Essays in Industrial Organization and Behavioral Economics

Abstract

What You Don’t Know Can’t Pass Through: Consumer Beliefs and Pass-through Rates I model consumer search with imperfect information about firms’ costs and test predictions about consumer beliefs and pass-through in the US residential mortgage market. In the model, when consumers are unaware of an increase in costs, a high price would be surprising and may induce additional search. In equilibrium, sellers do not pass though the entire change in costs, and average pass-though is decreasing in consumer uncertainty about costs. The model provides a unified explanation for a number of patterns in pass-through rates including incomplete pass-through (passthrough rates less than one), pass-through over-shifting (pass-through rates greater than one), and asymmetric pass-through (greater pass-through rates for cost increases than decreases). I test a novel prediction of this model using confidential Home Mortgage Disclosure Act data. I find that different components of the marginal cost of mortgage lending have different average pass-through rates. Widely known costs are passed through nearly completely while more obscure costs have much lower pass-through rates. This pattern is not explained by existing models of pass-through, as the standard determinants of pass-through are identical across all cost components of the same mortgage. People Don’t Demand Commitment Devices That Might Not Work Demand for costly commitment devices is rare. A possible explanation is that individuals are unaware of their present bias and their need for commitment. I run an experiment that successfully corrects subjects’ beliefs about their present bias and find that this increased awareness does not increase demand for commitment. These results, interpreted through the lens of a theoretical model of commitment demand, imply that low demand for commitment is not driven by a perceived lack of present bias, but rather subjects’ accurate belief that they may fail to follow through, even with the offered level of commitment. The Illusion of Competition with Michael Grubb Most existing models of price competition in the presence of search costs ignore the possibility that multiple products in a market are sold by the same firm. We develop a theoretical model of equilibrium price dispersion under costly consumer search over prices in the presence of jointly owned “brands.” We establish conditions on consumers’ search technology that determine consumer welfare implications and suggest antitrust remedies (e.g. post-merger consolidation of brands).