Risk-Sensitive Dynamic Market Share Attraction Games

We present partial results showing that risk-sensitive oligopolists would spend less on advertising than would their risk-neutral counterparts. The model is an infinite-horizon stochastic game in which each firm's “goodwill” is a random function of both its own and its competitors' current and past advertising expenditures. Single-period firm profits have a market share attraction form. Each firm seeks to maximize its expected exponential utility of the sum of discounted profits. We analyze the impact that risk sensitivity and other parameters have on equilibrium advertising strategies by exploiting the special structure of the stochastic game model.Journal of Economic LiteratureClassification Number: C73.     

The determinants of market share for the `dominant firm' in telecommunications

The present study examines the factors affecting the market share of the dominant firm in long-distance telecommunications, AT&T. A theoretical model is specified which includes competing long-distance rates (e.g., those of MCI and U.S. Sprint), price-cap regulation and advertising expenditures as determinants of the dominant firm's market share. Using intercity long-distance carrier charges for 1984–1994, this study points out the importance of AT&T's own rate structure, those of its major competitors, and government regulations in determining AT&T's market share over time.     

Higher order game dynamics

Continuous-time game dynamics are typically first order systems where payoffs determine the growth rate of the players? strategy shares. In this paper, we investigate what happens beyond first order by viewing payoffs as higher order forces of change, specifying e.g. the acceleration of the players? evolution instead of its velocity (a viewpoint which emerges naturally when it comes to aggregating empirical data of past instances of play). To that end, we derive a wide class of higher order game dynamics, generalizing first order imitative dynamics, and, in particular, the replicator dynamics. We show that strictly dominated strategies become extinct in n-th order payoff-monotonic dynamics n   orders as fast as in the corresponding first order dynamics; furthermore, in stark contrast to first order, weakly dominated strategies also become extinct for n?2$n?2$. All in all, higher order payoff-monotonic dynamics lead to the elimination of weakly dominated strategies, followed by the iterated deletion of strictly dominated strategies, thus providing a dynamic justification of the well-known epistemic rationalizability process of Dekel and Fudenberg [7]. Finally, we also establish a higher order analogue of the folk theorem of evolutionary game theory, and we show that convergence to strict equilibria in n-th order dynamics is n orders as fast as in first order.     

Strategic incentive in mixed oligopoly

This paper develops a two stage game model with two competing firms in a mixed oligopolistic market, a public firm and a private firm, and only the public firm giving its manager an incentive contract. The paper presents three types of public firm owner’s objective function and each objective function corresponds to three types of delegation, either of a profit-revenue type, or of a relative performance, or, finally, of a market share one. In an equilibrium, the public firm owner has a dominant strategy to reward his manager with an incentive contract combining own profits and competitor’s profits. Different from Manasakis et al. (2007), this paper suggests that the dominant strategy of the public firm owner is to reward his manager with a profit-revenue type of contract or a market-share type of contract, that is to say profit-revenue is identical with market-share. Using relative-performance type of contract will move the manager away from the owner’s true objective function when the public firm owner only pursues maximizing the social welfare. The private firm will be crowded out and the public firm is the only producer of the market. Under profits-revenues type of contract, the owner’s objective of maximizing the summation of the profit and consumer surplus leads the manager more aggressive. Different combinations give us different results. By comparing the results, each type of incentive contract is an owner’s best response to his decision.     

Intangible capital,market share and corporate strategy

This paper theoretically and empirically identifies the determinants of firm profitability and market share for twelve broadly defined US manufacturing industry groups. The effects of advertising, research and development, and diversification on profitability and market share are econometrically tested for each industry group, and corporate strategy implications of the results are considered. One major result of the analysis is that research and development (R&D) tends to be much more effective as a means of enhancing firm profitability than advertising, and research and development spending decisions are more closely related to the profitability of R&D than advertising decisions are related to the profitability of advertising.     

Strategic manipulation of a pollution permit market and international trade

We consider a framework where firms which compete in an international product market are not all submitted to a pollution permit market. Using the Brander and Spencer’s framework (J Int Econ 18:83–100, 1985), we seek to determine the optimal strategies of both a dominant firm in the pollution permit market and the regulator in a such context. We first show that the dominant firm pursues a strategic manipulation to increase its profit. We also find that the regulator uses a sophisticated strategic policy to increase the domestic welfare by using two instruments: the initial allocation of pollution permits and the pollution cap.     

Iterated Weak Dominance in Strictly Competitive Games of Perfect Information

We prove that any strictly competitive perfect-information two-person game with n outcomes is solvable in n−1 steps of elimination of weakly dominated strategies— regardless of the length of the game tree. The given bound is shown to be tight using a variant of Rosenthal's centipede game. Journal of Economic Literature Classification Numbers: C70, C72.     

