What determines the level of IPO gross spreads? Underwriter profits and the cost of going public

This paper addresses three empirical findings of the literature on initial public offerings. (i) Why do investment banks earn positive profits in a competitive market? (ii) Why do banks receive lower gross spreads in venture capitalist (VC) backed than in non-VC backed IPOs? (iii) Why is underpricing more pronounced in VC than in non-VC backed IPOs? While each phenomenon can be explained by itself, there is no explanation yet why all three occur simultaneously. We propose an integrated theoretical framework to address this issue. The IPO procedure is modeled as a two-stage signaling game: In the second stage banks set offer prices given their private information and the level of the spread. Issuing firms anticipate their bank's pricing decision and, in the first stage, set spreads to maximize expected revenue. Investors are aware of this process and subscribe only if their expected profits are non-negative. Firms' equilibrium spreads are large so as to induce banks to set high prices, allowing banks to make profits. Superiorly informed VC backed firms impose smaller spreads but face larger underpricing than non-VC backed firms.     

Market structure in congestible markets

This paper analyses market structure of industries that are subject to both positive and negative network effects. The size of a firm determines the quality of its product: when network effects are positive, a larger firm is of higher quality; when the effects are negative, a larger firm's product is of lower quality. Consumers have heterogeneous preferences towards quality (firm size), and firms compete in prices. Equilibria are characterised: for example, in any asymmetric equilibrium, it must be that congestion is not too severe. One consequence of this feature is that an increase in the number of firms in the industry can raise individual firms’ profits. Two factors can bound the number of firms in a free-entry equilibrium without fixed costs: expectations, and the ‘finiteness’ property (Shaked and Sutton, Review of Economic Studies 49 (1982) 3–13, Econometrica 51(5) (1983) 1469–1483) of price competition.     

Vertical Product Differentiation When Quality is Scarce: The Case of n > 2 Firms

This paper describes a model of vertical product differentiation in which more than two firms compete in quality and price. Quality is of fixed supply, so firms participate in an auction to attain it. Firms then simultaneously choose prices. The paper determines equilibrium bids in the quality auction and the Bertrand equilibrium prices. In equilibrium one firm attains all the units of quality, but pays a price such that it, like the minimum-quality firms, earns zero profits. Aggregate welfare is computed, and is shown to decrease as competition increases.     

网购市场鱼龙混杂现象的经济学解释：基于二维不对称信息的视角

网络购物市场存在商品鱼龙混杂的典型现象：高价格的商品不一定高质量，低价格的商品也不一定低质量，表现出明显的信息不对称特征。文章基于网络购物市场所存在的两个维度不对称信息的特征事实，即厂商在产品质量与产品生产成本两个方面拥有私有信息，通过构建二维不对称信息的分析框架，从市场均衡的视角首次解释了上述现象的经济机理。分析表明，由于二维不对称信息的存在，消费者和厂商决策的互动过程使得市场上产品价格与质量不再具有单调递增关系，从而网络购物市场可能出现鱼龙混杂的市场均衡，文章证明了这一均衡在合理的条件下是存在的。文章通过比较静态分析考察了市场环境的变化如何影响商品质量的价格信号显示效率以及消费者购买行为，并考察了网络购物行业商家披露信息、消费者对于商家的反馈评分机制和保证退货等手段对于消除商品鱼龙混杂现象的有效性，为进一步规范发展我国网络购物行业提供了参考。     

ENTRY AND QUALITY SIGNALLING WHEN ONLY SOME CONSUMERS ARE INFORMED OF THE ENTRANT'S QUALITY

This paper focuses on competition between an incumbent and an entrant when only the entrant's quality is unknown to (some) consumers. The incumbent may or may not know the entrant's quality. The model reveals a separating equilibrium where the entrant's high price signals its high quality when the proportion of informed consumers is at some intermediate value. The case in which the incumbent knows the entrant's quality generates two additional equilibria. When the proportion of informed consumers is large enough, firms choose their prices as in the complete information case. The entrant's high price in combination with the incumbent's low price signals the entrant's high quality. When the proportion of informed consumers is at some intermediate value, the incumbent's high price signals the entrant's low quality, while its low price signals the entrant's high quality. Interestingly, we find that entry may be facilitated with informational product differentiation.     

