Essays in Economic Theory and Industrial Organization

Abstract

This thesis consists of three essays in economic theory and industrial organization. <br /> The first chapter, The Welfare Implications of Product Recommendations, studies the implications of informative product recommendations on consumer search, market prices and welfare. Consumers, who are heterogeneous in search costs, search sequentially for firms to discover prices and valuations. An industry-profit-maximizing intermediary recommends a firm to each consumer based on noisy information about consumers' preferences. The findings reveal that recommendations not only enhance the efficiency with which existing consumers find products but also attract high search costs consumers who would otherwise refrain from participating in the search process. These high search costs consumers, who rely solely on recommendations, are less price-sensitive, leading to higher market prices. While high search costs consumers benefit from reduced search efforts, low search costs consumers are harmed by increasing market prices. <br /> The second chapter, Competition and Consumer Search with Costly Product Returns, incorporates product returns into a model of price competition and sequential consumer search. Consumers search for firms to discover prices and observable valuations by incurring positive search costs and can return unsatisfactory products by incurring positive and fixed product return costs. The optimal search rule is stationary: Consumers buy a product if and only if the observable valuation is above a threshold and return a product if and only if the total valuation is below some threshold. Importantly, product returns not only incentivize consumers to buy products but also to search for other products instead of buying. Equilibrium prices decrease with rising search costs but show a non-monotonic relationship with return costs, which leads to ambiguous welfare predictions. <br /> The third chapter, Information Design in Selection Problems, studies information design when there is a receiver who selects one out of many alternatives and takes an action, and a sender who transmits information about the viability of alternatives to persuade the receiver to select a favorable alternative and take a favorable action. The main theorem characterizes which distributions of posterior beliefs about the favorable alternative conditional on selection can be induced by some signal structure. This theorem facilitates a decomposition of the multi-dimensional information design problem into a selection persuasion problem and an action persuasion problem. I derive properties of optimal persuasion for special cases, and analyze applications to advertising and lobbying.