Mutually Destructive Bidding: The FCC Auction Design Problem

In general, synergies across license valuations complicate the auction design process. Theory suggests that a simple (i.e., non-combinatorial) auction will have difficulty in assigning licenses efficiently in such an environment. This difficulty increases with increases in fitting complexity. In some environments, bidding may become mutually destructive. Experiments indicate that a properly designed combinatorial auction is superior to a simple auction in terms of economic efficiency and revenue generation in bidding environments with a low amount of fitting complexity. Concerns that a combinatorial auction will cause a threshold problem are not borne out when bidders for small packages can communicate.     

Existence of an equilibrium in first price auctions

Summary We study the first price auction game with an arbitrary number of bidders when the bidders' valuations are independent from each other. In technical words, we work within the independent private value model. We show that if the supports of the valuation probability distributions have the same minimum and if this minimum is not a mass point of any of these distributions, then a Nash equilibrium of the first price auction exists. We then modify the first price auction game by adding a closed interval of messages. Every bidder has to send a message with the bid he submits. These messages are used in the resolution of the ties. The winner of the auction is chosen randomly among the highest bidders with the highest value of the message among the highest bidders. In the general case, we prove the existence of a Nash equilibrium for this augmented first price auction.I wish to thank Mamoru Kaneko and a referee for their comments on an earlier draft.     

Discriminatory Price Auctions in Electricity Markets: Low Volatility at the Expense of High Price Levels

A pay-as-offered or discriminatory price auction (DPA) has been proposed to solve the problem of inflated and volatile wholesale electricity prices. Using the experimental method we compare the DPA with a uniform price auction (UPA), strictly controlling for unilateral market power. We find that a DPA indeed substantially reduces price volatility. However, in a no market power design, prices in a DPA converge to the high prices of a uniform price auction with structural market power. That is, the DPA in a no market power environment is as anti-competitive as a UPA with structurally introduced market power.     

Auctions for Universal Service Subsidies

The Telecommunications Act of 1996 requires that telephone service be available in high-cost areas at rates that are affordable and reasonably comparable to those charged in low-cost areas. It also requires that carriers serving high-cost areas at below-cost rates be compensated with explicit and sufficient subsidies. This paper analyzes an auction mechanism for the allocation of such subsidies. It shows that in a wide range of circumstances auctions are more efficient than traditional subsidy schemes. It also shows, however, that auction designs aimed at stimulating competition among several subsidized carriers may be particularly vulnerable to collusion.     

Exchange rates and bertrand oligopoly

The impact of exchange-rate changes on industrial prices seems ambiguous. Incomplete and even perverse pass-through has been observed: the import prices in the depreciating country decrease while those in the appreciating country increase. To explain these counterintuitive price reactions we consider a situation of international Bertrand competition: two firms, based in different countries, are selling in both countries simultaneously. The profit-maximizing duopolists set the prices for their products in each of the two markets which are segmented on the demand side. We then study the qualitative effect of an exogenous exchange-rate change on the Bertrand-Nash equilibrium. Under the strong assumption of linear demand and cost functions we have normal exchange-rate pass-through. However, allowing for more general cost structures in this simple static model enables us to show that the import prices in both countries might move in counterintuitive directions.     

Strategy-proof and individually rational social choice functions for public good economies

Summary We consider the problem of choosing an allocation in an economy in which there are one private good and one public good. Our purpose is to identify the class of procedures of choosing an allocation which satisfy strategy-proofness, individual rationality, no exploitation and non-bossiness. Any such procedure is a scheme of semi-convex cost sharing determined by the minimum demand principle.I wish to thank Professors Salvador Barbera, Matthew Jackson, Herve Moulin and William Thomson for their helpful suggestions and two anonymous referees for their detailed comments. Conversations with Professors Hideo Konishi, Shinji Oseto Ken-ichi Shimomura and Stephen Ching were helpful. This work is supported by the Japan Economic Research Foundation and Research Grants PB89-0294 and PB89-0075 from the Direcion General de Investigacion Cientifica y Tecnica, Spanish Ministry of Education.     

