I interviewed Aviv Nevo, an assistant professor of economics and an affiliated professor of the Haas School of Business.  He has become a very busy person since graduating with a Masters and Ph.D. from Harvard University in 1997.  Besides teaching, he has published many papers and made numerous presentations at seminars and conferences around the world.  His strength lies in industrial organization, where he has studied topics ranging from price discrimination and market power to demand for differentiated products.

            Being a big cereal fan and having studied the ready-to-eat cereal industry in my IO class, I enjoyed the opportunity to find out what questions he has asked in the cereal industry, an area where he has done a lot of research.  The first question he asked was why the price-cost margins for cereal were so high?  The traditional answer was collusion among the firms.  But, Professor Nevo's studies have shown that consumers are loyal to certain cereals and are willing to pay for higher prices for ones they prefer.  Thus, the consumer's demand for unique brands have allowed firms to charge higher prices.

            Furthermore, Professor Nevo has done analysis on price discrimination in the breakfast cereal industry.  Traditionally, firms use coupons to help them differentiate among customers to extract more profits.  He noticed that instead of seeing the usual price increases associated with the use of coupons, he has seen price cuts.  The data used in Professor Nevo's research come from scanner data used by supermarkets for inventory purposes.  A company typically collects such data, which then can be passed on to firms like General Mills who find it useful.

            To come up with research questions, he asks what consumers care about.  For example, he knows that people wonder why cereal is so expensive or why there are so many different kinds of cereal available.  In other words, how can one explain the high price-cost margins or the proliferation of differentiated products?  The questions that come to Professor Nevo's mind are ones that people encounter in their everyday lives.  This is also a great way for a student to find a potential thesis topic.  Ask questions that you or your friends have thought about and think about how you would answer it.
 

The interview by Annika Todd:

      Aviv Nevo is a third year assistant professor in the field of  industrial organization.  IO deals with how industries are organized, why they are organized in this way, and how they should be organized ideally.  Many of the IO faculty are involved in the Microsoft antitrust case.

         For his dissertation, Professor Nevo wanted to research something that an ordinary person would care about.  He asked why the price of cereal is so high; its marginal cost is about half of the price.  The established economic theory said that since there are only a few companies that control most of the market for cereal, they colluded to set the price high.  The question he asked was: is this really true?

        He had a suspicion that demand might play a role, because people really like their brand of cereal, and aren't willing to change very much.  So he asked what part of the high price is due to collusion and what part is due to demand.  To answer this question, he estimated the demand curve for each cereal by regressing quantity of cereal sold on the price of cereal.  The variability in the price of cereal was from prices in different cities, and prices across time (sales, etc.).  Prof Nevo got his data from grocery store scanners, which keep track of the quantity and price of products.

        Once he had estimated a demand curve for each cereal, he asked what price the cereal company would set to get a maximum profit.  Since there is a lot of product differentiation with cereals (there's only one Life!), the companies are price setters, not price takers.  It turned out that the companies were choosing their prices solely based on the maximum profit price given the elasticity of the demand curve.  So all of the high price of cereal was due to customers' demand, and none of it was collusion.

         Another paper that Prof Nevo worked on was about coupons.  Classic economic theory said that coupons are a form of price discrimination; the companies can charge higher prices to people who want the product no matter the cost, and lower prices to people who would only want the product at a cheaper price.  According to the theory, if there are no coupons available, the price would be an average of the high price and the cheap price.  If coupons were introduced, the price should go up, to get the people who would pay that much, and the value of the coupon would be lower than the original price to get the cheap people.  He thought that this might not be true.

             To test his theory, Prof Nevo looked at the prices of products before and after coupons were introduced.  He found that the price actually went down, contrary to the theory.  When companies issue coupons, they are going all out to get more sales, maybe because they're doing badly.  So even well established theories that seem simple could turn out to be wrong.

The interview by Elizabeth Lee:

    Aviv Nevo has taught econometrics in the past and is currently teaching microeconomics. His main research interests lie within industrial organization economics.  His previous research questions include: Why do manufacturers issue coupons?  Why is the price of cereal so high relative to its marginal cost?  If two manufacturing companies merge, what is the effect on consumers?  How can we correct for the bias in CPI?

     Professor Nevo offered several suggestions to help students come up with research questions.  One suggestion is to start with observations.  Look at your surroundings and think of what interests you or what makes you think why something is a certain way.  His question, "why is the price of cereal so high relative to its marginal cost?" arose while he was in the supermarket.  While he was walking down the cereal aisle, he observed the high price of cereal and wondered why consumers continue to buy it.  At first, he believed it was due to collusive behavior between the companies to maintain high prices.  However, through his research he found that the prices were so high because cereal was unique and because it had brand loyalty.

     Professor Nevo also recommended phrasing interesting topics in the form of a question and gathering data to see if you can answer this question.  After looking at the data, discard the questions that you can't answer and fine-tune your question based on the information you found.  He called this an iterative process of researching.

     Another way to come up with questions is to look through literature and examine the examples given by the authors.  Test the example to see whether or not it was used correctly in the book, journal, or paper.  His question, "why do manufacturers issue coupons?"came from a microeconomics textbook.  The textbook listed coupons as an example of an instance when manufacturers charge two different groups of people two different prices for the same product. He advised that you look through literature and question whether or not the examples actually work, rather than accepting it as is.  One last thing Professor Nevo suggested was to ask questions that non-economists care about.  Ask your friends what they have always wanted to know or what intrigued them in the past.  An example of a question people care about is why housing is more expensive in districts with good schools than districts with not-so-good schools.  It's a simple question that many people are interested in learning more about, especially people who are considering purchasing a house.

     Starting with observations, think of topics that interest you, phrase that into a question, and conduct some preliminary research to adjust your question into something specific that you can answer.  You can get ideas from your surroundings, friends, family, or literature.  Ask questions that non-economists would want more information on and you're on your way to a great set of questions to start your thesis.