Innovation,licensing, and price vs. quantity competition

In this paper, we develop a differentiated duopoly model with endogenous cost-reducing R&D and review the argument on welfare effect of price and quantity competition in the presence of technology licensing. We show that, with licensing, the standard conclusion on duopoly (Singh and Vives, 1984) is completely reversed. Cournot competition induces lower R&D investment than Bertrand competition does. Moreover, Cournot competition leads to lower prices, lower industry profit, higher consumer surplus and higher social welfare than Bertrand competition.     

Price and quantity competition under free entry

This paper complements that of Cellini et al. (Cellini, R., Lambertini, L., Ottaviano, G. I. P., 2004. Welfare in a differentiated oligopoly with free entry: A cautionary note. Research in Economics, 58:125–33.), which shows that Cournot competition may generate higher welfare compared to Bertrand competition in an economy with free entry. Unlike them, we provide a more general proof for this result and show that Cournot competition generates higher welfare compared to Bertrand competition when the products are sufficiently differentiated. If the products are close substitutes, welfare is higher under Bertrand competition. We show that these qualitative results hold whether or not number of varieties increases market size. We also show when the active firms earn higher profits under Bertrand competition compared to Cournot competition.     

Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers

We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D that generates input spillovers. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers’ surplus.     

Maximum-revenue tariffs versus free trade

Welfare with the maximum-revenue tariff is compared to free-trade welfare under Cournot duopoly with differentiated products; under Bertrand duopoly with differentiated products; and under perfect competition in the case of a large country able to affect its terms of trade. Under Cournot duopoly and Bertrand duopoly, assuming linear demands and constant marginal costs, welfare with the maximum-revenue tariff is always higher than free-trade welfare. Under perfect competition, assuming linear demand and supply, welfare with the maximum-revenue tariff will be higher than free-trade welfare if the country has sufficient market power.     

Bundling strategy and product differentiation

The existing literature shows that a decrease in the degree of substitutability increases a monopoly’s incentive to bundle. This paper in addition takes into account competition in the second product market and then re-examines how intra-brand and inter-brand product differentiations affect the incentive to bundle. In order to formally examine the above conjectures, this research builds up a two-firm, two-product model in which product 1 (monopoly product) is produced only by the bundling firm and product 2 (competing product) is produced by both firms. The analysis shows that under both Bertrand and Cournot competitions the incentive to bundle does not necessarily increase with the degree of intra-brand differentiation, while it strictly decreases with the degree of inter-brand differentiation. Moreover, under Bertrand competition bundling always decreases consumer surplus, but may increase the competitor’s profit and social surplus. Under Cournot competition bundling always reduces the opponent’s profit and social welfare, but may increase consumer surplus.     

Information sharing about a demand shock

This paper examines two questions in asymmetric Cournot and Bertrand oligopoly with a demand shock. Under which conditions is information sharing a subgame-perfect equilibrium? What is the welfare effect when firms are better off? Given these questions, the normal assumptions in the earlier literature can be relaxed in three ways: demand functions can be asymmetric; a demand shock can affect firms differently; distributions of the demand shock and information signals can be arbitrary. Under these general assumptions, the answer to the first question is: every firm's response to the demand shock is stronger when all firms have perfect information than when one firm does so alone; the answer to the second question is: social welfare increases in Cournot competition, and consumer surplus decreases in Bertrand competition.     

Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.     

The implicit welfare weights used when maximizing aggregate surplus

Aggregate consumer and producer surplus is a special type of social welfare function. In this paper, we investigate how individual welfare weights and how the social marginal utility of an increase in an individual's income behave if one uses aggregate surplus as a measure of social welfare. Our conclusion is that aggregate surplus is an ethically unacceptable measure of social welfare.I am grateful to B. De Borger and to an anonymous referee for helpful comments and suggestions on an earlier version of this paper. Of course, all remaining errors are mine.     

Licensing under vertical product differentiation: Price vs. quantity competition

This paper develops a duopoly model of vertical product differentiation where two domestic firms incur variable costs of quality development. These domestic firms can purchase a superior foreign technology through licensing. Outcomes between Bertrand and Cournot competition are compared. We find that licensing raises domestic welfare, and domestic welfare is higher in Bertrand than in Cournot competition regardless of whether or not domestic firms engage in licensing. Non-exclusive licensing is also found to benefit the domestic country more than exclusive licensing.     

