Empirical tests of pricing theory in the U.S. automotive industry

The body of this dissertation comprises two standalone essays, presented in two respective chapters.;Chapter one empirically explores the degree to which consumers perceive a manufacturer's warranty as a signal of unobservable product quality. Data on household purchases of new automobiles, from the Consumer Expenditure Survey, is used to estimate both conditional and mixed logit models of consumer demand, with the indirect utility specification extended to incorporate the impact of manufacturer provided warranties. To distinguish between the two main possible motives underlying consumer preference for warranties, signaling and risk aversion, the impact of warranty length is allowed to differ by [1] proxies for household risk aversion and [2] proxies for the amount of product information available to the household. Our preliminary results suggest only a modest role for risk aversion but an important one for signaling. We find warranty length especially valuable for products that consumers have not experienced before and recently introduced automobiles (those not yet rated in Consumer Report), precisely the type of automobiles for which asymmetric information is the greatest and signals of product quality the most valuable.;Chapter two shows how prices of automobiles respond differently based on the type of products by using a random coefficient discrete choice model. The empirical founding of this paper is that PTM behavior is more renounced in non-luxury products than luxury products. In other words, the foreign firms producing luxury automobiles incorporate the exchange rate shocks to price and the foreign firms producing non-luxury products do not incorporate (or incorporate less) the shocks to prices. The results in this study imply that firms with higher market power will incorporate the exogenous shock (exchange rate shocks). The prices of luxury products might respond more with the tariff adjustment than prices of non-luxury products. Those implications should not be generalized to all industries and countries since this paper focuses automobile industry in the U.S. market. However, the implication might be valid in an industry that has similar market structure as the U.S. automobile market where several multinational firms compete each others.