Access pricing and investment: a real options approach

This paper examines a three-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the overall welfare generated by this decision. In a regulated environment, we consider a vertically integrated network provider that is required to provide access to downstream competitors and compare two distinct access pricing methodologies: the Efficient Component Pricing Rule (ECPR) and the Option to Delay Pricing Rule (ODPR). We identify the welfare-maximizing access prices using the unregulated market output as a benchmark and show that optimal access regulation depends on market conditions (that is, the nature of demand) with two possible outcomes: (i) access prices that provide a positive payoff to the incumbent, that is, provide a positive compensation to account for the option to delay; and (ii) access prices that yield a zero payoff to the incumbent. Moreover, unlike the earlier literature that argues in favor of an ECPR-type methodology to account for the interaction between irreversibility and demand uncertainty, we find that, except under very specific conditions, an access price that accounts for the option to delay value is welfare-superior to the ECPR.      

Leaders and competitors

The purpose of this article is to investigate the properties of equilibrium in a market with a leader. In particular, we examine how the equilibrium values depend on existing competitors. When the number of competitors is exogenously given, most equilibrium values, including the leader??s strategies, depend on the structure of the competitors: the number of incumbent competitors, their technologies, and their objective functions. In contrast, when an entry is endogenous, the equilibrium values, including not only the leader??s strategies but the entrants?? as well, are independent of such properties of the incumbent competitors. We provide several applications of our main result in industrial organization issues.     

Sustainable reputations with rating systems

In a product choice game played between a long lived seller and an infinite sequence of buyers, we assume that buyers cannot observe past signals. To facilitate the analysis of applications such as online auctions (e.g. eBay), online shopping search engines (e.g. BizRate.com) and consumer reports, we assume that a central mechanism observes all past signals, and makes public announcements every period. The set of announcements and the mapping from observed signals to the set of announcements is called a rating system. We show that, absent reputation effects, information censoring cannot improve attainable payoffs. However, if there is an initial probability that the seller is a commitment type that plays a particular strategy every period, then there exists a finite rating system and an equilibrium of the resulting game such that, the expected present discounted payoff of the seller is almost his Stackelberg payoff after every history. This is in contrast to Cripps, Mailath and Samuelson (2004) [5], where it is shown that reputation effects do not last forever in such games if buyers can observe all past signals. We also construct finite rating systems that increase payoffs of almost all buyers, while decreasing the seller?s payoff.     

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.     

Bid rotation and collusion in repeated auctions

This paper studies bidder collusion with communication in repeated auctions when no side transfer is possible. It presents a simple dynamic bid rotation scheme which coordinates bids based on communication history and enables intertemporal transfer of bidders’ payoffs. The paper derives a sufficient condition for such a dynamic scheme to be an equilibrium and characterizes the equilibrium payoffs in a general environment with affiliated signals and private or interdependent values. With IPV, it is shown that this dynamic scheme yields a strictly higher payoff to the bidders than any static collusion scheme which coordinates bids based only on the current reported signals.     

Efficient collusion in repeated auctions with communication

This paper studies collusion in repeated auctions when bidders communicate prior to each stage auction. For independent and correlated private signals and general interdependent values, the paper identifies conditions under which an equilibrium collusion scheme is fully efficient in the sense that the bidders’ payoff is close to what they get when the object is allocated to the highest valuation bidder at the reserve price in every period.     

Political Accountability,Electoral Control and Media Bias

Are anti‐establishment mass media really useful in preventing politicians from behaving dishonestly? This paper models the direction of media bias, and shows that the probability of a dishonest action by an incumbent is higher (than that in the case of no media bias) if and only if the mass media have some degree of “anti‐incumbent” bias (i.e. information favourable to the incumbent is converted into unfavourable news about the incumbent with a positive probability), provided that the incumbent is less likely to be opportunistic than a challenger in the upcoming election. This result holds irrespective of the degree of “pro‐incumbent” bias.     

Repeated Elections with Asymmetric Information

An infinite sequence of elections with no term limits is modelled. In each period a challenger with privately known preferences is randomly drawn from the electorate to run against the incumbent, and the winner chooses a policy outcome in a one-dimensional issue space. One theorem is that there exists an equilibrium in which the median voter is decisive: an incumbent wins re-election if and only if his most recent policy choice gives the median voter a payoff at least as high as he would expect from a challenger. The equilibrium is symmetric, stationary, and the behavior of voters is consistent with both retrospective and prospective voting. A second theorem is that, in fact, it is the only equilibrium possessing the latter four conditions — decisiveness of the median voter is implied by them.     

IMMEDIATE SETTLEMENT OR ENDURING A STRIKE: THE CHOICE OF SIGNALS

Some labour contract negotiations involve strikes while most conclude with immediate settlement. This article offers a model of union‐firm negotiation with private information to show that either strikes or immediate settlement will take place in the equilibrium. Different from most signalling literature where the signals are exogenously given, this article endogenizes the choice of signals. We compare two signals, the employment level and the strategic delay. We show that the low‐revenue firm will choose the signal which gives it higher payoff while separating itself from the high‐revenue firm.     

Individual protection against property crime: decomposing the effects of protection observability

Abstract.  We re-examine the efficiency of observable and unobservable crime protection decisions with new results and insights. Observable protection is unambiguously associated with a negative externality. At the individual level, it reduces the crime effort, but its unit payoff remains unchanged. Conversely, unobservable protection reduces the unit payoff and has no effect on the crime effort exerted, though it deters crime globally. A decrease in the global crime payoff is detrimental to a victim if protection is observable, while it is beneficial when unobservable. While observable protection has a positive diversion effect, it has the opposite effect when unobservable.     

