At the same time, online and offline advertising spending by drug companies is growing rapidly. I seek to understand how consumers use search engines to find drug information and how this activity is influenced by direct to consumer advertising. I utilize a database of user click-through data from America Online to analyze the search behavior of consumers seeking drug information online. Compared with other searches, users submitting drug-related queries are more likely to click on more than one result in a search session, and when they do, they click more rapidly through the results and tend to migrate away from dot-com sites and toward those ending in dot-org and dot-net. Offline advertising on a drug serves to increase the frequency and intensity of these searches. Chapter 3: Drug Information via Online Search Engines This paper utilizes a database of organic and sponsored search results from four large search engines to analyze the supply of drug-related information available on the internet. I show that the information varies significantly across search engines, domain extensions, and between organic and sponsored results. Regression results reveal that websites with relatively more promotional content are pushed down in the search results while informational sites (including those ending in dot-gov and dot-org) are more likely to appear on page one of the results.