ANTIDUMPING,INTRA‐INDUSTRY TRADE,AND QUALITY REVERSALS

We examine an export game where two (home and foreign) firms produce vertically differentiated products. The foreign firm is more R&D efficient and is based in a larger and richer market. The unique (risk‐dominant) Nash equilibrium exhibits intra‐industry trade, and the foreign producer manufactures a higher‐quality product. When transport costs are low, unilateral dumping by the foreign firm arises; otherwise, reciprocal dumping occurs. For some parameters, a domestic antidumping policy leads to a quality reversal in the international market whereby the home firm becomes the quality leader. This policy is desirable for the implementing country, though world welfare decreases.     

The equivalence of the Dekel–Fudenberg iterative procedure and weakly perfect rationalizability

Summary. Two approaches have been proposed in the literature to refine the rationalizability solution concept: either assuming that a player believes that with small probability her opponents choose strategies that are irrational, or assuming that their is a small amount of payoff uncertainty. We show that both approaches lead to the same refinement if strategy perturbations are made according to the concept of weakly perfect rationalizability, and if there is payoff uncertainty as in Dekel and Fudenberg [J. of Econ. Theory 52 (1990), 243–267]. For both cases, the strategies that survive are obtained by starting with one round of elimination of weakly dominated strategies followed by many rounds of elimination of strictly dominated strategies. Received: 10 December 1998; revised version: 26 April 1999     

刺激还是抑制：企业负债对广告投入影响的理论与实证研究

以布莱德和莱维斯的理论为基础,假设广告具有拓展效应和窃取效应,研究企业负债与市场地位对企业广告投资的影响。结果显示：企业资本市场行为影响其产品市场竞争,负债具有竞争策略性;企业负债刺激其广告投入,而竞争对手负债抑制其广告投入;寡头垄断市场,企业初始市场份额抑制其广告投入;广告投入具有行业差异,且非制造业内部差异更大。研究结论拓展布莱德和莱维斯研究的同时,也给企业广告投资提供参考价值。     

Asymmetric Information and the Russian Individual Savings Market

The article considers the influence of informational imperfections on the performance of the Russian financial market. The focus is on the individual savings market, which exhibits inefficiencies, including those associated with the market power of a dominant agent—Sberbank. Reinforcement of Sberbank's dominance on the market in the period 1994‐98 (before the August default combined with financial crisis) is explained as a consequence of asymmetric information about the probability of bankruptcy of a new bank. Under asymmetric information a new private bank has to provide specific quality signals in order to attract depositors. Two major lines of inquiry are the criteria for choosing forms of savings, including that of a bank in which to deposit money, by Russian citizens, and banks' advertising strategies to confirm the factual risk of default. Within the conceptual framework of a game with separating equilibrium, we analyse the behaviour of the agents on both supply and demand sides in the market. We find that there is evidence of using advertising as a tool of quality signalling at a certain phase of the Russian individual savings market's development.     

Equilibrium selection through incomplete information in coordination games: an experimental study

We perform an experiment on a pure coordination game with uncertainty about the payoffs. Our game is closely related to models that have been used in many macroeconomic and financial applications to solve problems of equilibrium indeterminacy. In our experiment, each subject receives a noisy signal about the true payoffs. This game (inspired by the “global” games of Carlsson and van Damme, Econometrica, 61, 989–1018, 1993) has a unique strategy profile that survives the iterative deletion of strictly dominated strategies (thus a unique Nash equilibrium). The equilibrium outcome coincides, on average, with the risk-dominant equilibrium outcome of the underlying coordination game. In the baseline game, the behavior of the subjects converges to the theoretical prediction after enough experience has been gained. The data (and the comments) suggest that this behavior can be explained by learning. To test this hypothesis, we use a different game with incomplete information, related to a complete information game where learning and prior experiments suggest a different behavior. Indeed, in the second treatment, the behavior did not converge to equilibrium within 50 periods in some of the sessions. We also run both games under complete information. The results are sufficiently similar between complete and incomplete information to suggest that risk-dominance is also an important part of the explanation.      

Bertrand–Edgeworth Duopoly with Buyouts or First Refusal Contracts

In this game the players are firms involved in a Bertrand–Edgeworth duopoly market. Payoffs to the low priced firm depend only on the own price, whereas the payoff to the high priced firm depends on both its own price and the price of the opponent. The price of the opponent enters the payoff function of the high priced firm through buyout or a first refusal contract. Only when the total capacity in the market is less than the output in a monopoly situation, there is an equilibrium in pure strategies.Journal of Economic LiteratureClassification Numbers: C72, D43, L12.     

Socially responsible firms and endogenous choice of strategic incentives

In this paper we are analyzing a mixed quantity-setting duopoly consisting of a socially concerned firm and a profit-maximizing firm. The socially concerned firm considers one group of stakeholders in its objective function and maximizes its profit plus a share of consumer surplus. Both firms have the option to hire a manager who determines the production quantity on behalf of the firm's owner. We find that in the subgame-perfect equilibrium of this game both firms hire a manager and delegate the production choice. If the unit production costs of the firms are similar, then the socially concerned firm has a higher market share and even higher profit. Interestingly, we observe that the relationship between the share of consumer surplus taken into account by the socially concerned firm and its profit is non-monotonic. As the share increases, the socially concerned firm's profit first increases and then decreases. The conclusion is that it pays off to take stakeholder interests into account, but not too much.     

