Essays on competition under asymmetric information

This dissertation presents research on issues of competition and market structure in economics, and in particular considers the role of asymmetric information in firm competition. This includes asymmetric information among firms, between firms and regulators and between consumers and firms. In the course of this I adapt and expand on recently developed methods for solving, estimating and simulating dynamic models of firm behavior. Finally, this dissertation focuses attention on firms' motivations for and the consequences of horizontal expansion, both in the form of horizontal mergers in a differentiated goods market and in the form of horizontal chain affiliation. This research proceeds in three steps. In Chapter 2 I explore and document consumers growing ability to use new online reputation mechanisms to both share their experiences with a wide variety of firms and gain information from other consumers' shared experiences. In Chapter 3 I present a theoretical model of horizontal mergers in a dynamic industry setting. I use this model to answer a question that increasingly interests antitrust policymakers concerned with innovation: In a concentrated industry, does allowing rival firms to merge increase or decrease total investment? This model has two important features. First, the environment is fully dynamic, and second, I allow mergers to occur endogenously. In Chapter 4, I combine many of the concepts from Chapters 2 and 3 into on piece of research to address the question: why do firms organize into chains? I use of combination of reduced form and structural dynamic methods to examine possible answers to this question in the context of the hotel industry. In particular, I take advantage of recent advances in estimating dynamic industry models to show that there is no evidence in favor of the traditional explanation for horizontal expansion, economies of scale or cost efficiencies. Instead, using a detailed examination of hotel revenue along with firm and market data, I show that chain firms have a substantial demand side advantage resulting from the fact that consumers frequently have little information on firm quality. In this industry, then, asymmetric information seems to not only matter for chain affiliation, it is the only factor that matters.