Speculative dynamics

We develop a method for solving for equilibrium outcomes in stationary strategic settings in which speculators are informationally large and understand how their actions affect the information content of prices. This allows us to characterize speculation by institutional investors who receive private long-lived information on a recurring basis, and trade strategically. When the underlying asset value process has a stationary autoregressive structure, we develop a contraction mapping argument to solve for the stationary linear equilibrium. We derive analytically and numerically how the characteristics of private information—its quantity, persistence and correlation, and division among speculators—affect trading profits, pricing and trading strategies. Our central finding is that what matters for equilibrium outcomes are the most recent signals that speculators receive. Speculators trade so much more aggressively on new information than old that the bulk of their profits come from their two or three most recent private signals. Trading on past prices drops off faster yet; effectively only the most recent price matters.     

Real estate price and heterogeneous investment behavior in China

We study the dynamic link between real estate prices and firms' investment behaviors in China using a new Keynesian dynamic stochastic general equilibrium model. The model features heterogeneous production sectors in which private firms face discriminatory borrowing constraints while state-owned firms are not. Fitted to China's quarterly data from 2005Q3 to 2014Q4, the quantitative general equilibrium model enables us to identify the driving forces behind and the macroeconomic variables interacting with land price. It confirms the existence of the “collateral channel” in the private sector without bearing the potential endogeneity problems in empirical studies. More importantly, we identify a “crowding out” channel between private and state-owned firms caused by discriminatory financial constraints. The “crowding out” channel implies a negative relationship between real estate prices and the investment of state-owned firms, which has been documented in empirical research but short of explanation so far.     

The tax advantage of public firms over private firms in the German household solid waste disposal industry

We measure the tax advantage of public firms over private firms, which operate at municipality level in the German household solid waste disposal industry. Public firms with sovereign duties pay no taxes, but equivalent private firms have to. In a simple risk-free setting, we develop a measure of the percentage difference of the charges of both types of firms demanded under their respective tax treatments. We model a cost-covering public firm and a net present value maximizing private firm. For sensible model parameters from the German waste disposal industry the private firm has to demand an about 16% to 18% higher charge. The by far biggest impact on the measure has the value added tax, with revenues as a much larger tax base than profits. Tax savings, which directly affect pre-tax profits, only alleviate the disadvantage bit. There is some evidence that at least one type of private firms—that is, private law firms that are also majority privately owned, are productive enough to overcome the tax advantage of public firms and be able to charge a lower price than public firms.     

COLLUSION,FLUCTUATING DEMAND,AND PRICE RIGIDITY*

We study an infinitely repeated Bertrand game in which an i.i.d. demand shock occurs in each period. Each firm receives a private signal about the demand shock at the beginning of each period. At the end of each period, all information but the private signals becomes public. We consider the optimal symmetric perfect public equilibrium (SPPE) mainly for patient firms. We show that price rigidity arises in the optimal SPPE if the accuracy of the private signals is low. We also study the implications of more firms and firms' impatience on collusive pricing.     

Strategic delegation under quality competition

This paper examines strategic manipulations of incentive contracts in a model where firms compete in quality as well as in price. Compensation schemes for managers are based on a linear combination of profits and sales. For a given level of quality, a firm desires to reduce the manager's compensation when product sales increase; this serves as the firm's commitment to raise prices. Nevertheless, in general, a manager has a stronger incentive to produce goods of higher quality if he is compensated according to sales. Therefore, a compensation scheme that penalizes a manager when sales increase may result in products that are inferior to those of its rival. We show that, depending on the nature of quality, a positive weight on sales may be desirable when firms compete in quality and price. Welfare implications are also explored.     

Price Competition and Consumer Externalities in a Vertically Differentiated Duopoly with Information Disparities

In this paper, we extend the model of vertical product differentiation to consider information disparities about quality differences and their effects on price competition. If uninformed consumers overestimate vertical differentiation, asymmetric information is a source of market power and informed consumers exert positive externalities on high quality product purchasers and negative externalities on low quality product purchasers. Such a result is consistent with the fact that information undermines brand. If uninformed consumers are skeptical, adverse selection issues arise and market demands may be perfectly inelastic to prices. With elastic demands equilibrium prices may be either distorted downwards or reflect real quality if the share of informed consumers is suffciently high. Therefore, with skeptical consumers firms may want either to signal quality or subsidize information provision.     

The determinants of privatization prices: evidence from Turkey

This paper analyses the determinants of privatization prices in a multi-industry study using a sample of 68 recently privatized firms from Turkey. Results show that revenue and market characteristics are significant determinants of privatization prices while current cost and profit indicators are not. It is argued that potential buyers regard these state firms as inefficient, therefore do not take into consideration their current costs and profits in determining their value. When the dependent variable is altered by dividing the firm's privatization price by the firm's sales (revenues), it is found that sales-adjusted privatization prices are responsive to firms profit margins. However, this result does not hold when the sample is restricted to a single industry. Profit margins along with other profitability and firm efficiency measures are no longer significant determinants of sales-adjusted privatization prices in the cement industry analysis. Unexploited production opportunities measured by capacity utilization ratios, and complete private ownership resume a more important role.     

