Three essays on product quality and pricing

Abstract

This dissertation consists of three essays on product quality and pricing. Essay 1: Pricing and Quality Provision in a Channel: A Model of Efficient Relational Contracts The first essay analyzes how quality concerns affect relationships in a channel. A firm concerned about uncontractible quality for a customizable good has to pay higher prices to sustain a relationship with the supplier. If the customizable good has very volatile demand, premium payments on this good cannot be sustained. Instead, the downstream firm pays a premium for a good with more stable demand that is correlated with demand for the customizable good. I use a novel dataset containing sales made by a wholesaler to Asian restaurants in the Southeastern United States to test this prediction empirically. As predicted by the proposed model, if customizable goods have very volatile demand, the high end restaurants do not pay a premium on those goods but instead pay a premium for other goods with more stable demand. Essay 2: Third Party Marketing Approvals The second essay measures the effect of competition in a certifier market. When customers purchase new products, there is often a degree of uncertainty about their quality. A common solution is to rely on a third-party certifier to provide some form of accreditation that signals quality. However, the incentives of a third-party certifier may not be completely benign. Competitive certification markets may lead the certifiers to provide unduly positive evaluations of quality to gain market share or provide unduly negative evaluations in order to gain credibility with end-users. This paper exploits an unusual natural experiment to evaluate the extent to which third-parties can be relied upon to correctly report product quality. It focuses on the FDA's decision to allow third parties to prepare certifications for certain medical devices, and observes how this decision to introduce competition at the reviewer stage has affected the quality of products allowed to go to market. There is evidence that allowing third party certification leads to significantly lower product quality. However, experience with using a third party reviewer in the past diminishes the negative effect of reviewer competition. Essay 3: Layaway and the Quasi-Endowment Effect of Installment Payments The third essay explores the quasi-endowment effect. The paper evaluates how much consumers are willing to prepay for a purchase which will be experienced in the future. In particular, the results indicate that prepaid installment plans allow the consumer to start deriving utility for the purchase from the moment of the first payment. This quasi-endowment effect is felt only for goods that are purchased for own consumption.