Interconnection and competition among asymmetric networks in the Internet backbone market

We examine the interrelation between interconnection and competition in the Internet backbone market. Networks that are asymmetric in size choose among different interconnection regimes and compete for end-users. We show that a direct interconnection regime, peering, softens competition as compared to indirect interconnection since asymmetries become less influential when networks peer. If interconnection fees are paid, the smaller network pays the larger one. Sufficiently symmetric networks enter a Peering agreement while others use an intermediary network for exchanging traffic. This is in line with considerations of a non-US policy maker. In contrast, US policy makers prefer that relatively asymmetric networks peer.     

Bargaining with asymmetric information in non-stationary markets

Summary. The Rubinstein and Wolinsky bargaining-in-markets framework is modified by the introduction of asymmetric information and non-stationarity. Non-stationarity is introduced in the form of an arbitrary stochastic Markov process which captures the dynamics of market entry and pairwise matching. A new technique is used for establishing existence and characterizing the unique outcome of a non-stationary market equilibrium. The impact of market supply and demand on bilateral bargaining outcomes and matching probabilities is explored. The results are useful for examining such questions as why coordination failures and macroeconomic output fluctuations are correlated with real and monetary shocks. Received: July 22, 1994; revised version: January 21, 1998     

Profits and competition under alternative technologies in a unionized duopoly with product differentiation

This paper aims at investigating if the conventional wisdom (i.e. an increase of competition linked to a decrease in the degree of product differentiation always reduces firms׳ profits) can be reversed in a unionized duopoly model. We show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the firms׳ production technology and the mode of competition in the product market. Specifically, under constant returns to labour, the “reversal result” can apply under both Cournot and Bertrand competition, but it is more likely when firms compete in quantities. By contrast, under decreasing returns, profits can increase with competition but only if firms compete in prices.     

Optimal pollution taxation in a Cournot duopoly

It is well known that the optimal pollution tax in a competitive industry is equal to the marginal damage inflicted by the pollution. It has also been shown that the optimal pollution tax on a monopoly is less than the marginal damage. In this paper, I derive the optimal pollution tax for a Cournot duopoly. If firms have different production costs, the optimal tax rate may exceed the marginal damage. This is so because the tax may be an effective instrument for allocating production from the less to the more efficient firm. It is also shown that, if one firm has a positive most preferred pollution tax, the sum of consumer and producer surpluses will be declining in the tax at this level.     

Partial privatization in mixed duopoly

We investigate a quantity-setting duopoly involving a private firm and a privatized firm jointly owned by the public and private sectors. The private firm maximizes profits, while the privatized firm takes both profits and social welfare into consideration. We consider how many shares the government should hold in the privatized firm. We find that neither full privatization (the government does not hold any shares) nor full nationalization (the government holds all of the shares) is optimal under moderate conditions.     

Asymmetric information and survival in financial markets

Summary. In the evolutionary setting for a financial market developed by Blume and Easley (1992), we consider an infinitely repeated version of a model á la Grossman and Stiglitz (1980) with asymmetrically informed traders. Informed traders observe the realisation of a payoff relevant signal before making their portfolio decisions. Uninformed traders do not have direct access to this kind of information, but can partially infer it from market prices. As a counterpart for their privileged information, informed traders pay a per period cost. As a result, information acquisition triggers a trade-off in our setting. We prove that, so long as information is costly, uninformed traders survive.JEL Classification Numbers: D50, D82, G14.I am deeply indebted to Luca Anderlini for his helpful guidance. I also benefited from discussion with Larry Blume, David Easley, Jayasri Dutta, Thorsten Hens, Hamid Sabourian, Klaus Reiner Schenk-Hoppé and Hyun Song Shin. Useful comments came from an anonymous referee and participants to seminars in Barcelona, Bielefeld, Cambridge, Manchester, Oxford, Rotterdam, Venice, Zurich, to the PhD Awards Italian tour in Rome, Naples, Padova and Milan, and to ESEM99 and EEA99 in Santiago de Compostela.     

Price discrimination and price dispersion in a duopoly

This paper analyses the problem of price discrimination in a market where consumers have heterogeneous preferences both over a horizontal parameter (brand) and a vertical one (quality). Discriminatory contracts are characterized for different market structures. It is shown that price dispersion, i.e. the observed range of prices for each class of customers, increases almost everywhere as competition is introduced in the market.     