The Impact of Discounting on an Auction with a Buyout Option: a Theoretical Analysis Motivated by eBay’s Buy-It-Now Feature

An auction with a buyout option occurring over continuous time with rules similar to eBays buy it now option is analyzed. When auction participants make no distinction as to when a transaction occurs, the seller optimally chooses a buyout option price so high that bidders never exercise the option. However, time impatience on either side of the transaction can motivate the seller to offer an option price low enough so that the option is exercised with positive probability. Further, allowing a time impatient seller to offer such an option results in an ex ante Pareto improvement when bidders do not discount future transactions.     

Exchange rates and perfect competition

The purpose of this note is to demonstrate that the commonly held belief that incomplete and perverse pass-through are incompatible with perfect competition is wrong! To this end, we consider two types of firms both operating in two countries. The demand sides of the markets of the two countries are separated and each type of firm produces its good in one of these countries. We study the effect of an exchange-rate change on the competitive equilibrium prices in each country. When producing for the foreign market causes the same costs as producing for the home market then the law of one price holds and an exchange-rate change is completely offset by price changes. Furthermore, when cost functions neither exhibit economies nor diseconomies of scope between producing for the home and producing for the foreign market then prices move in the right directions in response to an exchange-rate change. However, with general cost structures, even in this simple perfectly competitive model, perverse directions of price changes can result from an exchange-rate change.     

Learning for Innovation and the Skill Premium

The computer revolution took very long to pay off in productivity growth in the computer-using sectors. The relative wage of skilled workers, however, has risen sharply from the early days of the computer revolution onward. As skilled workers wages reflect their productivity, the two observations together pose a puzzle.This paper provides a micro-based explanation for the long diffusion period of the computer revolution. The general equilibrium model of growth zooms in on the research process and provides an explanation for sluggish growth with booming relative wages of the skilled. Technological progress in firms is driven by research aimed at improving the production technology (innovation) and by assimilation of ideas or principles present outside the firm (learning). A new General Purpose Technology (GPT) like the computer revolution generates an initial slowdown in economic growth and an increase in the skill premium.Acknowledgement I am indebted to Theo van de Klundert for suggestions and encouragement. Suggestions by Jan Boone, Bas Jacobs, Patrick Francois, Henri de Groot, Lex Meijdam, Niek Nahuis Sjak Smulders, Harald Uhlig and anonymous referees have contributed to the paper.     

Anonymous sequential games: Existence and characterization of equilibria

Summary In this paper we consider Anonymous Sequential Games with Aggregate Uncertainty. We prove existence of equilibrium when there is a general state space representing aggregate uncertainty. When the economy is stationary and the underlying process governing aggregate uncertainty Markov, we provide Markov representations of the equilibria.Table of notation Agents' characteristics space ( ) - A Action space of each agent (aA) - Y Y = x A - Aggregate distribution on agents' characteristics - (X) Space of probability measures onX - C(X) Space of continuous functions onX - _X Family of Borel sets ofX - State space of aggregate uncertainty ( ) - x _t=1 aggregate uncertainty for the infinite game - = (₁,₂,...,_t,...) - ^{t t} (₁, ₂,..., _t) - L₁(^t,C ×A),v _t Normed space of measurable functions from ^t toC( x A) - 8o(^t,( x A)) Space of measurable functions from ^tto( x A) - X^t X^t= x _s=1 ^t X - _X ^t Borel field onX ^t - v Distribution on - v_t Marginal distribution of v on ^t - v(^t)((¦^t)) Conditional distribution on given ^t - v^t(^s)(v_t(¦^s)) Conditional distribution on ^t given ^s (wheres) - _t Periodt distributional strategy - Distributional strategy for all periods =(₁,₂,...,_t,...) - _t Transition process for agents' types - ( _t,^t,y)(P _t+1(, _t , ^t ,y)) Transition function associated with _t - u _t Utility function - V _t (, a, , ^t) Value function for each collection (, a, , ^t ) - W _t (, , ^t ) Value function given optimal action a - C() Consistency correspondence. Distributions consistent with and characteristics transition functions - B() Best response correspondence (which also satisfy consistency) - E Set of equilibrium distributional strategies - x _t=1 ( ^t , (x A)) - S Expanded state space for Markov construction - (, a, ) Value function for Markov construction - P( _t ^* , _t y)(P(, _t ^* , _t , _y )) Invariant characteristics transition function for Markov game We wish to acknowledge very helpful conversations with C. d'Aspremont, B. Lipman, A. McLennan and J-F. Mertens. The financial support of the SSHRCC and the ARC at Queen's University is gratefully acknowledged. This paper was begun while the first author visited CORE. The financial support of CORE and the excellent research environment is gratefully acknowledged. The usual disclaimer applies.     

