Essays in industrial organization
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This dissertation consists of three essays in industrial organization and examines the issues of R&D and product switching, maintenance and replacement, and countercyclical seller pricing or sales, using search and optimal-control theories. The first essay studies the incentives for R&D of a multi-product firm and the timing of product switching in a two-product Cournot model of duopoly with process innovation. The two firms are an innovator and an imitator and both supply a market with an existing homogeneous product. The innovator is also a prototype producer of a new product, which is an imperfect substitute to the existing old product. Time is divided into two stages. Stage 2 is the production stage. In stage 1, the imitator copies the innovator's initial technology while the innovator carries out further cost-reducing process R&D A new R&D model is proposed, which adopts a search-theoretic framework to formulate the stochastic nature of the R&D process and can be used to extend many leading deterministic models in the literature. By dealing with multi-product R&D and product selection together, this essay presents new insights into the timing of product switching. The second essay examines the problem that a firm faces, when deciding how best to maintain a capital asset that is subject to both physical wear and tear and obsolescence. The model developed is a non-linear extension of the Thompson model, an early contribution to the optimal-control literature on deterministic maintenance. The model is estimated from the U.S. data on rent and maintenance expenditures on office buildings, and is then used to carry out counterfactual simulations. It is shown that the path of an optimal maintenance expenditure is different according to the asset being a high-deterioration type or not ( i.e., whether it wears out rapidly without maintenance or not). Also, it is demonstrated that a high obsolescence rate and a high deterioration rate could have different effects on an optimal maintenance policy. The third essay examines a customer market of a homogeneous good and shows that the equilibrium average price may be countercyclical for two reasons. The first reason is that in times of high demand, sellers' reputational concerns may increase, causing them to offer extra discounts. The second reason is that buyers' search incentives may increase, causing buyers to become more price sensitive. The two reasons are interdependent in a manner not yet considered. The model developed is a two-period extension of Reinganum's model. Our explanation nests two previous hypotheses in the literature and raises the possibility of multiple forces jointly generating countercyclical price movement. Also, it is shown that while the average price falls, price decreases may be different across sellers according to their types. Specifically, high-cost sellers tend to reduce their prices by larger amounts than low-cost sellers during peak demand periods. This insight is new in the theoretical literature and accords with the evidence of a recent empirical study.