Cost‐Based Anti‐dumping as a Repeated Game

In this paper, we consider anti‐dumping (AD) duties as a tool to facilitate collusion between a domestic and a foreign firm in an infinitely repeated differentiated Bertrand game, where prices are publicly observable and each firm receives a privately observed i.i.d. cost shock in each period. We consider second‐best scenarios, where market‐share or production arrangement with sidepayments is not allowed. We show that there exist equilibrium‐path reciprocal ADs. The collusive (trigger) price is distorted downward compared with complete information benchmark as a trade‐off between diminishing the incentive to deviate and ensuring off‐schedule deviation gains when private cost shocks are highly favourable. The model differs from Green and Porter ( 1984 ) and Rotemberg and Saloner ( 1986 ) in that it is the private cost shocks as opposed to public demand shocks that necessitate modifications of collusion. In conclusion, AD policy may encourage collusion, and therefore, unless the source of market imperfection is carefully examined, laissez faire might be a better choice.     

A laboratory study of advertising and price competition

We use a laboratory experiment to study advertising and pricing behavior in a market where consumers differ in price sensitivity. Equilibrium in this market entails variation in the number of firms advertising and price dispersion in advertised prices. We vary the cost to advertise as well as varying the number of competing firms. Theory predicts that advertising costs act as a facilitating device: higher costs increase firm profits at the expense of consumers. We find that higher advertising costs decrease demand for advertising and raise advertised prices, as predicted. Further, this comes at the expense of consumers. However, advertising strategies are more aggressive than theory predicts with the result that firm profits do not increase.     

The strategic nature of advertising in segmented markets

We develop a simple model in which firm-specific advertising has cooperative and predatory effects. Our model is set in a static market where firms are naturally segmented into two distinct submarkets: several large firms located in the core, with small firms operating as a fringe. We test the net effect of opposing market size (cooperative) and market share (predatory) effects of both fringe and core firm advertising on the advertising decisions of large firms in several US consumer industries. Empirically, fringe firm advertising leads to an increase in advertising efforts by large firms, implying strategic complementarity. On the other hand, increased advertising by core firms in an industry decreases advertising expenditures of other core firms, indicating they are strategic substitutes. Our findings imply that equilibrium levels of advertising can be greater with asymmetric, rather than symmetric, strategic interactions.     

To Commit or Not to Commit: Endogenous Timing in Experimental Duopoly Markets

In this paper we experimentally investigate the extended game with action commitment of Hamilton and Slutsky (1990, Games Econ. Behavior2, 29–46). In their duopoly game firms can choose their quantities in one of two periods before the market clears. If a firm commits to a quantity in period 1, it does not know whether the other firm also commits early. By waiting until period 2, a firm can observe the other firm's period-1 action. Hamilton and Slutsky predicted the emergence of endogenous Stackelberg leadership. Our data, however, do not confirm the theory. While Stackelberg equilibria are extremely rare, we often observe endogenous Cournot outcomes and sometimes collusive play. This is partly driven by the fact that endogenous Stackelberg followers learn to behave in a reciprocal fashion over time, i.e., they learn to reward cooperation and to punish exploitation. Journal of Economic Literature Classification Numbers: C72, C92, D43.     

Corporate social responsibility and the ‘game of catallaxy’: the perspective of constitutional economics

The paper examines the issue of corporate social responsibility (CSR) from the perspective of constitutional economics, focusing on the distinction between a political community’s constitutional choice of the rules of the “market game,” and the market players’ sub-constitutional choice of strategies within these rules. Three versions of CSR-demands are identified and discussed, a “soft,” a “hard”, and a “radical” version. The soft version is concerned with the issue of how “socially responsible” corporations ought to play the market game within existing rules. The hard version is about how the rules of the market ought to be changed in order to induce “socially responsible” corporate behavior. And the radical version questions the compatibility of CSR and the logic of the market game, calling in effect for adopting some alternative economic regime.

Infinite Histories and Steady Orbits in Repeated Games

We study a model of repeated games with the following features: (a) Infinite histories. The game has been played since days of yore, or is so perceived by the players: (b) Turing machines with memory. Since regular Turing machines coincide with bounded recall strategies (in the presence of infinite histories), we endow them with "external" memory; (c) Nonstrategic players. The players ignore complicated strategic considerations and speculations about them. Instead, each player uses his/her machine to update some statistics regarding the others′ behaviour, and chooses a best response to observed behaviour. Relying on these assumptions, we define a solution concept for the one shot game, called steady orbit. The (closure of the) set of steady orbit payoffs strictly includes the convex hull of the Nash equilibria payoffs and is strictly included in the correlated equilibria payoffs. Assumptions (a)–(c) above are independent to a large extent. In particular, one may define steady orbits without explicitly dealing with histories or machines.