Real indeterminacy of equilibria and manipulability

In this paper, we analyze the indeterminacy of equilibria in financial markets and propose a selection mechanism. We suggest that there is one equilibrium that prevails over the others, as a result of the market power of the agents that some states of nature become monopolists of certain commodities. Given a financial assets model, we define a price game and show the existence of mixed strategies equilibria. Then we purify these equilibria by considering a price game with incomplete information.     

Spatial competition with demand uncertainty: A laboratory experiment

Motivated by recent research on product differentiation, we conduct laboratory experiments to study how demand uncertainty influences firms' incentives to differentiate. We ground our experiment on a discrete version of the standard location-then-price game introduced by Hotelling (1929), and we consider different levels of demand uncertainty. We first derive the game equilibrium assuming risk-neutral firms, and obtain the standard prediction that a high level of demand uncertainty generates more differentiation. Second, we extend the analysis to consider non-risk neutral firms and markets with asymmetric risk profiles. We show that the game equilibrium can differ substantially according to the attitude to risk. Third, we compare our predictions with the experimental data and find that demand uncertainty acts as a differentiation force in the context of both symmetric markets composed of risk-neutral or risk-lover subjects and asymmetric markets. We find support also for the agglomeration effect arising from demand uncertainty for sufficiently risk-averse subjects. Overall, these results might explain the opposite product differentiation strategies frequently observed in markets with fast-evolving tastes (i.e., minimum or maximum differentiation). Finally, the data confirm that subjects differentiate to relax price competition and provide evidence of a strong positive relationship between differentiation and prices.     

Consumer Cognition and Pricing in the Nines in Oligopolistic Markets

The paper fully characterizes the Bertrand equilibria of oligopolistic markets where consumers may ignore the last (i.e., the right-most) digits of prices. Consumers, in this model, do not do this reflexively or out of irrationality, but only when they expect the time cost of acquiring full cognizance of the exact price to exceed the expected loss caused by the slightly erroneous amounts that are likely to be purchased or the slightly higher price that may be paid by virtue of ignoring the information concerning the last digits of prices. It is shown that in this setting there will always exist firms that set prices that end in nine though there may also be some (nonstrict) equilibria where a non-nine price ending occurs. It is shown that all firms earn positive profits even in Bertrand equilibria. The model helps us understand in what kinds of markets we are most likely to encounter pricing in the nines.     

Rational expectations equilibrium and the strategic choice of costly information

This paper studies costly information acquisition in one-good production economies when agents acquire private information and prices transmit information. Before asset markets open, agents choose the quality of their private information. After this information stage, agents trade assets in sequentially complete markets taking into account their private information and the information revealed by equilibrium prices (rational expectations equilibrium, (Radner, R., 1979. Rational expectations equilibrium: generic existence and the information revealed by prices, Econometrica 47, 655–678.)). An overall equilibrium in asset and information market is defined as a Nash equilibrium of the information game in which agents’ actions are information choices and their utility payoffs are the ex-ante expected utilities of the corresponding rationale expectations equilibrium. This paper shows that for a generic set of economies parameterized by endowments and productivity shocks, an overall equilibrium in information and asset market (a Nash equilibrium of the induced information game) with costly information acquisition and fully-revealing prices exists. In other words, informational efficiency is in general consistent with costly information acquisition.     

Keeping a weather eye on prediction markets: The influence of environmental conditions on forecasting accuracy

Increasingly, prediction markets are being embraced as a mechanism for eliciting and aggregating dispersed information and providing a means of deriving probabilistic forecasts of future uncertain events. The efficient market hypothesis postulates that prediction market prices should incorporate all information that is relevant to the performances of the contracts traded. This paper shows that such may not be the case in relation to information regarding environmental factors such as the weather and atmospheric conditions. In the context of horserace betting markets, we demonstrate that even after the effects of these factors on the contestants (horses and jockeys) have been discounted, the accuracy of the probabilities derived from market prices is affected systematically by the prevailing weather and atmospheric conditions. We show that significantly better forecasts can be derived from prediction markets if we correct for this phenomenon, and that these improvements have substantial economic value.     

Endogenous mechanisms and Nash equilibrium in competitive contracting games

We model strategic competition in a market with asymmetric information as a noncooperative game in which each firm competes for the business of a buyer of unknown type by offering the buyer a catalog of products and prices. The timing in our model is Stackelberg: in the first stage, given the distribution of buyer types known to all firms and the deducible, type-dependent best responses of the agent, firms simultaneously and noncooperatively choose their catalog offers. In the second stage the buyer, knowing his type, chooses a single firm and product-price pair from that firm’s catalog. By backward induction, this Stackelberg game with asymmetric information reduces to a game over catalogs with payoff indeterminacies. In particular, due to ties within catalogs and/or across catalogs, corresponding to any catalog profile offered by firms there may be multiple possible expected firm payoffs, all consistent with the rational optimizing behavior of the agent for each of his types. The resolution of these indeterminacies depends on the tie-breaking mechanism which emerges in the market. Because each tie-breaking mechanism induces a particular game over catalogs, a reasonable candidate would be a tie-breaking mechanism which supports a Nash equilibrium in the corresponding catalog game. We call such a mechanism an endogenous Nash mechanism. The fundamental question we address in this paper is, does there exist an endogenous Nash mechanism—and therefore, does there exist a Nash equilibrium for the catalog game? We show under fairly mild conditions on primitives that catalog games naturally possess tie-breaking mechanisms which support Nash equilibria.     