Competition with Congestible Networks

We analyse competition between two network providers when the quality of each network depends negatively on the number of customers connected to that network. With respect to price competition we provide a sufficient condition for the existence of a unique pure strategy Nash equilibrium. Comparative statics show that as the congestion effect gets stronger quantities will decrease and prices increase, under both Bertrand and Cournot competition. In an example with endogenous capacities it turns out that equilibrium capacities are at first increasing and then decreasing in the strength of congestion. Furthermore, capacities are higher under Cournot competition. Welfare comparisons between Bertrand and Cournot competition are unambiguous for fixed capacities, but may turn around for endogenous capacities.     

Information quality choice and information disclosure in oligopoly

In this paper, we provide a framework to analyze the information disclosure and information quality choice in the oligopoly in which one firm has the opportunity to choose her information quality flexibly and then decide her information disclosure rule after she has observed her information.We find that in the Cournot (Bertrand)competition, when the goods are substitutes (complements) and the degree of substitution (complement) is small enough, the firm will choose the maximal information quality. However, if the degree of substitution (complement) is large enough, the information quality is some intermediate value. On the other hand, in the Cournot (Bertrand) competition, when the goods are complements (substitutes), the maximal information quality will be chosen. We also find that the Fully Revealing case in which the probability of information disclosure is one will occur in (i) the Cournot competition with sufficiently small degree of substitution; (ii) the Cournot competition when goods are complements; (iii) the Bertrand competition when goods are substitutes; (iv) the Bertrand competition with sufficiently small degree of complements. Moreover, we show that the No Revealing case in which the probability of information disclosure is zero will never show up.     

Modelling exchange of probabilistic opinions

Summary. This paper studies how communication or exchange of opinions influences correlation of beliefs. The paper focuses on a situation in which agents communicate with each other infinitely many times without observing data. It is an extension to the ‘Expert Problem’ in Bayesian theory, where the informational flow is asymmetric. Moreover, this paper generalizes the existing literature of communication that employs the common prior assumption (CPA) by allowing for heterogeneous beliefs. Some basic convergence results are shown in contrast with the results obtained under the CPA. Furthermore, several economic implications of the basic results are provided. Received: August 27, 2001; revised version: April 16, 2002 RID="*" ID="*" The results presented in this paper are taken from my Ph.D. thesis at Stanford University. I gratefully acknowledge the inspiration obtained from innumerable discussions with Mordecai Kurz about this subject. Also, I appreciate comments from Kenneth J. Arrow, Peter J. Hammond, Maurizio Motolese, Carsten K. Nielsen, Ho-Mou Wu and the anonymous referee.     

Inefficient Markov perfect equilibria in multilateral bargaining

We study a complete-information alternating-offer bargaining game in which one “active” player bargains with each of a number of other “passive” players one at a time. In contrast to most existing models, the order of reaching agreements is endogenously determined, hence the active player can “play off” some passive players against others by m oving back and forth bargaining with the passive players. We show that this model has a finite number of Markov Perfect Equilibria, some of which exhibiting wasteful delays. Moreover, the maximum number of delay periods that can be supported in Markov Perfect Equilibria increases in the order of the square of the number of players. We also show that these results are robust to a relaxing of the Markov requirements and to more general surplus functions. Received: November 19, 2001; revised version: August 20, 2002 RID="*" ID="*"This paper grew out of my dissertation submitted to Stanford University. I am deeply indebted to my advisor, Paul Milgrom, for his insights and guidance. I would also like to thank Douglas Bernheim, Sushil Bikhchandani, Harold Demsetz, Bryan Ellickson, Avner Greif, Peter Hammond, David Levine, Bentley Macleod, Joe Ostroy, John Pencavel, Jean-Laurent Rosenthal, David Starrett, Robert Wilson, Bill Zame and especially John Riley and Jeff Zwiebel for their helpful comments. I am grateful to an anonymous referee for extremely constructive suggestions.     

Floating exchange rates versus a monetary union under rational beliefs: the role of endogenous uncertainty

Using the concept of ex-post optimality, we compare different exchange rate regimes, including floating exchange rates and fixed exchange rates with a Monetary Union in a two country OLG model with stochastic endowments. The emphasis of this comparison is on the welfare consequences of agents having incorrect beliefs. We do not assume that agents can hold any beliefs, but rather that their beliefs are rational that is consistent with the observed empirical behavior of the economy. We study a large set of possible policies, but two of them have our particular interest. The first policy implies devaluations in reaction to a negative shock, while the other implies a fixed exchange rate. These policies have very different consequences. The first will for generic beliefs not result in an ex-post optimal allocation. The other policy is on the other hand always feasible and results in an ex-post optimal allocation. When the two countries form a Monetary Union, the ex-post optimal allocation is also achieved. The meaning of “endogenous uncertainty” as an institutionally induced uncertainty is illustrated. Received: September 1, 2001; revised version: 24 June 2002 RID="*" ID="*" I would like to thank Horace W. Brock, Gianluca Cassese, Paula Orlando, Ho-Mou Wu as well as seminar participants at Copenhagen Business School, ESEM98, Keio University, Kyoto University, Osaka University, SITE (Stanford) and University of Copenhagen for many useful comments on the paper. I am also grateful to Mark J. Garmaise, Takako Fujiwara-Greve, and an anonymous referee for many helpful suggestions for improving the paper. Without the many discussions about Rational Beliefs and related issues I have had with Mordecai Kurz over the years, the research presented here would not have been possible. Financial support from The Carlsberg Foundation, Danish Social Research Council, University of Copenhagen and SITE is gratefully acknowledged.     

