Essays in Industrial Organisation

© 2020 Svetlana DanilkinaThis thesis contains three essays in Industrial Organisation. The first two are united by a common theme: the role of bounded rationality in shaping market behaviour. In Chapter 2, we provide a novel explanation of the relationship between product quality and variety. We develop a theoretical model with nearly rational consumers who randomize among all alternatives that yield the same utility for them but can mistakenly choose a slightly worse alternative. We show that a firm price discriminates more effectively if it offers more varieties of its higher-quality, more-profitable, products. When the market is thin at the very top quality level, the number of varieties first increases and then decreases as quality increases. In Chapter 3, we consider a model of Bertrand oligopoly when consumers are boundedly rational and make their purchase decisions probabilistically, according to the Luce model. We consider three different cases: first, we characterize equilibrium when firms face boundedly rational consumers with the fixed irrationality parameter; second, we discuss the case of obfuscating oligopoly, when firms can invest in order to confuse consumers, i.e. to increase their irrationality parameter; and third, we consider educating oligopoly, when firms can choose to invest to decrease the irrationality parameter. We show that while it is worthwhile for the firms to confuse the consumers, it is only optimal to educate them if they are sufficiently rational at default. We also analyse how the social welfare, consumer surplus and the firms' profits depend on the number of firms. The final essay, Chapter 4, examines the optimal procurement mechanisms when the procurer tests potential contractors for reliability either before or after the auction. Testing suppliers before the procurement auction is the procedure typically followed by US supply chains, while public procurement in the European Union typically take place by running an auction first and then testing the reliability of the low bidders afterwards. We compare both approaches and show that when testing can be performed at no cost and the procurer and contractors are risk neutral, the timing of the test (before vs after the auction) has no effect on the procurer's expected surplus, the contractors' expected payoffs, or the total surplus. In case of costly testing a risk neutral procurer would prefer testing after the auction