Should Mobile Marketers Collect Data Other Than Geo‐Location?*

We take today's mobile marketing data landscape as a starting point and consider a duopoly model of third‐degree price discrimination in which firms can complement geo‐location information with data on consumer flexibility of varying quality. We show that, depending on consumer heterogeneity, higher‐quality flexibility data affect profits according to three different patterns. In equilibrium, both firms tend to acquire data if the data are of high quality, while only one acquires data if the data quality is low. Firms are likely to gain from additional data if consumers have similar preferences and/or when data are precise. Although social welfare (weakly) improves, consumers can be harmed.     

Peak-load pricing in duopoly

In this paper, we consider peak-load pricing by duopolists that maximize profit (not social welfare). We compare price levels and profits across peak-load versus uniform pricing regimes. Our main result is that the introduction of peak-load pricing can plausibly reduce prices by making price competition more severe and thereby reducing profits. This result suggests that competing firms may engage in collusion by not committing to peak-load pricing. Therefore, from the regulator's perspective, it will be desirable to encourage firms to engage in peak-load pricing to intensify competition.     

Pricing and signaling with frictions

We study a market where each seller chooses the quality and price of goods and the number of selling sites. Observing sellers? choices of prices and sites, but not quality, buyers choose which site to visit. A seller?s choices of prices can direct buyers? search and signal quality. A unique equilibrium exists and is separating. When the quality differential is large, the equilibrium implements the efficient allocation with public information. Otherwise, the quality of goods and/or the number of sites created is inefficient, due to a conflict between the search-directing and signaling roles of prices.     

The price normalization problem in imperfect competition and the objective of the firm

Summary. General equilibrium models of oligopolistic competition give rise to relative prices only without determining the price level. It is well known that the choice of a numéraire or, more generally, of a normalization rule converting relative prices into absolute prices entails drastic consequences for the resulting set of Nash equilibria when firms are assumed to maximize profits. This is due to the fact that changing the price normalization amounts to altering the objective functions of the firms. Clearly, the objective of a firm must not be based on price normalization rules void of any economic content. In this paper we propose a definition of the objective of a firm, called maximization of shareholders' real wealth, which takes shareholders' demand explicitly into account. This objective depends on relative prices only. Real wealth maxima are shown to exist under certain conditions. Moreover, we consider an oligopolistic market and prove the existence of a Nash equilibrium in which each firm maximizes the real wealth of its shareholders. Received: July 10, 1997; revised version: July 27, 1998     

Investor sentiment,information and asset pricing model

We present an asset pricing model with investor sentiment and information, which shows that the investor sentiment has a systematic and significant impact on the asset price. The equilibrium price's rational term drives the asset price to the rational, and the sentiment term leads to the asset price deviating from it. In our model, the proportion of sentiment investors and the information quality could amplify the sentiment shock on the asset price. Finally, the information is fully incorporated into prices when sentiment investors learn from prices. The model could offer a partial explanation of some financial anomalies: price bubbles, high volatility, asset prices' momentum effect and reversal effect.     

Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers

This paper analyses the effects of tax competition on environmental product quality, pollution and welfare in a two-country, vertically differentiated, international duopoly, in which consumers are environmentally conscious. The firm in each country chooses first the environmental quality of its product (which reflects the emissions generated in the production process) and then the price. In equilibrium one country will be more polluted than the other because firms choose different levels of environmental quality of their products. We find that a country’s optimal commodity tax is higher if the domestic firm is the more polluting supplier. Furthermore, non-cooperative commodity tax rates are inefficiently high in equilibrium. This is because, in this framework with environmentally aware consumers, commodity taxes affect the choice of firms regarding their emissions. Therefore, a domestic tax reduction not only raises the profits of the foreign firm but also lowers its emission levels, resulting in higher welfare for the other country. We also analyse the optimal cooperative and non-cooperative commodity and emission taxes with border tax adjustments. With these two policy instruments available, commodity taxes are higher.     

A Mixed Duopoly With Switching Costs

We examine the effects of switching costs in a two‐period Hotelling‐type model where a profit‐maximising private firm competes with a welfare‐maximising public firm. We show that, in contrast with the case in which both firms are private, where switching costs raise prices in both periods, in the mixed duopoly they raise prices in the second period but reduce them in the first period. Moreover, the first‐period price reduction is of such magnitude that switching costs reduce firms’ profits and raise consumer welfare. We also find that switching costs affect the consequences of privatisation in favour of firms and against consumers.