The role of externalities and information aggregation in market collapse

We examine the role that belief, network externality, and information aggregation play in inefficient market collapses. After receiving consecutive negative shocks, some ex-ante identical Bayesian agents will be discouraged about the unknown state of the market they invest; therefore, they will stop investing. This decision will have two effects: first, it will cause agents to aggregate information through social/observational learning; second, it will decrease the network externality effect. We show that there might be an inefficient market collapse if the externality effect diminishes too much, and the cost of re-entry to the market is too high. We also analyze the effects of strategic delay and experimentation on the exit decision of the agents. I especially thank Thomas D. Jeitschko, Matthew Mitchell, B. Ravikumar Ted Temzelides. I also thank anonymous referees, an associate editor, John Conlon, Larry Samuelson, Troy Tassier, Stephen Williamson, and seminar participants of the University of Saskatchewan, Georgia Tech, Concordia University, University of Manitoba, Iowa Alumni Workshop, Midwest Economic Theory Conferences held at Indiana Bloomington, and Notre Dame, and 1st International Conference on Business, Management and Economics organized by Yasar University.     

Market games with asymmetric information: the core

This paper concerns cores of economies with asymmetric information. Alternative definitions of the information available to traders in coalitions and the cooperative games they generate are analyzed. An important technical result states that such NTU games in characteristic function form are well defined. Properties of various cores with asymmetric information are examined. Sufficient conditions on information sharing rules are provided for the induced games to be totally balanced or balanced, so that their cores are nonempty. Incentive compatibility issues are considered. Finally, a perspective on this research area is provided.     

Mixed ownership in a mixed duopoly with differentiated products

We determine optimal privatization in a symmetric differentiated duopoly when the public firms do not bear the full cost of production and hence their objective functions differ from the government’s objective function. In the social optimum firms will generally have mixed ownership, and it will depend on the type of uncovered cost, the degree of substitutability of the two products and the output decision rule of the partially public firms. Different types of mixed duopoly emerge, ranging from both firms being partially privatized, to one being fully privatized. We also derive an optimal tax-subsidy scheme as a substitute for privatization.      

The value of information in asymmetric all-pay auctions

This note analyzes a two-player all-pay auction with incomplete information. More precisely, one bidder is uncertain about the size of the initial advantage of his rival modeled as a head start in the auction.I derive the unique Bayesian Nash equilibrium outcome for a large class of cumulative distribution functions of the head start. The stronger player generates an informational rent if and only if his head start distribution is not stochastically dominated by a uniform distribution. I identify why my results for an uncertain head start differ qualitatively from uncertainty about a cost function or a valuation.     

On the superiority of fixed fee over auction in asymmetric markets

It is well known that selling licenses for the use of a cost-reducing innovation by auction yields a higher revenue compared to fixed fee in a symmetric Cournot industry. In this note we show that this result can be reversed in an asymmetric Cournot industry, i.e., the fixed fee policy can generate a strictly higher revenue than the auction policy in an industry where prior to the innovation firms are cost-asymmetric.     

Price regulation in insurance markets with asymmetric information

The paper presents and discusses a regulatory policy in insurance markets. It is based upon a two-sided rule: each company must propose at least one contract with full coverage and a ceiling is imposed on the level of premiums.     

Subsidizing cooperative and noncooperative R&D in duopoly with spillovers

Comparing the effect on private R&D investments of allowing firms to cooperate in R&D with that of providing R&D subsidies reveals that in general the latter policy is more effective than the former in promoting R&D activity. Analyzing the implementation of both policies simultaneously reveals that subsidizing cooperative and noncooperative R&D leads to the same market outcome. The preferred R&D-stimulating policy is to subsidize optimally an agreement according to which firms only share the outcomes of their independent research.     

Production and financial policies under asymmetric information

We propose an extension of the standard general equilibrium model with production and incomplete markets to situations in which (i) private investors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into ‘sectorial’ funds. In our model the financial policy of the firm is not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of asymmetric information. We also illustrate the properties of the model in three simple examples. We would like to thank Alberto Bisin, Armando Dominioni, Piero Gottardi, Tito Pietra, Paolo Siconolfi, and an anonymous referee for useful suggestions and comments.     

