title: Essays in microeconomics: opportunities of competitive screening and shortcomings of labor market signaling
Creators: name: Ceschi, Nadia Jlenia
Publisher: name: Universität Bern
Year: 2022
Subjects: subject: 330 Economics

description: This thesis consists of three essays in industrial organization and behavioral economics. The part in industrial organization, consisting of the first two chapters, studies advance selling in an oligopolistic market with heterogeneous firms. Chapter 1 introduces a theoretical model in which asymmetric firms use advance purchase discounts as a competition instrument. The analysis focuses on how the considered heterogeneity influences the firms' profit-maximizing price schemes. Chapter 2 uses the developed framework and applies it to the study of entry in markets with advance selling. Predictions are tested through an empirical analysis of Italian railway pricing. The third chapter analyzes a labor market signaling model under the lense of behavioral economics. The proposed model considers workers characterized by loss aversion who use their parents' income as a reference point in their education choice. All chapters have in common the concept of asymmetric information in the sense that one party (the consumers/the workers) is better informed about their characteristics than the other (the firms/the employers). In the first two chapters, the uninformed part offers a menu of choices from which the informed part self-selects according to their type. In the third chapter it is the informed side that reveals its type by choosing to invest (or not) in a costly signal.

Chapter 1, co-authored by Marc Möller, proposes a model of advance selling in differentiated product markets with heterogeneous firms and individual demand uncertainty. We consider two types of asymmetry; firms differ either in their effciency, that is, in their marginal cost of production, or in their prominence, that is, net of prices, a larger fraction of consumers prefer one product over the other. We distinguish two periods: the advance selling period, in which consumers have imperfect information about their preferred product, and the consumption period, in which uncertainty is resolved. In order to attract customers firms offer a discounted price for consumers buying in advance. This strategy, however, increases the competition between the two firms that gain lower profits than when price discrimination is not allowed. The firms' exact pricing strategy depends on which type of asymmetry is considered.

When firms differ in their effciency, they offer the same advance purchase discount in absolute terms. However, because the more effcient firm charges lower prices, its relative discount is higher. This allows for the more effcient firm to sell a higher output in the advance selling period and increase its market share compared to a uniform, time-invariant, pricing schedule.

When firms differ in their prominence, the prominent firm sets higher prices, offers a higher advance purchase discount and a lower relative discount. The less prominent firm has an incentive to offer a high relative advance purchase discount to shift the competition to the advance selling period, where due to uncertainty, consumers view the products as more homogeneous. The increase in competition caused by advance selling harms the prominent firm more than the less prominent firm, meaning that the profit difference among the two is smaller under price discrimination than with uniform pricing.

In Chapter 2, the model is applied to an entry scenario by considering a more prominent incumbent facing a more effcient entrant. Consistent with the results of Chapter 1, the entrant sets lower prices, offers a smaller absolute advance purchase discount and a larger relative advance purchase discount. Thanks to advance selling, the entrant diverts competition to the first period, where its prominence disadvantage looms less heavily. Advance selling promotes entry in the sense that compared to uniform pricing, it allows the entrant to increase its market share and narrows the profit gap with the incumbent. 

The model's predictions are then tested with prices from the Italian railway market. The market, liberalized in the early 2000s, currently features two companies active in intercity connections: Trenitalia (incumbent and former monopolist) and Italo (entrant). Prices were collected three, two and one weeks before as well as at the day of departure. The empirical analysis shows significant evidence for the theoretical results.

Chapter 3 introduces loss aversion to Spence's (1973) labor market signaling model and explores a new channel through which family background influences education choice. In the presented model, workers derive utility from their own income and from a comparison of their income with their parents' income (i.e. their reference point). Loss aversion implies that the negative effect of an income lower than the reference one is stronger than the positive effect from exceeding the reference income.

The workers' education choice depends on their ability level and their reference income. Loss aversion and the weight attached to the reference-dependent utility establish the propensity to follow the parents' footsteps. When this propensity is low compared to the difference in the workers' ability, we obtain an equilibrium in which workers separate by ability. High ability workers choose a higher level of education than low ability workers, independently of their family income. When the propensity to follow the parents' footsteps is high, workers separate by the income of the household of origin. Workers from rich households, independently from their ability, choose a higher level of education than workers from low income households. This result establishes a link between cultural differences in loss aversion and higher (in case of separation by ability) or lower (in case of separation by income) intergenerational mobility.

Although higher intergenerational mobility is desirable in terms of equality of opportunity, it is not necessarily beneficial in terms of welfare. In Chapter 3, we see that in a separation by ability equilibrium, the cost of education is better distributed, but separation by income requires a lower level of education. Thus, separation by ability is better in terms of welfare than separation by income only if the difference in ability among workers is high enough.