Three Essays in Applied Microeconomic Theory.

Abstract

In Chapter 1, I examine the frequent use of recommended retail prices by manufacturers. I present a model in which price recommendations convey information to consumers about aggregate market conditions. The manufacturer uses recommendations to directly affect consumers’ search and indirectly affect retail prices. I show that the manufacturer can credibly provide information through cheap talk. A ban on recommendations can be welfare reducing, harming both consumers and the manufacturer. Price recommendations are not simply a substitute for price restraints and allow the manufacturer to achieve outcomes unattainable with resale price maintenance.

With a co-author in Chapter 2, we explore a class of settings in which a principal chooses when to hold a selection contest. Agents’ types evolve and a later contest is more accurate. However, an agent’s effort in the contest diminishes her task performance and the less time until the task, the costlier the effort. We show later contests are better whenever types are more disperse and whenever contests favor the skilled. We find that the expected performance of the selected agent is invariant to average ability and can increase or decrease with the number of participants. We recast the timing decision as a screening problem with the principal suffering agents’ signalling costs. The optimal screening mechanism is equivalent to that in Chakravarty and Kaplan (2006), is stochastic, and favors agents with low hazard ratios.

In Chapter 3, I address the long standing puzzle of trading volume in financial markets. No trade theorems suggest that no two rational speculators can trade. I propose a simple dynamic matching model where trades occur. Agents are endowed with information and through zero sum trading discover whether their information is valuable. Traders with bad information learn their type and exit, traders with good information remain and collect surplus in perpetuity. In equilibrium agents rationally enter trades they expect to lose because of the option value of information. There is a speculator multiplier on trading volume as the market size grows exponentially with gains from trade.