Essays in Microeconomics

Abstract

The first paper considers a two-stage duopoly model of costless advertising: in the first stage each firm simultaneously chooses the accuracy of signals informing consumers about how much they value its product; in the second stage firms compete in prices. We find that when the distributions of consumers' valuations for each product are identical, independent and symmetric, and the market is covered for any combination of first-stage choices, the subgame-perfect equilibrium involves both firms perfectly informing consumers in order to increase ex post differentiation and reduce price competition. When the market is not covered for all first-stage choices, one firm may no longer choose perfectly accurate signals in equilibrium, as an increase in the informativeness of a signal further lowers the ex post valuation of those consumers indifferent between purchasing or not, causing them to drop out of the market. Numerical results indicate that if the symmetric distribution of valuations is sufficiently peaked, then both firms inform perfectly; otherwise one firm informs perfectly and the other chooses the highest level of informativeness such that the market is covered.

The second paper analyses the choice of commodity tax base when countries set their taxes non-cooperatively in a two-country symmetric reciprocal dumping model of homogeneous goods trade with trade costs and horizontal FDI. We show that under our assumption of linear demand, the consumption base (destination principle) weakly dominates the production base (origin principle) for a large range of plant fixed costs. When integration is complete, the destination principle dominates the origin principle for all levels of plant fixed costs below which FDI occurs under the origin principle.

The third paper considers a static Cournot duopoly game with incomplete information regarding firms' marginal costs. Each player knows her own unit cost (low or high), but is uncertain of her opponent's cost. Posterior beliefs are consistent if they admit a common prior. Action symmetry holds if total output does not depend on which player has low or high cost. A player has independent beliefs if her posteriors are the same regardless of her type. Beliefs are essentially the same if each player of each type has the same posteriors about the type of the other player, or if they would be the same after a relabelling of types with low switched with high. We prove that action symmetry and consistent beliefs hold simultaneously if and only if beliefs are essentially the same or both players have independent beliefs. A player has independent beliefs and beliefs are consistent if and only if her opponent has independent beliefs and actions are symmetric. Finally, we investigate the degree to which small departures from each of these properties affects these results.