Perfect competition in asymmetric information economies: compatibility of efficiency and incentives

The idea of perfect competition for an economy with asymmetric information is formalized via an idiosyncratic signal process in which the private signals of almost every individual agent can influence only a negligible group of agents, and the individual agents’ relevant signals are essentially pairwise independent conditioned on the true states of nature. Thus, there is no incentive for an individual agent to manipulate her private information. The existence of incentive compatible, ex post Walrasian allocations is shown for such a perfectly competitive asymmetric information economy with or without “common values”. Consequently, the conflict between incentive compatibility and Pareto efficiency is resolved exactly, and its asymptotic version is derived for a sequence of large, but finite private information economies.     

Elimination of arbitrage states in asymmetric information models

In a financial economy with asymmetric information and incomplete markets, we study how agents, having no model of how equilibrium prices are determined, may still refine their information by eliminating sequentially “arbitrage state(s)”, namely, the state(s) which would grant the agent an arbitrage, if realizable.      

Incentives in market games with asymmetric information: the core

Summary. This paper examines the ex ante core of a pure exchange economy with asymmetric information in which state-dependent allocations are required to satisfy incentive compatibility. This restriction on players' strategies in the cooperative game can be interpreted as incomplete contracts or partial commitment. An example is provided in which the incentive compatible core with nontransferable utility is empty; the game fails to be balanced because convex combinations of incentive compatible net trades can violate incentive compatibility. However, randomization of such strategies leads to ex post allocations which satisfy incentive compatibility and are feasible on average. Hence, convexity is preserved in such a model and the resulting cooperative games are balanced. In this framework, an incentive compatible core concept is defined for NTU games derived from economies with asymmetric information. The main result is nonemptiness of the incentive compatible core. Received: December 26, 2001; revised version: June 11, 2002 RID="*" ID"*" This work was financed, in part, by contract No 26 of the programme “P?le d'attraction interuniversitaire” of the Belgian government, and, in part, by research grant SBR93-09854 from the U.S. National Science Foundation. Much of my thinking about this topic was developed during a wonderful visit to CORE for the 1991–1992 academic year (on sabbatical from the University of Pennsylvania). This paper was originally circulated in December 1991 as CARESS Working Paper #91-38, Center for Analytic Research in Economics and the Social Sciences, Department of Economics, University of Pennsylvania and in February 1992 as CORE Discussion Paper 9221, Center for Operations Research and Econometrics, Université Catholique de Louvain, Louvain-la-Neuve, Belgium. RID="*" ID="*" At the very start of my research, Jean-Fran?ois Mertens was almost a co-author. Fran?ois Forges provided detailed comments at a later stage, during my visit to THEMA, Université Cergy-Pontoise, in Spring 1997. They are entitled to the customary disclaimer.     

Learning with noiseless information and payoff-relevant signals

Summary. In models of active learning or experimentation, agents modify their actions to affect the distribution of a signal that provides information about future payoffs. A standard result in the experimentation literature is that agents experiment, if at all, to increase information. This finding is a direct consequence of Blackwell's theorem: one experiment is more informative than another if and only if all expected utility maximizers prefer to observe the first. Blackwell's theorem presupposes, however, that the observed signal only conveys information and does not directly affect future payoffs. Often, however, signals are directly payoff relevant, a phenomenon that we call signal dependence. For example, if a firm is uncertain about its demand and uses today's sales as a signal of tomorrow's demand, then that signal may also directly affect tomorrow's profit if the good is durable or if consumers form consumption habits. Datta, Mirman and Schlee [9] and Bertocchi and Spagat [4] show that, if the signal is payoff relevant, experimentation may indeed reduce information. Here we show that, despite the inapplicability of Blackwell's Theorem, agents always experiment to increase information if the information structure is noiseless: given the true value of the unknown parameter, the signal realization is deterministic. We then apply our framework to analyze Lazear's [16] model of retail clearance sales, a model with both signal dependence and noiseless information. Received: February 19, 1999; revised version: August 11, 1999     

Global environment and dynamic games of environmental policy in an international duopoly

This paper examines a differential game model of international pollution control in which polluting oligopolists compete in a third country market. Two alternative policy instruments (emission taxes and command-and-control regulations) are considered. A tougher emission policy in the home country enhances the foreign firm’s competitiveness because of the static “rent-shifting” effect. The foreign country also enjoys a future improvement of the global environmental quality by “free riding” on the home country’s emission reduction effort. Because of these strategic effects, the levels of environmental policy determined in the noncooperative policy game are distorted away from the socially optimal level. Moreover, the emission tax game produces a more distortionary outcome than that in the command-and-control game; it generates more pollution and lower welfare.