Zhou, J; (2008) Essays on industrial organization: reference dependence, prominence and search, and advertising. Doctoral thesis , UCL (University College London).

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Abstract

This thesis consists of four essays on three topics in industrial organization with an emphasis on consumer behavior. Chapter 1: Introduction. This chapter is a non-technical summary of this thesis. Chapter 2: Reference Dependence and Market Competition. This chapter examines the implications of reference dependence with loss aversion in a competitive market where consumers consider products sequentially and regard the first product they have considered as the reference point. We find that consumer reference dependence can induce firms to randomize prices, to differentiate their advertising intensities even if firms are ex ante identical, and to differentiate their product qualities even if improving quality is costless. Chapter 3: Prominence and Consumer Search. This chapter examines the pricing and welfare implications of prominence in a search model where firms compete in price and consumers are "biased" to consider the prominent product first. We find that the prominent product will be cheaper than others, and making one product prominent will usually increase industry profit but lower consumer surplus and total welfare. Chapter 4: Prominence in Search Markets: Competitive Pricing vs Central Pricing. This chapter develops Chapter 3 by considering multiple prominent products and compares it with a central-pricing model where a multi-product firm chooses the prices of all products. The implications of prominence are almost reversed in the central-pricing case: prominent products are now more expensive than others, and making some products prominent can improve all market players’ surplus. Chapter 5: Advertising, Misperceived Preferences, And Product Design. This chapter studies a kind of advertising which highlights one (or few) attribute(s) of a multi-attribute product. We propose that this kind of advertising can mislead some naive consumers to overestimate the relative importance of the advertised attribute. In a monopoly market where naive consumers coexist with sophisticated consumers, we investigate how the firm can take advantage of consumers through advertising and product design, and how naive consumers can impose negative externalities on sophisticated consumers.

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