Dynamic common agency

A general model of dynamic common agency with symmetric information is considered. The set of truthful Markov perfect equilibrium payoffs is characterized and the efficiency properties of the equilibria are established. A condition for the uniqueness of equilibrium payoffs is derived for the static and the dynamic game. The payoff is unique if and only if the payoff of each principal coincides with his marginal contribution to the social value of the game. The dynamic model is applied to a game of agenda setting.     

Selecting equilibria in common agency games

We characterize equilibrium payoffs of a delegated common agency game in a public good context where principals use smooth contribution schedules. We prove that under complete information, payoff vectors of equilibria with truthful schedules coincide with the set of smooth equilibrium payoffs, including non-truthful schedules. We next consider whether the presence of arbitrarily small amounts of asymmetric information is enough to refine this payoff set. Providing that the extensions of the equilibrium schedules beyond the equilibrium point are flatter than truthful schedules, the set of equilibrium payoffs is strictly smaller than the set of smooth (equivalently, truthful) equilibrium payoffs. Interestingly, some forms of asymmetric information do not sufficiently constrain the slopes of the extensions and fail to refine the payoff set. In the case of a uniform distribution of types and arbitrary out-of-equilibrium contributions, the refinement has no bite. If, however, one restricts out-of-equilibrium behavior in a natural way, the refinement is effective. Alternatively, we may consider an exponential distribution with unbounded support (and hence no out-of-equilibrium choices) and we find that the refinement selects a unique equilibrium payoff vector equal to Lindahl prices.As a separate contribution, equilibria with forcing contracts are also considered both under complete and asymmetric information.     

Endogenous bid rotation in repeated auctions

I study collusion between two bidders in a general symmetric IPV repeated auction, without communication, side transfers, or public randomization. I construct a collusive scheme, endogenous bid rotation, that generates a payoff larger than the bid rotation payoff.     

Equilibrium selection in global games with strategic complementarities

We study games with strategic complementarities, arbitrary numbers of players and actions, and slightly noisy payoff signals. We prove limit uniqueness: as the signal noise vanishes, the game has a unique strategy profile that survives iterative dominance. This generalizes a result of Carlsson and van Damme (Econometrica 61 (1993) 989-1018) for two-player, two-action games. The surviving profile, however, may depend on fine details of the structure of the noise. We provide sufficient conditions on payoffs for there to be noise-independent selection.     

What does “clean” really mean? The implicit framing of decontextualized experiments

It is standard in experimental economics to use decontextualized designs where payoff structures are presented using neutral language. Here we show that cooperation in such a neutrally framed Prisoner’s Dilemma is equivalent to a PD framed as contributing to a cooperative endeavour. Conversely, there is substantially less cooperation in a PD framed as a competition. We conclude that in a decontextualized context, our participants by default project a cooperative frame onto the payoff structure.     

Favoritism and reverse discrimination

We analyze the inefficiency that may arise in the form of reverse discrimination in the presence of favoritism or nepotism. Favoritism is typically associated with inefficient transfers to the core support of the incumbent government. But inefficiency that is opposite in nature may also arise through the electoral process in a political environment where favoritism is pervasive. We show that if the policy maker is sufficiently office seeking, a socially efficient action may never be taken if it yields benefits to his core support due to reputational concerns. Hence, the core support of the incumbent may fare worse than other groups. We also consider the implications of policies such as anti-nepotism laws or term limits in the presence of favoritism.     

Cost Signals under Uncertain R&D Outcomes

When it is difficult for firms to differentiate their products from those of their competitors, research and development (R&D) spending on process innovation to lower the cost of production is crucial for profitability. However, the information asymmetry in production costs that results from innovation reduces the efficiency of all firms in a market for a homogeneous good. We employ a signalling game to discuss the feasibility of utilising R&D spending and output levels as cost signals in an environment of quantity competition. The results show that a firm does not spend its money on R&D solely to signal the type of cost. Rather, R&D spending may be chosen as a cost signal over the output level only if expenditures on R&D can lead to a sufficiently high probability of reducing production costs.     

Are choice experiments reliable? Evidence from the lab

This study investigates whether a popular stated preference method, the choice experiment (CE), reliably measures individuals’ values for a good. We address this question using an induced value experiment. Our results indicate that CEs fail to elicit payoff maximizing choices. We find little evidence that increasing the salience of the choices or adding monetary incentives increase the proportion of payoff maximizing choices. This questions the increasing use of CE to value non-market goods for policy making.     

Excess capacity as a policing device

A great deal of recent work has been devoted to the question of whether an incumbent firm can successfully deter entry by investing in excess capacity. This paper demonstrates that a dominant firm may invest in excess capacity even when it is certain that this will not deter entry. Rather, the excess capacity is held by the dominant firm in order to ensure that its competitors will exercise appropriate restraint in their own output decisions. An example is provided that illustrates that the rate of return on the capital invested in excess capacity may be very high.     

Entry and espionage with noisy signals

We analyze the effect of industrial espionage on entry deterrence. We consider a monopoly incumbent who may expand capacity to deter entry, and a potential entrant who owns an Intelligence System. The Intelligence System (IS) generates a noisy signal based on the incumbentʼs actions. The potential entrant uses this signal to decide whether or not to enter the market. The incumbent may signal-jam to manipulate the likelihood of the noisy signals and hence affect the entrantʼs decisions. If the precision of the IS is commonly known, the incumbent benefits from his rivalʼs espionage. Actually, he benefits more the higher is the precision of the IS while the spying entrant is worse off with an IS of relatively high quality. When the IS quality is private information of the entrant, the incumbent is better off with an IS of high expected precision while the entrant benefits from one of high quality. In this case espionage makes the market more competitive.