Dynamic duopoly with learning through market experimentation

Summary This paper analyzes how learning behaviors can substantially modify the outcome of competition in an oligopolistic industry facing demand uncertainty. We consider the case of a symmetric duopoly game where firms have imperfect information about market demand and learn through observing the volume of their sales. The main body of the paper consists in showing how market experimentation can explain the existence ofprice-dispersion in an oligopolistic industry. We study this phenomenon and its dynamic evolution in the context of an Hotelling duopoly model; we then extend the analysis to general demand functions and toN-firm oligopolies. We discuss some implications of the public good aspect of information about market demand. We then conclude with a few comments on what happens when the value of information in the oligopolistic industry is negative.We are very grateful to Patrick Bolton for his helpful advice. We also wish to thank Richard Caves, Anthony Creane, Jean-Jacques Laffont, Andreu Mas-Colell, Eric Maskin, Jean-Charles Rochet, Margaret Slade, John Sutton, Jean Tirole, Mike Whinston and an anonymous referee.     

A probabilistic ghost in the experimental machine

This paper focuses on the opposition between two contemporary research programs in economics: behavioral economics (BE) and experimental market economics (EME). Our claim is that the arguments of this opposition can be clarified through the lens of another opposition in the philosophy of probability and in probability theory, between Bayesianism and frequentism. We show how this probabilistic opposition has indirectly shaped a controversy in psychology that opposes two research programs – Heuristics and Biases and Ecological Rationality – which play respective roles in the foundations of individual rationality in BE and EME. To understand these theoretical interrelationships, we investigate the 1996 controversy between Kahneman, Tversky, and Gigerenzer. Those psychologists held different views on how probabilistic representations influence the context-dependency of rationality. This provides a rationale to suggest that a probabilistic ghost may be haunting the experimental machine in economics, and explains how and why the oppositions between BE and EME are structured around the interplay between the norms of rationality and the context in which rationality is exercised.     

Resale price maintenance and collusion

The article revisits the conventional wisdom according to which vertical restrictions on retail prices help upstream firms to collude. We analyze the scope for collusion with and without resale price maintenance (RPM) when retailers observe local shocks on demand or retail costs. In the absence of RPM, retail prices react to retailers' information, and deviations from collusive behavior are thus difficult to detect. By eliminating retail price flexibility, RPM facilitates the detection of deviations but reduces profits and thus increases the short‐run gains from a deviation. Overall, RPM can facilitate collusion and reduce total welfare when firms adopt it.     

Why do intermediaries divert search?

We analyze the incentives to divert search for an information intermediary who enables buyers (consumers) to search affiliated sellers (stores). We identify two original motives for diverting search (i.e., inducing consumers to search more than they would like): (i) trading off higher total consumer traffic for higher revenues per consumer visit; and (ii) influencing stores’ choices of strategic variables (e.g., pricing). We characterize the conditions under which there would be no role for search diversion as a strategic instrument for the intermediary, thereby showing that it occurs even when the contracting space is significantly enriched. We then discuss several applications related to online and brick‐and‐mortar intermediaries.     

Horizontal mergers between multisided platforms: Insights from Cournot competition

This paper discusses the literature on horizontal mergers between multisided platforms and argues that the Cournot model can provide useful insights into the welfare effects of such mergers. To illustrate those insights, we develop a simple model in which two‐sided platforms offer a homogeneous service and compete à la Cournot, and derive the effects of “average‐marginal‐cost‐preserving” mergers on consumers on both sides of the market. We conclude with a discussion of several research avenues that could be explored to understand better the impact of horizontal mergers between multisided platforms.     

Screening risk-averse agents under moral hazard: single-crossing and the CARA case

Principal-agent models of moral hazard have been developed under the assumption that the principal knows the agent's risk-aversion. This paper extends the moral hazard model to the case when the agent's risk-aversion is his private information, so that the model also exhibits adverse selection. We characterize the optimal menu of contracts; while its detailed properties depend on the setting, we show that some of them must hold for all environments. In particular, the power of incentives always decreases with risk-aversion. We also characterize the relationship between the outside option and the optimal contracts. We then apply our results to testing for asymmetric information in insurance markets.The authors thank P.A. Chiappori, D. de Mezza, R. Myerson, C. Prendergast, the late S. Rosen, D. Webb and an anonymous referee for helpful discussions or comments, as well as seminar participants in Berkeley, Chicago, Montré al, Northwestern, Rome, Stanford and Wisconsin. Bruno Jullien gratefully acknowledges financial support from the Fédération Francaise des Sociétés d'Assurance; Bernard Salanié thanks the University of Chicago for its hospitality.     

Narrativity and identity in the representation of the economic agent

We critically survey explicit discussions of the narrativity of economic agents by economists. Narrativity broadly refers to the way humans construct and use stories, notably to define their personal identity. We borrow from debates outside of economics to provide the critical dimension of our survey. Most contributions on the narrativity of economic agents do not discuss one another. To establish communication, we suggest a structure of oppositions that characterize these contributions taken as a whole. These oppositions are notably characterized by three tensions: in terms of methodological attitudes (‘scientism’ vs. ‘humanism’), of underlying theories of personal identity postulating the existence of a unique sense of self or not (‘diachronicity’ vs. ‘episodicity’) and of the normative implications of narrativity (‘welfare-increasing’ vs. ‘welfare-decreasing’). The main goal is to clarify the structure of opposite positions within a more or less explicit debate about the identity of individuals in economics.     

Auction and the informed seller problem

A seller possessing private information about the quality of a good attempts to sell it through a second-price auction with announced reserve price. The choice of a reserve price transmits information to the buyers. We characterize the equilibria with monotone beliefs of the resulting signaling game and show that they lead to a reduced probability of selling the good compared to the symmetric information situation. We compare the unique separating equilibrium of this signaling game to the equilibrium of a screening game in which an uninformed monopoly broker chooses the trading mechanism. We show that the ex ante expected probability of trade may be larger with a monopoly broker, as well as the ex ante total expected surplus.     

Should More Risk-Averse Agents Exert More Effort?

Consider an agent facing a risky distribution of losses who can change this distribution by exerting some effort. Should he exert more effort when he becomes more risk-averse? For instance, should we expect more risk-averse drivers to drive more cautiously? In this article, we give sufficient conditions under which the answer is positive, using results presented in Jewitt (1989). We first extend the standard models of self-insurance and self-protection and show that the comparative statics depends only on the effect of effort on the net loss. We then present conditions for the continuous case with applications.     

Tying in Two‐Sided Markets with Multi‐Homing: Corrigendum and Comment

We identify two issues in Choi's [2010] paper on tying in two‐sided markets published in this Journal, and provide solutions to both of them. First, we point out that the equilibrium in the absence of tying requires more restrictive conditions and does not satisfy a natural equilibrium refinement criterion. We offer an alternative timing structure that validates the equilibrium derived in Choi [2010] under the conditions provided there. Second, we show that his equilibrium analysis with tying ignores a profitable deviation. We rectify this analysis under our alternative timing structure and derive the (mixed‐strategy) equilibrium with tying. We also show by means of simulations that tying is welfare‐enhancing whenever it is profitable, which is consistent with the main finding in Choi [2010].