Essays on differentiated products in oligopoly markets

Abstract

<p>The common theme running through my dissertation work is differentiated products in oligopoly markets with emphasis on the demand analysis. In the markets, consumers generally present heterogeneous preferences even for the same product, which brings additional dimension of differentiation for the market and add more complexity for the equilibrium. The purpose of this dissertation is to qualify and quantify consumers' purchase behavior in relevant markets, and to further investigate the effects on firms' pricing strategy, the market structure, and the effectiveness of policy regulations.</p> <p>The second chapter studies consumers' heterogeneous demands for two transportation fuels, E10 and E85, and evaluates the Renewable Fuel Standard (RFS) program that promotes the consumption of E85. The RFS sets mandate volumes for the consumption of biofuels. Because E85 contains more ethanol than E10, the Renewable Fuel Standard Program conveys a subsidy to E85, relative to E10. A central question for RFS policy concerns the pass-through of the induced subsidy to consumers. To investigate the issue, we develop a structural model suitable to study the pass-through rate at retail level. We consider two dimension of heterogeneity: consumers' randomly distributed locations, which make fuel products provided by different gas stations horizontally differentiated; and their heterogeneous propensities for the two different fuel products, which are vertically differentiated. Accordingly, we build the model from the "Hotelling" framework and extend it to also include the vertical dimension of heterogeneity. The model provides a natural way to represent the role of imperfect competition at the retail level. We then calibrate the model parameters using real world data and simulate the Nash Equilibrium results of the model. Our results show that the pass-through rate is about 0.7 at the baseline level of model parameters. More market power, higher subsidy level, and consumers' higher preferences for subsidized product are related to lower pass-through rate.</p> <p>The third chapter empirically models heterogeneity in the seed demand and also focuses on a crucial issue in farmers' purchase behavior—brand inertia. Brand inertia has long been a topic of interest in the Economics and Marketing literature, and it refers to the situation that an individual is more likely to choose the brand he/she has purchased previously. Among the potential explanations for this tendency, researchers have been particularly interested in the importance of state dependence, defined as the causal dependency of an individual's future choices on their current state. In this chapter, we develop and estimate a micro-level random coefficient logit model—the random coefficient is to capture unobserved heterogeneity over farmers and state dependence is modeled by incorporating the previous purchased brand. Our results show that on average, farmers are willing to pay an additional $5.31/unit for a brand if it was purchased in the previous period, equivalent to about 12% of the average retail price, and there is substantial heterogeneity in the estimates. In the counterfactual analysis of two temporary shocks, price discount and late technology innovation adoption, we find that state dependence implies long-lasting effect on farmers' choice decision.</p>