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Essays in Industrial Organization: Entry in Multi-Object Auctions and Freemium Packages in Two-sided Markets

  • Author(s): Zaterka Giroldo, Renato
  • Advisor(s): Asker, John W
  • et al.
Abstract

In the first two chapters of this dissertation, I study the design of multi-object auctions. Using a large data set from the Brazilian public procurement sector, I show evidence that entry is costly and that the mix of products being auctioned off is a first-order effect to understand firm participation.

In the first chapter, I find evidence that the data is consistent with a theory of selection. The average entrant has a higher product match with the session, and they are closer to auction locations. Distance affects entry decisions negatively: a 1 unit (100km) increase in the distance to the auction location lowers the odds ratio for entry 0.91 times. At the same time, an additional auction in the set of potential auctions of a firm increases the odds for entry 1.62 times.

In terms of variable costs, a 1% increase in the distance to the auction location increases bid by 0.4% to 3.3%. There are also gains of scale in terms of the size of the contracts: a 1% increase in the contract quantity for a given product increases bids by 0.64% to 0.76%. The main force responsible for lowering procurement costs is the presence of additional bidders. I find that an extra bidder can lower costs between 21.2% and 32.4%. These results motivate and feed into the structural model presented in chapter 2.

In the second chapter, I continue to analyze this market with the focus on estimating entry costs and answering policy questions. To do so, I build a novel model of endogenous entry in multi-object auction sessions that allows me to disentangle two forces that affect entry decisions: entry costs, and the menu of items of a given session. The model has two stages. In the first stage, firms decide whether to enter an auction session and pay a fixed cost after observing an imperfect signal of their true cost. In the second stage, both the items for which they can bid and their costs are realized, and the auction takes place. I focus the analysis on type symmetric equilibria, where bidders of the same type follow the same entry strategy. In equilibrium, marginal bidders make zero profits. This condition allows me to link the unobserved entry costs to the observed bid behavior of entrants.

Having derived the equilibrium of the model, I estimate model fundamentals and turn to policy questions. The estimates provide evidence that entry is more attractive to local firms. I find that their cost distribution stochastically dominates the one from non-local firms. Moreover, conditioned on the number of items a firm can participate in, non-local firms face between 3.9% to 6.5% higher entry costs than local firms.

I focus on two counterfactual simulations. In the fully efficient scenario, where firms do not incur any entry costs, I find that procurement costs would be lowered by 22.5% to 40.1%. These are bounds on the maximum cost savings and also quantifies the degree of inefficiency present in this market. The second counterfactual is a partially efficient scenario, where non-local firms face the same entry costs as local firms. This analysis focuses on a selected equilibrium where firms enter the sessions sequentially. Firms are sorted according to a lexicographic order which is determined by the strength of their signal, number of items, and firm type (non-local/local). I find that procurement costs would be lowered by 2.8% to 2.9%. Thus, on this type of equilibrium and by holding on-site auctions, the government indirectly sacrificed some efficiency to the benefit of local firms.

In the third chapter, I study the pricing of platforms that offer consumers the choice between a free package, in which consumers are exposed to advertising, and a premium package, in which they pay to not be exposed to advertisements. I characterize its profit-maximizing and Pigouvian pricing, which allows me to analyze the degree to which the platform incorporates consumers’ distaste for advertising in its pricing scheme, as well as the trade-offs that emerge between the free and paid packages. The results contribute to the discussion of consumers' overexposure to advertising when platforms behave as a social planner and maximize their value.

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