Full price competition and Dupuit's defense of the long-and-short-haul “discrimination”

Condemnation of the long-and-short-haul discrimination has been nearly ubiquitous in the literature on economic theory and transportation. However, the French economist Dupuit developed a case against all transport regulation by relating it to a defense of the practice of place discrimination before the middle of the nineteenth century. He did so, moreover, within an early elaboration of a full price explanation of competitive functioning. This paper analyzes the idea in Dupuit's context and argues that this so-called form of price discrimination is actually an efficient and necessary form of the competitive process.     

Nachfragesysteme für österreich

Summary This paper gives an empirical reexamination of the Linear-Expenditure-hypothesis for Austria. It starts with a brief theoretical discussion of the principal properties and restrictions of the Linear-Expenditure-System (LES). To obtain empirical estimates of the parameters of the LES two different estimation procedures are applied, i.e. the original method used byStone and a simplified version of the Systems-Least-Squares-approach (following theMarquardt-algorithm). There are no essential differences between these estimates. They all seem plausible and satisfy the theoretical restrictions.Usually the stability (i.e. time-invariance) of the parameters is accepted without proof. Using the Moving-Window-Regression-technique, however, most of the estimates vary significantly in time. To obtain a direct proof of the time-dependence of the parameters the LES is reestimated now including trend-factors. Especially results considering time-dependent marginal-budget-shares are considerably better than the static-model results.The conclusion of this paper is that the static version of the LES does not explain the consumer behaviour in Austria and that much more effort should be spent on the estimation of dynamic demand systems.     

Augmented serial rules for an excludable public good

Summary. We present a new class of rules named augmented serial rules for the provision of an excludable public good. First, we characterize this class by the four axioms of strategy-proofness, envy-freeness, access independence, and nonbossiness. Second, we identify two important subclasses by imposing an additional axiom: (i) anonymous augmented serial rules by anonymity, and (ii) Moulins serial rule by individual rationality.Received: 31 December 2002, Revised: 9 June 2004, JEL Classification Numbers: D71, D82, H41.This paper is a substantial revision of Serial cost sharing with simple games. I would like to thank Hervé Moulin, Yoshikatsu Tatamitani, an associate editor, and three anonymous referees for helpful suggestions and detailed comments. This research was partially supported by the Ministry of Education, Culture, Sports, Science, and Technology in Japan (Grant-in-Aid for 21st Century COE Program Microstructure and Mechanism Design in Financial Markets).     

Endogenous Entry and Exit in Common Value Auctions

We develop and experimentally test a model of endogenous entry, exit, and bidding in common value auctions. The model and experimental design include an alternative profitable activity (a safe haven) that provides agentspecific opportunity costs of bidding in the auction. Each agent chooses whether to accept the safe haven income or forgo it in order to bid in the auction. Agents that enter the auction receive independently-drawn private signals that provide unbiased estimates of the common value. The auctioned item is allocated to the high bidder at a price that is equal to the high bid. Thus the market is a first-price sealed-bid common value auction with endogenous determination of market size.     

Klassische Nationalökonomie gestern und heute

Ohne ZusammenfassungDieser Artikel ist dieungekürzte Fassung des Beitrages Klassische Nationalökonomie des Verfassers zum Staatslexikon (Band IV).     

