This dissertation explores the intricacies associated with the use of distance functions in empirical studies. It focuses on the measurement of advertising efficiency and investigates the properties of the models that seek to approximate the abatement costs of socially undesirable outputs. The first manuscript is devoted to the development of the algorithm that can be used to measure the efficiency with which firms market their brands in the presence of advertising by rivals. An empirical illustration is carried out using the data from the U.S. brewing industry. The second study analyzes the difficulties associated with the accurate approximation of the abatement costs of socially undesirable outputs. It contrasts the results from a variety of different shadow-pricing models, each of which relies on a different type of distance functions that are used to approximate the polluting technology. The shadow prices of sulfur dioxide are computed using linear programming techniques and the data from the U.S. electric utility industry. The third manuscript shows how a generalized method of moments (GMM) algorithm can be used to estimate the parameters of certain types of distance functions; the empirical illustration is carried out using the data set from the second study. The first manuscript illustrates that advertising spillovers are important in brewing and shows that the estimates of marketing efficiency are inaccurate when spillover effects are present and ignored. The second study shows that the shadow price estimates of socially undesirable outputs are not invariant to the assumptions regarding the parametric form of production technology and can in fact be predetermined by selecting a specific model. Finally, the third study established the legitimacy of the GMM procedure as a choice of an algorithm for the shadow pricing of undesirable outputs. / Graduation date: 2005

This dissertation consists of three independent essays. We briefly introduce these essays in chapter 1 and leave a comprehensive introduction to each essay. Chapter 2 considers a vertically separated industry where production takes time and vertical mergers shorten production time. We investigate the impact of vertical mergers on the downstream firms' ability to collude and show that vertical mergers facilitate downstream collusion. Chapter 3 provides a theoretical foundation for a puzzling empirical observation that advertising follows an inverted U shape for some new products. Chapter 4 analyzes an incumbent's response to a competitive entry. We show that if the quality of the entrant is uncertain, the incumbent can "jam" the quality signalling of the entrant. Finally, chapter 5 summarizes main conclusions of three essays. / text