考虑港口收费管制的进出口贸易竞争研究

考虑港口的收费管制因素,建立了进出口贸易竞争模型。该模型由一个出口国和两个进口国组成,且各国都拥有一个港口,位于出口国的两家公司均向两个进口国销售商品,并在各个进口国展开市场竞争（古诺竞争或伯川德竞争）,各贸易国的港口根据其是否存在价格管制确定港口收费。针对进出口公司的每种竞争模式,得到了不同的港口收费管制组合下各贸易国的港口收费、港口利润和社会福利,并将竞争均衡结果进行了比较。研究发现： （1）在进出口公司古诺竞争模式下,若三个贸易国的港口都无收费管制（有收费管制）且进出口产品的差异较大 （小）时,各贸易国的社会福利和港口利润均更高; （2）在进出口公司伯川德竞争模式下,若进出口产品的差异较大 （小）,则出口国的港口利润主要取决于港口收费 （贸易量）,而进口国恰好相反; （3）当进出口产品的差异较大 （小）时,进出口公司在古诺 （伯川德）竞争模式下各贸易国的社会福利、港口利润以及港口使用费都更高。     

Macro foundations of micro-economics

This paper attempts to circumvent the nonsense of the representative agent which arises in macroeconomics. It recognises that macro data are relevant to agents' decisions, and so excess demands should contain macro variables as arguments. The macro variables I consider are the price index, unemployment and GNP. This paper should be regarded as a tentative beginning to make macroeconomic theory literate. Received: September 19, 2001; revised version: July 24, 2002 RID="*" ID="*"I am delighted to contribute to this Festschrift for Mordecai now that he has reached the appropriate age.     

Equilibrium in a decentralized market with adverse selection

Summary. This paper deals with trade volume and distribution of surplus in markets subject to adverse selection. In a model where two qualities of a good exist, I show that if trade is decentralized (i.e. conducted via random pairwise meetings of agents), then all units of the good are traded, and all agents have positive ex-ante expected payoffs. This feature is present regardless of the quality distribution, and persists in the limit as discounting is made negligible. This offers a sharp contrast to models of centralized trade with adverse selection (Akerlof, Wilson). Received: April 2, 2001; revised version: March 29, 2002 RID="*" ID="*" This research was funded by a grant from UQAM. I wish to thank Roberto Serrano and seminar participants at UQAM, Queen's University at Kingston, the 2001 CEME General Equilibrium Conference (Brown University), and the 2001 North American Summer Meeting of the Econometric Society (University of Maryland) for comments.     

The Effect of Quotas on Domestic Product Price and Quality

A quota on foreign competition generally leads to quality upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese Voluntary Export Restraint (VER) in the U.S. auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare.I am grateful to Jim Gaisford, and Konrad Stahl, seminar participants at the Universität Mannheim and at the ZEW, and an anonymous referee for useful comments and suggestions. As Senior Fellow at the Center for European Integration Studies (ZEI), Bonn, I gratefully acknowledge its continued support.     

Bertrand versus Cournot competition in a downstream mixed oligopoly with foreign ownership

Focusing on foreign ownership in the private firm, we examine the Cournot-Bertrand comparison in a mixed oligopolistic market with vertical market structure. We have found that if public and private firms were charged with uniform price for their inputs, then Cournot-Bertrand ranking in market outcomes confirms those obtained by Ghosh and Mitra (2010). This implies that under uniform pricing in the upstream sector, the vertical market structure does not have substantial influences on Cournot-Bertrand ranking. However, if discriminatory pricing is adopted, firm's profits, output, and social welfare are often reversed to those obtained from uniform pricing in the upstream sector. Given the closeness of products, if the share of foreign ownership is sufficiently low, social welfare in Cournot competition can exceed that of Bertrand competition, contrasting with the standard welfare ranking that Bertrand welfare is strictly higher than Cournot. This implies that Cournot competition can be more socially desirable than Bertrand in mixed oligopoly with vertical market structure if discriminatory pricing scheme is adopted by foreign upstream monopolists.