Essays on applied microeconomic theory

Protopappas, Konstantinos and Matros, Alexander and Rietzke, David and Troumpounis, Orestis (2020) Essays on applied microeconomic theory. PhD thesis, Lancaster University.

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Abstract

This thesis consists of three chapters which cover multiple fields in applied microeconomic theory, such as behavioural industrial organisation (Chapter 1), contest theory (Chapters 2 and 3), political economy (Chapter 3) and optimal pricing (Chapters 1 and 3). Particularly, in the first chapter, I study the role of loss-averse consumers’ expectations about future consumption in the pricing policy of a monopolistic firm. Firm offers a contract consisting of two units of service and consumer makes two sequential consumption choices: buy first unit or not and if she buys first unit, buy second unit or not. Before signing the contract, consumer forms expectations about consumption of second unit. I, first, study consumer’s optimal consumption strategy. Then, I derive firm’s optimal pricing strategy for each case of consumer’s expectations. Interestingly, if consumer expects to buy second unit with high probability, firm finds it optimal to prevent her from buying it offering a three-part tariff contract, namely, a fixed fee, first unit at a price below marginal cost and second unit at a price above it. In the second chapter, I study a two-stage contest with two players ex ante asymmetric in abilities and a prize awarded at the second stage. At the first stage, players compete with each other and the winner earns a lower effort cost at the second stage. Then, with the second-stage effort costs having been allocated, the players compete again to win the final award. I consider two cases of the first stage: simultaneous and sequential moves by the players and find equilibrium efforts, expected payoffs as well as provide comparative static results. The ex ante advantaged player will never be inactive, even if her opponent plays first. Moreover, in equilibrium her equilibrium effort and expected payoff are always higher than her opponent’s, regardless of the time she makes effort. I, also, endogenise the timing of the players’ efforts and show that both players prefer sequential first stage with the weak player exerting effort first. Finally, the third chapter is an application of the model of the second chapter to a game with two candidates and two interest groups. Groups offer two kinds of costly contributions to achieve political influence: a) pre-electoral campaign contributions to their favourite candidates that increase their probability of winning the election, and b) post-electoral lobbying contributions to the winning candidate to affect the implemented policy. Candidates, in turn, are the first to act by strategically choosing the lobbying prices they will charge the groups once in office. I characterise the equilibrium values for lobbying prices, campaign, and lobbying contributions and show that: a) candidates commit to charge a lower lobbying price the group that supports them in the election, justifying the preferential treatment of certain groups once in office, and b) less skilled candidates tend to promise a larger preferential treatment to the group that supports them than more skilled candidates.