DIRECTED SEARCH,COORDINATION FAILURE,AND SELLER PROFITS: AN EXPERIMENTAL COMPARISON OF POSTED PRICING WITH SINGLE AND MULTIPLE PRICES

We experimentally examine posted pricing and directed search. In one treatment, capacity‐constrained sellers post fixed prices, which buyers observe before choosing whom to visit. In the other, firms post both “single‐buyer” (applied when one buyer visits) and “multibuyer” (when multiple buyers visit) prices. We find, based on a 2 × 2 (two buyers and two sellers) market and a follow‐up experiment with 3 and 2 × 3 markets, that multibuyer prices can be lower than single‐buyer prices or prices in the one‐price treatment. Also, allowing the multibuyer price does not affect seller profits and increases market frictions.     

The Stability of Price Dispersion under Seller and Consumer Learning*

In many markets, it is possible to find rival sellers charging different prices for the same good. Earlier research has attempted to explain this phenomenon by demonstrating the existence of dispersed price equilibria when consumers must make use of costly search to discover prices. We ask whether such equilibria can be learned when sellers adjust prices adaptively in response to current market conditions. With consumer behavior fixed, convergence to a dispersed price equilibrium is possible in some cases. However, once consumer learning is introduced, the monopoly outcome first found by Diamond (Journal of Economic Theory3 (1971), 156–68) is the only stable equilibrium.     

Social Insurance and Redistribution with Moral Hazard and Adverse Selection*

Rochet (1991) showed that with distortionary income taxes, social insurance is a desirable redistributive device when risk and ability are negatively correlated. This finding is re‐examined when ex post moral hazard and adverse selection are included, and under different informational assumptions. Individuals can take actions influencing the size of the loss in the event of accident (or ill health). Social insurance can be supplemented by private insurance, but private insurance markets are affected by both adverse selection and moral hazard. We study how equity and efficiency considerations should be traded off in choosing the optimal coverage of social insurance when those features are introduced. The case for social insurance is strongest when the government is well informed about household productivity.     

Pricing and price competition in consumer markets

This paper offers a simple model of the price mechanism in markets where buyers take prices as given and prices are set by sellers, as in most consumer markets. It explains price competition by arguing that a market price goes down if—and only if—a price cut appears profitable to a firm even if its competitors follow suit. It also explains why markets do not always clear, that is, why production can be restricted by sales and not capacity at prices set by firms.     

Moral hazard,insurance claims,and repeated insurance contracts

Abstract The paper develops a simple model of repeated automobile insurance contracts, providing a framework for analyzing changes in aggregate insurance data in periods of changes that affect driver incentives. Experience rating of premiums gives drivers an incentive to exert effort to avoid accidents (ex ante moral hazard), and an incentive to hide accidents (ex post moral hazard). The empirical analysis, using data from the competitive insurance markets in Ontario and Alberta over a period of major legislative changes in Ontario, suggests that much of the recent decline in accidents in Ontario was due to an increased incentive to hide accidents.     

Information Asymmetries and Risk Management in Healthcare Markets: The U.S. Affordable Care Act in Retrospect

This article critically examines the pertinent issues in ex ante and ex post moral hazard in healthcare markets, with the U.S. Affordable Care Act (ACA) as its focal point of inquiry. First, it compares the various types of information asymmetries resulting from the production, allocation, and utilization of health insurance. Second, it reviews the literature on adverse selection, moral hazard, and risk mitigation against which salient ACA reforms are analyzed. In contrasting conventional moral hazard from an alternative theory of welfare maximization, it suggests that healthcare (over)utilization cannot necessarily be considered wasteful, even if it ends up costing insurers more on a short-term basis. Costs and savings attributable to healthcare spending under the ACA will vary between the consumer, insurer, and regulator-subsidizer. Despite the ambiguities surrounding definitions of “health,” the challenge of containing inefficient moral hazard, and encouraging its desirable counterpart, lies in the tradeoffs that arise between consumer access to affordable and quality healthcare and the market competitiveness of health insurers. The new Trump administration will have to address these tradeoffs in repealing and replacing the ACA, particularly in light of escalating insurance premiums and deductibles, narrower provider networks, and technical implementation issues.     

