Essays in industrial organization

This thesis contains three essays in industrial organization. Chapter 1 studies escalating fines for repeat offenders, that is, fine increases in the number of previous offenses. We demonstrate that a fine-setting authority does not in fact have an incentive to increase the fine for repeat offenders. However, if the authority has an interest in redistributing offender gains to society, escalation does occur and is driven by the incentive to reduce the fine for low-value offenders in the future in order to redistribute additional private gains. The model we develop nests optimal law enforcement with uncertain detection and behavior-based monopoly pricing with imperfect customer recognition. Chapter 2 develops a non-parametric approach to empirically determine the geographic size of a market. I study the impact of a new store entry on competing stores in an increasing range to the site of entry. I apply the estimator to the Swiss grocery retail industry and find that markets are highly localized in a tight four kilometer radius. I further document evidence that the impact weakens with increasing distance within a local market and that the local market in which a small grocery retailer competes in is only two kilometers in size. Chapter 3 examines the value of seller reputation in the online market for illegal drugs. In this black market, no legal institutions exist to alleviate uncertainty and buyers must instead rely solely on seller reputation provided by a rating system. We identify sellers that were forced to open new accounts in the market following a sudden exit of a major sales platform, resetting their reputation in the process. We find that a one-percentage-point increase in seller rating increases the unit price charged by 2-12$, depending on the drug type. Our work demonstrates that reputation plays a crucial role in enabling market transactions when legal institutions are lacking.