Three Essays on Product Quality and Sequential Auctions

Bing Han

This dissertation consists of three studies about product quality and sequential auctions. The first study develops a model of product differentiation in which firms strategically compete in product quality and advertising intensity. Products exhibit a combination of vertical and horizontal differentiation. Consumers' utility has a stochastic relationship with quality, and consumers are more likely to prefer a higher quality good. Consumers face a trade-off between higher quality goods and price. Increased competition leads to less advertising, but may result in higher or lower quality products offered in the market. The second study characterizes a set of Bayesian Nash equilibria in a first-price sealed-bid sequential auction with the right of first refusal when rivals may learn about the value of the contract by observing the operation of the previous winner. We model two bidders with unknown contract values and analyze bidding strategies and the related expected net payoff for each bidder given different information revelation strategies. The results indicate that under some conditions, bidders may operate to misrepresent the true contract value to limit rival learning. Learning from observing the incumbent's output increases the expected net payoff for the entrant no matter the quality of the value signal. The last study analyzes the optimal bidding strategy in a set of sequential procurement auctions with an unknown number of bidders. We introduce the impact of previously winning in these auctions by allowing the previous winners to enjoy cost reductions. The theoretical results indicate that bids decrease with the number of previously won contracts to supply the same or similar products. Bidders bid less for contracts requesting more of the products and with more potential bidders. We empirically estimate the impact of winning by using data from the fruit procurement auctions in the USDA school lunch project. The results suggest that previously won contracts decrease the bidders' unit and fixed costs significantly. At last, we analyze the competitiveness between the USDA school lunch fruit suppliers through the estimated mark ups of bid over the estimated unit cost. We identify that more potential bidders and lower reserve bid decrease bidders' mark ups.

Three Essays on Product Quality and Sequential Auctions

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