Hangovers

This paper analyzes a process by which a market boom brought on by a temporary increase in the flow of buyers, can subsequently lead to a collapse of liquidity (speed of sale), prices and production to levels lower than before the onset of the boom. I consider a general model of markets subject to search frictions in the matching of buyers and sellers, where the entry of buyers and sellers (through production) are subject to adjustment costs. The resulting co-movement between unemployment, inventories and sales with the production cycle matches the stylized facts.     

The Impact of Price Regulation on the Cost of Capital

This paper investigates how price regulation under moral hazard can affect a regulated firm's cost of capital. We consider stylized versions of the two most typical regulatory frameworks that have been applied in the most recent decades by regulators: Price Cap and Cost of Service. We show that there is a trade‐off between lower operational costs and a higher cost of capital under Price Cap regulation and higher operational costs and a lower cost of capital under Cost of Service regulation. As a result, when the extent of moral hazard is not significant, Price Cap regulation generates lower welfare than does Cost of Service regulation.     

Equity home bias,incomplete financial markets,and nominal rigidities

Abstract This paper analyzes optimal portfolio decisions in a monetary open‐economy framework. It is found that market completeness and the specific form of nominal rigidities, namely, nominal price vs. nominal wage rigidities, matter for justifying the observed structure of equity holdings. When markets are complete, sticky prices generate a negative correlation between the non‐diversifiable labour income and the profit of domestic firms with respect to the productivity shocks, which explains why households invest little abroad. In contrast, when markets are incomplete, rigidities in goods prices result in a counterfactual ‘super home bias’, because domestic equities provide a good hedge against not only the labour income risk but also the relative price risk. Wage rigidities, however, have the opposite effect. Therefore, nominal rigidities in both goods prices and wage rates are needed to address the empirical composition of gross equity positions under incomplete markets.     

The (Q,S,s) pricing rule: a quantitative analysis

Are nominal prices sticky because menu costs prevent sellers from continuously adjusting their prices to keep up with inflation or because search frictions make sellers indifferent to any real price over some non-degenerate interval? The paper answers the question by developing and calibrating a model in which both search frictions and menu costs may generate price stickiness and sellers are subject to idiosyncratic shocks. The equilibrium of the calibrated model is such that sellers follow a (Q,S,s) pricing rule: each seller lets inflation erode the effective real value of the nominal prices until it reaches some point s and then pays the menu cost and sets a new nominal price with an effective real value drawn from a distribution with support [S, Q], with s < S < Q. Idiosyncratic shocks short-circuit the repricing cycle and may lead to negative price changes. The calibrated model reproduces closely the properties of the empirical price and price-change distributions. The calibrated model implies that search frictions are the main source of nominal price stickiness.     

Shrouding Add‐On Information: An Experimental Study*

We explore how increased competition affects firms’ obfuscation strategies in a laboratory experiment. Firms sell a base good and an add‐on product. Besides choosing the base‐good price, sellers take an action that mimics the effects of shrouding the add‐on product. Shrouding is an equilibrium but an unshrouding equilibrium coexists. In our experiment, more competition matters, in that only duopolistic markets are frequently shrouded whereas four‐firm markets are not. With repeated interaction, shrouding rates do not increase. However, the opportunities to shroud facilitate tacit collusion on the base‐good price for the duopolies: the unshrouding equilibrium serves as a credible punishment if deviations occur.     

THE PUZZLING DIVERGENCE OF RENTS AND USER COSTS, 1980–2004

This paper demonstrates that, in the context of U.S. housing data, rents and ex ante user costs diverge markedly—in both growth rates and levels—for extended periods of time, a seeming failure of arbitrage and a puzzle from the perspective of standard capital theory. The tremendous volatility of even appropriately‐smoothed ex ante annual user cost measures implies that such measures are unsuitable for inclusion in official price statistics. The divergence holds not only at the aggregate level, but at the metropolitan‐market level as well, and is robust across different house price and rent measures. But transactions costs matter: the large persistent divergences did not imply the presence of unexploited profit opportunities. In particular, even though detached housing is readily moved between owner and renter markets, and the detached‐unit rental market is surprisingly thick, transactions costs would have prevented risk‐neutral investors from earning expected profits by buying a property to rent out for a year, and would have prevented risk‐neutral homeowners from earning expected profits by selling their homes and becoming renters for a year. Finally, computing implied appreciation as a residual yields a house price forecast with huge errors; but either longer‐horizon or no‐real‐capital‐gains forecasts—which turn out to have similar forecast errors—imply a far less divergent user cost measure which might ultimately be useful for official price statistics. Some conjectures are offered.     

