Thomas Ross


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Graduate Student Supervision

Doctoral Student Supervision (Jan 2008 - Nov 2020)
Essays in Competition and Price Determination in Diverse Markets (2014)

This thesis studies competition and price determination in three distinctly different markets. Chapter 2 carries out an empirical analysis of the effect of a non-uniform pricing strategy on box office revenues in the theatrical movie market. Using a rich and unique dataset of the Hong Kong market, a nested Principles of Differentiation (nested PD) demand model is estimated and the estimation results are used to simulate theaters' profits under the differential and uniform pricing strategies. The main finding is that differential pricing dominates the uniform pricing (demand effect) but gains from the differential pricing policy are limited due to intensified competition (competition effect). Chapter 3 examines the relationship between prices and market structure in geographically isolated gasoline markets that are exposed to large demand shocks. The temporal variation in market size provides instrumental variables to overcome the classical endogeneity bias in the standard price-concentration regression. There is evidence of local market power in the studied markets. Additionally, the high margins that characterize concentrated markets dissipate quickly with the increase of the number of gas stations. The results also suggest that the regression analysis that does not account for the endogeneity between entry and prices will significantly underestimate the effect of market concentration on prices. Chapter 4 studies a public sector problem in which a government faces the choice of using public-private partnerships (PPP) or more traditional public procurement approaches to procure public services. Specifically, a basic trade-off associated with PPPs is modeled: while PPPs marshal the power of competitive markets, they involve long-term contracts that may prove relatively inflexible. It is shown that the optimal choice between PPPs and public procurement depends on factors including the likelihood that changes will be necessary, the productivity of non-contractible effort exerted by private sector partners, the costs of switching, the difference between first-best and second-best projects, and the bargaining power of governments vis-à-vis private parties. It also shows that the optimal choice may depend on whether the government’s objective is to maximize “value for money” (i.e., deliver the right project at the lowest cost to taxpayers) or to maximize total social surplus.

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Essays in industrial organization: exclusionary contracts and advertising choice (2010)

This dissertation addresses some interesting questions related to exclusionary contracts and advertising choice. The first paper develops a model of long-term contracts as barriers to entry with differentiated products. It shows that if an incumbent firm can hold the consumer surplus in the pre-entry period hostage, he can sign the buyer up for a long-term exclusive contract regardless of the degree of product differentiation. Even though entry by an equally efficient firm is blocked, the contract still increases welfare if the incumbent's and the entrant's products are close substitutes. The model is further extended to include more periods, uncertainty, discounting, and no commitment power. When the incumbent is not able to credibly commit to refuse supply, entry may nevertheless still be blocked by the long-term contract. The objective of the second paper is to examine a monopoly firm's decision on price and advertising in a market where exclusivity matters. Two types of advertising are analyzed: (a) informative advertising, by which the firm provides information about the product's existence, features and quality, and (b) image advertising, by which the firm communicates an appealing image for the product with which buyers can associate themselves through their consumption of the good. In equilibrium only a fraction of consumers buy the image good. The effects of income dispersion, product nature, and existence of a strategic competitor on the equilibrium outcome and welfare are analyzed. It is found that monopoly advertises and serves more consumers than duopoly, generating higher total surplus. The third paper, which is joint with Tirtha Dhar, investigates the key macroeconomic drivers of deceptive advertising. We use a unique data set on advertising complaints in the United States, and combine it with macroeconomic indicators to show that deceptive advertising is counter-cyclical. When we analyze the data taking into account product durability, we find that this relationship is significant only in the case of nondurable goods. More importantly, deceptive advertising is pro-cyclical in the case of nondurable search goods, and counter-cyclical in the case of nondurable experience goods. These findings suggest policy recommendations related to the type of industry and prevailing economic conditions.

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A study on regulatory policies in the international telephone markets : theory and empirical evidence (2009)

The provision of international telephone calls requires a settlement arrangementbetween countries in traffic exchanges. A call-termination charge, or "settlement rate", is paid from the call-initiating country to the terminating one. Around 1980, the U.S. government attempted to improve efficiency by unilaterally introducing competition into its domestic market, supplemented with rules on carriers designed to avoid an unfavorable position in settlement negotiations with other countries. In particular, the FCC required all U.S. carriers to act collectively when negotiating settlement rates with foreigncarriers and apply a Proportional Return Rule (PRR) to share foreign settlement income in accordance with their market shares of outbound. The dissertation tries to evaluate the FCCs policies and identify the factors that can derive the market efficiency. Chapter 2 analyzes a scenario that competing carriers in a country jointlydetermine a uniform settlement rate for foreign incoming traffic. Under thePRR,, an increase in domestic competition reduces retail prices but also increases net settlement payments to other countries. Moreover, fixing the level of retail competition, the PRR cannot reduce retail prices, but increases the U.S.'s net settlement payments, contrary to the FCCs intent. Chapter 3 discusses two other scenarios. The first one is that carriers from two countries choose settlement rates in a cooperative fashion of Nash bargaining. The equilibrium settlement rate is lower than the one under non-cooperative regime. The second model, multiple routes relaxes the Uniformity requirement. When there are multiple routes to exchange trafficbetween two countries, or there is competition at the settlement services,the retail competition can steer the market outcomes toward the efficient level. Chapter 4 empirically examines the above theoretical predictions. I constructed a measurement of the intensity of the PRR for each international route in each year. I found empirical evidence that the rule did increase both the settlement rates and the net settlement payments made by the U.S. carriers. However, the rule's effect toward the retail price is unclear, possiblydue to the model specification and the endogeneity issues. The empirical finding suggests that a multiple-route model matches the data better than the one with uniformity requirement.

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Auditor size and audit quality revisited : the role of market size and legal environment (2009)

The objective of this thesis is to revisit the notion of audit quality and investigate how it is related to auditor size and the structure of the auditing industry. Specifically, I propose a model of audit firm competition where both audit quality and auditor size are endogenous and predict how market characteristics, namely market size and investor protection regime, affect the structure of the auditing industry and differences between Big-4 and Non-Big-4 audit quality and fees. I show that Big-4 audit firms compete mostly on audit value (i.e., quality and price) through investments in audit technology, the level of which is increasing in both market size and investor protection. Consistent with my predictions, empirical results for the U.S. audit market, where investor protection is held constant across local markets, confirm that the audit industry is characterised as a natural oligopoly dominated by the higher quality Big-4 audit firms. More importantly, I find that Big-4 audit value is increasing in market size. In particular, Big-4 audit quality, relative to Non-Big-4 audits is constant in market size while Big-4 audit fee premium is decreasing in market size. I also present detailed hypotheses adapted to a cross-country setting to empirically evaluate the impact of investor protection regimes on characteristics of the audit industry and the audit product. Although I leave to future research actual empirical testing, preliminary evidence reviewed from other studies generally supports my hypotheses.My thesis has direct policy implications as it provides key insights about the audit industry, how audit firms compete and how the industry evolves. Taken together, my results imply that the audit industry is naturally concentrated yet remains overall competitive. That is, Big-4 audit quality and fees are not adversely affected, thus far, by the high level of auditor concentration and Big-4 market power. Accordingly, recent concerns about high auditor concentration, although warranted, may be overstated.

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