Up in the Air: GTE's Experience in the MTA Auction for Personal Communication Services Licenses

In late 1994, GTE, one of the largest telecommunications firms in the world, entered an auction for the rights to provide personal communications services (PCS) using the electromagnetic spectrum. The administering agency, the Federal Communications Commission, adopted a novel multiple-round format for the PCS auction. The format presented GTE with a complex bidding problem. This article describes how the GTE bidding team answered the following question: Given its budget and valuations and the information available about rival bidders, how should GTE bid to achieve the best attainable outcome?     

The welfare costs of unreliable water service

Throughout the developing world, many water distribution systems are unreliable. As a result, it becomes necessary for each household to store its own water as a hedge against this uncertainty. Since arrivals of water are not synchronized across households, serious distributional inefficiencies arise. We develop a model describing the optimal intertemporal depletion of each household's private water storage if it is uncertain when water will next arrive to replenish supplies. The model is calibrated using survey data from Mexico City, a city where many households store water in sealed rooftop tanks known as tinacos. The calibrated model is used to evaluate the potential welfare gains that would occur if alternative modes of water provision were implemented. We estimate that most of the potential distributional inefficiencies can be eliminated simply by making the frequency of deliveries the same across households which now face haphazard deliveries. This would require neither costly investments in infrastructure nor price increases.     

Auctions and Regulation: Reengineering of Regulatory Mechanisms**

The FCC auctions, beginning in July 1994, were a watershed event in what may be best called reengineering regulation. It was the first time a new market mechanism, in the form of an auction, had been developed especially to replace traditional administrative procedures for regulating access to a natural resource. The spectrum auctions, and the soon to follow trading in SO₂ emission rights were the two initial instances in which game theory, and more specifically auction theory, played an essential role in the design of an market-based allocation process. The FCC developed a novel auction format for the spectrum auctions. The replacing of administrative regulatory processes with market mechanisms is a major innovation in regulation, or perhaps more accurately, deregulation.     

Resale Price Maintenance Post Leegin: A Model of RPM Incentives

The prominent Babies R Us decision (McDonough et al. v. Toys R Us, Inc., 2009) was the first to explore the economic consequences of resale price maintenance after the Supreme Court’s Leegin decision. Previously, litigation concerned the presence or absence of an agreement; but that changed with the new jurisprudence which instead emphasized the restraint’s direct anti-competitive effects. While the district court’s decision in the Babies R Us case rested on the factual circumstances of the case, it did not have before it an economic model through which those facts could be integrated. This paper offers such a model, the predicates of which are drawn from the case. The conclusions derived from the model are entirely consistent with the court’s decision     

Default Service Auctions

In February 2002, New Jersey completed a market process whereby the utilities were able to purchase one-year forward contracts to ensure energy needs for their default service customers for a one-year period. The auction was the first application of the simultaneous descending clock auction to power procurement. We chose this auction format to fit the specific needs of the New Jersey Electric Discount and Energy Competition Act and the New Jersey Board of Public Utilities mandate for a competitive bidding process to procure the electricity to meet the electric utilities default service obligations.     

The strategic use of early bird discounts for dealers

We study a widely used ordering process (“Early Bird Discounts”) whereby a profit-maximizing manufacturer permits his dealers to place advance orders at a discount before they set retail prices. We show that such discounts may be used to shift just enough channel profits to dealers to enable them to cover their fixed costs and stay in business. If the manufacturer instead simply cut his wholesale price in order to generate gross margins for his dealers, these margins would soon dissipate as price competition among dealers selling the same product forced retail prices back down to the per-unit cost. We show that when dealer fixed costs are low, the manufacturer offers an Early Bird Discount to his multiple dealers that induces all but two of them to exit; when fixed costs are high, the manufacturer offers no preorder discount (i.e. switches to linear pricing) and induces all but one dealer to exit. Although uniform slotting allowances could also be used to reward dealers, a sales-based alternative like an Early Bird Discount sometimes has a key advantage when the manufacturer has dealers in cities of different sizes. If the same Early Bird Discount is offered, dealers in markets with more consumers, who typically have larger fixed costs, will preorder larger amounts and will automatically receive higher gross margins. To duplicate such payments with slotting allowances, non-uniform allowances would have to be offered to firms in different markets, which is divisive and possibly illegal.     

THE ECONOMICS OF NATURAL RESOURCE EXTRACTION: A PRIMER FOR DEVELOPMENT ECONOMISTS

As developing countries become major consumers of the globalsupply of commercial energy, it is essential to understand thedeterminants of future energy prices. At the same time, manydeveloping countries are relying on exports of their own naturalresources—tropical hardwoods, oil, tin, gold, and otherminerals—to generate badly needed foreign exchange. Governmentpolicies influence how much of a resource is extracted todayand how much is saved for the future. Flawed policies needlesslywaste precious national wealth.      

For sale by owner: When to use a broker and how to price the house

By using a broker, the owner of a house can speed up his search for buyers but must pay a percentage of the sale price as a commission. Nonstationarities inherent in the housing market may make it optimal to market a house by-owner at the outset and to retain a broker only if the house remains on the market later in the selling season. This article investigates the optimal sequence of asking prices within the by-owner phase, within the broker phase, and at the transition between the two phases. The asking price declines within each phase but may jump up at the transition to cover part of the commission. The model implicity determines the demand for broker services as a function of the commission rate. When estimated, it may be useful in investigations of price fixing among brokers.     

The benefits of expediting government gold sales

Additional gold can be made available either by mining at high cost (approximately $250 per ounce in 1997 dollars) or by mobilizing government stocks at zero cost. Governments own massive above-ground stocks but loan out only a small percentage of these stocks. Making all government gold available for private uses immediately through some combination of sales and loans maximizes total welfare from private uses, a consequence of the first welfare theorem. We simulate a calibrated version of our model to quantify the effects of liquidating government stocks on alternative dates. If governments sell immediately rather than never, total welfare increases by $340 billion; if they make an unanticipated sale in 20 years, $105 billion of that amount is lost. By depressing prices, such sales benefit depletion and service users but injure private owners of stocks above and below-ground. However, the injury to above-ground stock owners is more than offset by the benefits to service users—often the same individuals. Mine owners would be the principal losers; however, they could be compensated (twice over) from government sales revenue without any need for tax increases.