COMPETITIVE PRICING AND EFFICIENCY IN SEARCH EQUILIBRIUM*

We consolidate and generalize some results on price determination and efficiency in search equilibrium. Extending models by Rubinstein and Wolinsky and by Gale, heterogeneous buyers and sellers meet according to a general matching technology and prices are determined by a general bargaining condition. When the discount rate r and search costs converge to 0, we show that prices in all exchanges are the same and equal the competitive, market clearing, price. Given positive search costs, efficiency obtains iff bargaining satisfies Hosios' condition and r=0. When prices are set by third‐party market makers, however, we show that search equilibrium is necessarily efficient.     

声誉、搜寻成本与网上交易市场均衡

本文在搜寻理论的框架内分析了在卖家声誉存在差异的情况下,网上拍卖市场搜寻成本对价格水平和价格离差的影响,进而考察了搜寻成本对网上市场声誉机制的影响。本文的结论是:尽管搜索工具提高了网上交易市场的效率,但网上交易市场仍存在不可忽视的搜寻成本;较高的搜寻成本导致不同声誉水平的卖家同时存在于网上交易市场,高声誉卖家制定的价格较高,低声誉卖家制定的价格较低;搜寻效率的提高可以降低均衡价格水平,网站提供的推广服务也可以降低搜寻成本,降低均衡价格水平。模型很好地解释了网上拍卖市场中的一些现象,也与最近文献的经验事实有较好的吻合。     

Search less for a better price

In many markets, sellers must spend resources to learn the costs of providing goods/services. This paper considers consumer searches in such markets. The findings show that: (i) even with ex ante identical consumers and sellers, there is price dispersion in the equilibrium, (ii) despite price dispersion and minimal search costs, it could be optimal to search just two sellers and (iii) the optimal number of searches can increase with sellers' information costs.     

On input market surplus and its relation to the downstream market game

Abstract In order to analyze the welfare effects of price changes in input markets – following for example a price‐fixing conspiracy – economists have studied the relationship between the surplus measured in the input markets and the surplus in the output markets. The latest results hinge on simplifying assumptions, which are relaxed here by linking the input markets surplus question to another stream of literature, which characterizes functions that oligopolists collectively, yet unintentionally, maximize. It is shown that the area under the input demands is equal to the change in a function for which critical points coincide with the equilibria of the downstream game. A particular case of these functions is the exact potential function.     

Optimal food price stabilisation policy

This paper proposes a framework for designing optimal food price stabilisation policies in a self-sufficient developing country. It uses a rational expectations storage model with risk-averse consumers and incomplete markets. Government stabilises food prices by carrying public stock and by applying a state-contingent subsidy/tax to production. The policy rules are designed to maximise intertemporal welfare. The optimal policy under commitment crowds out all private stockholding activity by removing the profit opportunity from speculation. The countercyclical subsidy/tax to production helps price stabilisation by subsidising production in periods of scarcity and by taxing it in periods of glut. It contributes little to welfare gains, most of which come from stabilisation achieved through public storage.     

An experimental comparison of two search models

Summary. We report an experiment designed to investigate markets with consumer search costs. In markets where buyers are matched with one seller at a time, sellers are predicted to sell at prices equal to buyers' valuations. However, we find sellers post prices that offer a more equal division of the surplus, and these prices tend to be accepted, while prices closer to the equilibrium prediction are rejected. At the other extreme, sellers are predicted to sell at a price equal to marginal cost when buyers are matched with two sellers at a time. Here, we find prices are closer to, but still significantly different from, the equilibrium prediction. Thus, our results support theoretical comparative static, but not point, predictions.     

Search costs and the severity of adverse selection

In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If search costs are not negligible, sellers׳ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can mitigate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.