A characterization of equilibria in the Groves–Ledyard mechanism

In this paper, we characterize all interior and boundary equilibria of the Groves–Ledyard mechanism for a large class of economies and determine their stability properties. We show that the mechanism admits three types of equilibria: a symmetric, efficient, stable interior equilibrium, a large set of asymmetric, efficient, unstable, interior equilibria, and a large set of asymmetric, inefficient, stable boundary equilibria. We further show that asymmetric equilibria fail to exist for large values of the punishment parameter or if the message space is bounded sufficiently. The boundary equilibria previously had not been located nor had the instability of the asymmetric equilibria been known. Interestingly, the stability of the symmetric equilibrium rests on two dynamics that individually produce instability.     

Constrained suboptimality when prices are non-competitive

The paper addresses the following question: how efficient is the market system in allocating resources if trade takes place at prices that are not competitive? Even though there are many partial answers to this question, an answer that stands comparison to the rigor by which the first and second welfare theorems are derived is lacking. We first prove a “Folk Theorem” on the generic suboptimality of equilibria at non-competitive prices. The more interesting problem is whether equilibria are constrained optimal, i.e. efficient relative to all allocations that are consistent with prices at which trade takes place. We discuss an optimality notion due to Bénassy, and argue that this notion admits no general conclusions. We then turn to the notion of p-optimality and give a necessary condition, called the separating property, for constrained optimality: each constrained household should be constrained in each constrained market. If the number of commodities is less than or equal to two, the case usually treated in the textbook, then this necessary condition is also sufficient. In that case equilibria are constrained optimal. When there are three or more commodities, two or more constrained households, and two or more constrained markets, this necessary condition is typically not sufficient and equilibria are generically constrained suboptimal.     

Cournot outcomes under Bertrand–Edgeworth competition with demand uncertainty

We provide new results for two-stage games in which firms make capacity investments when demand is uncertain, then, when demand is realized, compete in prices. We consider games with demand rationing schemes ranging from efficient to proportional rationing. In all cases, there is a subgame perfect equilibrium outcome coinciding with the outcome of the Cournot game with demand uncertainty if and only if (i) the fluctuation in absolute market size is small relative to the cost of capacity, or (ii) uncertainty is such that with high probability the market demand is very large and with the remaining probability the market demand is extremely small. Otherwise, equilibria involve mixed strategies. Further, we show under efficient rationing that condition (i) is sufficient for the unique equilibrium outcome to be an equilibrium outcome of the Cournot game with demand uncertainty.     

Pre-play communication in procurement auctions: Silence is not golden

I study the effect of cheap talk between bidders on the outcome of a first-price procurement auction in which participation is costly. Although no side payments or commitments are allowed, there exists a family of equilibria in which sellers use communication to collude on a subset of participants and/or reveal information about their cost. Cheap talk matters in the sense that it strictly enlarges the set of Nash equilibria (symmetric and asymmetric) and the set of public correlated equilibria of the game. I show that the buyer may benefit from cheap talk between sellers and that the surplus increases in the amount of information revealed in equilibrium under one fairly general condition. This is because when communication is cheap, sellers cannot directly collude on higher prices. Rather, communication leads to competition between fewer, but more aggressive bidders, which entails greater allocative efficiency and a decrease in the total wasteful entry cost.     

Hassle Costs: The Achilles' Heel of Price-Matching Guarantees*

We show that price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs), we find that any increase in equilibrium prices due to firms' price-matching policies will be small; often, no price increase can be supported. In symmetric markets price-matching guarantees cannot support any rise in prices, even if hassle costs are arbitrarily small In asymmetric markets, higher prices can be supported, but the prices fall well short of maximizing joint profits. Our model can explain why some firms adopt price-matching guarantees while others do not.     

Vertical Integration and Exclusive Behavior of Insurers and Hospitals

We examine vertical integration and exclusive behavior in health care markets in which insurers and hospitals bilaterally bargain over contracts. We employ a bargaining model of two hospitals and two health insurers competing on premiums. We show that asymmetric equilibria exist in which one insurer contracts one hospital whereas the other insurer contracts both hospitals, even if all players are equally efficient in their production. Asymmetric equilibria arise if hospitals are sufficiently differentiated. In these cases, total industry profits increase and consumer welfare decreases in comparison to the case in which both insurers have contracts with both hospitals. Vertical integration makes these equilibria possible for a wider range of parameters.     