From “tax state” to “debt state”

The paper is motivated by Joseph A. Schumpeter's The Crisis of the Tax State. It inquires whether the buildup of government debt in peacetimeprosperity is a threat to the stability, existence or creation of viable tax states. The paper begins by setting out Schumpeter's conception of the tax state and the nature of recent political-economic events which have reinvigorated the concept. Next the paper sets out some simple debt dynamics and sketches a debt-induced business cycle arising from heavy reliance on debt finance in peacetimeprosperity. Finally, the paper assesses threats to the tax state in light of recent work on path dependence and positive feedback. An attempt is made to throw some light on whether the plethora of new, and often small, states spawned by the demise of communism can be viable tax states.Essay on Government, the Tax State and Economic Dynamics submitted to the Third Schumpeter Prize Competition.     

Convention, Social Order, and the Two Coordinations

The word coordination has two meanings, and thesemeanings are often conflated. One meaning, associated with ThomasSchelling, is seen in situations like choosing whether to driveon the left or the right; the drivers must coordinate to eachother's behavior. The other meaning, associated with FriedrichHayek, means that a concatenation of activities is arranged soas to produce good results. Along with the Schelling sense ofcoordination comes the notion of convention, such as drivingon the right. Some conventions are consciously designed; othersemerge without design (or are emergent). Along with the Hayeksense of coordination comes the notion of social order. Somesocial orders, such as the skeleton of activities within thefirm or within the hypothetical socialist economy, are consciouslyplanned. Other social orders, such as the catallaxy of the freesociety, function without central planning (or are spontaneous).Distinguishing between the two coordinations (and, in parallelfashion, between convention and social order) clarifies thinkingand resolves some confusions that have arisen in discussionsof coordination and spontaneous order. The key distinctionsare discussed in the context of the thought of, on the one hand,Menger, Schelling, David Lewis, and the recent path-dependencetheorists, and, on the other hand, Smith, Hayek, Polanyi, Coase,and the modern Austrian economists. The paper concludes witha typology that encompasses the several distinctions.     

Impact of regulation on demand side conservation programs

This paper reviews critically the economics of utility demand-side conservation programs under different regulatory regimes introducing a service-oriented framework in order to derive simultaneously the demand for electricity and for efficiency. This framework establishes a relation between engineering efficiency improvements, the rebound effect (i.e., more efficient appliances tend to increase the service demand), and actual conservation. Price-cap regulation, which is consistent with least cost planning (LCP), leads to the necessary condition for (profitable) DSM that the price cap does not cover the marginal costs of supplying electricity. The difference between the marginal costs and the price cap determines the upper bound on the costs of a negawatt. This necessary condition for LCP cannot be met within the traditional model of rate-of-return regulation so that other incentives (shared saving) induce the utility to undertake DSM. A profit-maximizing, regulated utility subverts the DSM expenditures to inflate the rate base yet minimizing the impact on revenues. Therefore, a rate-of-return regulated utility might favor inefficient conservation programs, which helps to explain that the costs of actual conservation exceed the a priori expectations by far. Finally, DSM as a permanent option will increase free riding substantially, due to strategic consumer reactions.I acknowledge discussions with Reinhard Haas and suggestions from the editor of the journal, Professor Michael A. Crew. I am particularly grateful for the extensive, constructive and, in the end, very helpful comments from an anonymous referee.     

Risk Aversion, Intergenerational Equity and Climate Change

The paper investigates a climate-economy model with an iso-elastic welfare function in which one parameter measures relative risk-aversion and a distinct parameter measures resistance to intertemporal substitution.We show both theoretically and numerically that climate policy responds differently to variations in the two parameters. In particular, we show that higher but lower leads to increase emissions control. We also argue that climate-economy models based on intertemporal expected utility maximization, i.e. models where = , may misinterpret the sensitivity of the climate policy to risk-aversion.     

Auction markets for dispatchable power: How to score the bids

Competitive bidding for electric generating capacity is becoming based on economic dispatch rather than the PURPA must-take norm. Incorporating economic dispatch into bidding requires different price scoring procedures. The avoided cost of a dispatchable project is determined by the energy price offered. Price scoring methods based on a percentage of avoided cost approach are uneconomically biased against baseload projects, because they neglect the duration effects of their dispatch. This bias is illustrated in a simple model of economic dispatch. A number of utilities use the percentage of avoided cost method for dispatchable capacity. They can correct the bias by using a net benefits per kW measure of economic value.