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Essays on unconventional pricing strategies and impacts of economic regulation on stock return asymmetry

  • Author(s): Lima, Daniel F.
  • et al.
Abstract

This dissertation contains two essays in industrial organization and one related to the corporate finance literature. In Chapter 1, I investigate how consumers' feedback might affect investments in innovation and quality assurance (QA). I also focus on how innovation impacts intertemporal price discrimination. In the model, a monopolist releases a new technology embedded in a durable good. Then, I investigate the determinants of the introduction of a new generation in the second period. In the proposed framework consumers' feedback can reduce the firm's QA/R&D expenses. However, consumers usually provide feedback through complaints, causing reputation damage. I derive conditions under which the lower "quality" version of the good (first generation) will have a higher price than the improved version (second generation). Planned obsolescence causes the price schedule to be steeper than predicted by the previous literature on durable goods. The model predicts and explains Apple's experience with several products, in particular the iPhone family. In Chapter 2, Aren Megerdichian and I examine a firm's decision to raise price overtly (by increasing the dollar amount of a good) versus the adoption of hidden price change (by decreasing the contents in a good's package). We provide an oligopoly model explaining the hidden price change phenomenon, as well as a comprehensive set of empirical analyses, including demand estimation to assess the impact of hidden price increases on expenditure share and profitability. We focus on the ready-to-eat cereal industry. During July 2007, General Mills decreased the cereal content for 20 out of 23 of their products in our sample of scanner data. We find that some General Mills products gained expenditure share after the hidden price change relative to what the demand system predicts, indicating that a sufficient proportion of consumers did not notice the hidden price change. We also find that some products lost share relative to what the demand system predicts. A key finding is that consumers tend to notice hidden price changes on smaller-sized boxes of cereal, leading them to substitute to larger-sized boxes of cereal. The final chapter is a joint work with Regio Martins. Our conjecture is that regulated firms may be subject to some regulatory practices that can potentially affect the symmetry of the distribution of their future profits. If these practices are anticipated by investors in the stock market, the pattern of asymmetry in the empirical distribution of stock returns may differ among regulated and non-regulated companies. We review recently proposed asymmetry measures that are robust to the empirical features of return data and investigate whether there are any meaningful differences in the distribution of asymmetry between these two groups of companies

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