Debt contracts and cooperative improvements

In this paper, we consider a dynamic game with imperfect information between a borrower and lender who must write a contract to produce a consumption good. In order to analyze the game, we introduce the concept of a coalitional perfect Bayesian Nash equilibrium (cPBNE). We prove that equilibria exist and are efficient in a precise sense, and that deterministic contracts that resemble debt are optimal for a general class of economies. The cPBNE solution concept captures both the non-cooperative aspect of firm liquidation and the cooperative aspect of renegotiation.     

National pricing with local quality competition

We study the incentives of national retail chains to adopt national (uniform) prices across local markets that differ in size and competition intensity. In addition to price, the chains may also compete along a quality dimension, and quality is always set locally. We show that absent quality competition, the chains will never use national pricing. However, if quality competition is sufficiently strong there exist equilibria where at least one of the chains adopts national pricing. We also identify cases in which national pricing benefits (harms) all consumers, even in markets where such a pricing strategy leads to higher (lower) prices.     

Pricing‐to‐Market and Market Structure*

Stimulated by imperfect competition/sticky prices framework of the new open economy macroeconomics, empirical research has reconsidered the role of exchange rates in international adjustment. This paper reassesses the link between exchange rates and traded good prices by estimating pricing‐to‐market equations for the five main euro area countries over the period 1990–99. We minimize selection biases by keeping all manufacturing products and all destination markets and show that exchange rate pass‐through (ERPT) is much larger, almost complete, than previously estimated. Thanks to a huge variability in terms of exchange rate variations, products and destination markets, we can map differences in ERPT into market structures and, at the same time, reconcile our results with the empirical literature. We find that ERPT is highly incomplete for sales by oligopolistic industries into advanced economies, indeed in the order of 50–60% as previously estimated. ERPT is instead almost complete in emerging and developing economies where therefore exchange rate movements can help adjust external imbalances. We also find that ERPT is largely asymmetric: it is almost complete after an appreciation of the exporter's currency, rather incomplete after a depreciation. This result is very robust across specifications.     

Intertemporal coordination in two-period markets

This paper studies the stability of the intertemporal coordination dynamics when the common knowledge of individual expectations of future prices is perturbed in a neighborhood of a perfect foresight equilibrium. The main forces that affect stability are: (i) the effect of a change in asset demand on second period spot market prices, and (ii) the effect on asset demand of a small change in second period prices. In an intertemporal market game whose interior Markov perfect equilibria correspond to perfect foresight equilibria, it is shown that though M-rationalizability implies the stability of the intertemporal dynamics, the converse is not always true.     

Intertemporal coordination in two-period markets

This paper studies the stability of the intertemporal coordination dynamics when the common knowledge of individual expectations of future prices is perturbed in a neighborhood of a perfect foresight equilibrium. The main forces that affect stability are: (i) the effect of a change in asset demand on second period spot market prices, and (ii) the effect on asset demand of a small change in second period prices. In an intertemporal market game whose interior Markov perfect equilibria correspond to perfect foresight equilibria, it is shown that though M-rationalizability implies the stability of the intertemporal dynamics, the converse is not always true.     

The asymmetric effect of crude oil prices on stock prices in major international financial markets

The aim of this paper is to explore the potential asymmetric impacts of positive and negative shocks in crude oil prices on stock prices in six major international financial markets which include China, Hong Kong, America, Japan, Britain, and Germany. We test for these asymmetric effects on 8 major international financial markets indices over the 2007M01–2020M03 periods. Our independent measures include the prices of Brent crude oil futures and West Texas Intermediate (WTI) futures. We use the nonlinear ARDL (NARDL) model proposed by Shin et al. (2014), which can capture both short- and long-run nonlinearities through positive and negative partial sum decompositions of the explanatory variables. This research finds that positive and negative fluctuations of oil price have asymmetric effects on stock price index in four financial markets, but the performance of the asymmetry is different. Specifically, the impacts of volatility in oil prices on two indices of Chinese stock prices are different, and the asymmetric effects of oil price volatility on stock price indices in China and other financial markets are significantly different.     

An analysis of the opening mechanisms of Exchange Traded Fund markets

We examine the opening of Exchange Traded Fund (ETF) markets in a multimarket trading environment. We find that the opening trades on the American Stock Exchange (AMEX) are the most costly. This result is consistent with the market power hypothesis which suggests that the specialists use their informational advantage about the order imbalance at the open or take advantage of the inelastic demand at the open by imposing wider spreads. We also find that the transparent opening mechanisms of the New York Stock Exchange (NYSE) and Electronic Communication Networks (ECNs) enable them to facilitate greater price discovery at the opening and to have more efficient opening prices. This result implies that the transparency effect dominates the market power effect. Further, we find that peripheral markets do not passively free ride on information revealed through the AMEX because their opening trades contribute significantly to the price discovery process.