Essays on Price Protection and Investor Attention

Abstract

This collection of essays includes a theoretical evaluation of price protection and a study of investor attention using a new measure based on Google searches.

Chapter 1 introduces price protection to a dynamic pricing environment with homogeneous goods and different agent types. I find that prices regularly drop to allow the lowest valuation to make a purchase. I characterize how prices fluctuate during repeating cycles in equilibrium and the firm optimal length of such cycles for different parameters under no commitment. I find that price protection lowers social welfare by delaying price drops.

Chapter 2 introduces a measure of investor attention. The finance literature on investor attention has recently measured interest in stocks by using the search volume index (SVI) of companies' ticker symbols on Google. I use the major stylized fact of local bias (LB) in household stock-portfolio choices to test the precision of this measure. Constructing a database of Google searches on stock tickers at the metropolitan level, I show that stock-ticker-SVIs fail to exhibit the property of LB. I therefore propose an alternative measure of investor attention to stocks which seem to reflect more naturally the way retail investors search for information on Google and is consistent with LB behavior. This measure increases estimated LB effects by a factor of 10, suggesting that one standard deviation increase in distance lowers investor interest by around 15%.

In Chapter 3, which I co-author with Ioannis Branikas, we use this measure to test for the effect of product advertisements on investor attention. Using Super Bowl as an experiment and a new measure of local investment interest on stocks from Google searches, we study the effects of advertising expenses on investor attention. We find that the post-game Monday attention of investors in areas with high viewership ratings increases significantly for the stocks of companies that aired commercials, regardless of whether these are local or non-local. Distant firms with high advertising exposure in a region attract more interest than local firms with low exposure, suggesting that advertising has a stronger effect on investor attention than local bias.