Group incentive compatibility in a market with indivisible goods

In a market where each trader has one unit of an indivisible good, there are procedures for exchanging goods which result in competitive allocations. One of these procedures, the top trading cycle, has the property that it is in each trader's best interest to report his true preferences over the set of goods. This note shows that no subset of traders can misrepresent their preferences and improve the allocation for all members of the subset. Additionally, if there are no indifferences in the preferences, then some traders in a subset that misrepresents preferences do worse.     

Random competitive exchange: Price distributions and gains from trade

This paper studies the behavior of a competitive exchange under uncertain preferences and random indivisible endowments. We obtain explicit closed-form results for the price distribution and expected gains from trade, both for case where the market is “thin” and the number of traders is low, and for the asymptotic case where the number of traders tends to infinity. We demonstrate that increasing the number of traders reduces price variability and increases the expected gains from trade, and that increasing the variability of traders' reservation prices increases price variability as well as the expected asymptotic gains from trade.     

Price competition, quality and income disparities

A market is considered, the demand side of which consists of a large number of consumers with identical tastes but different income levels, and the supply side, of two firms selling at no cost products which are relatively close substitutes for each other. Consumers are assumed to make indivisible and mutually exclusive purchases. A full characterization of the demand structure and the non cooperative market solution is given, and the dependence of the latter on income distribution and quality parameters is analyzed.     

Public Information Quality with Monopolistic Sellers

We show that in markets with asymmetric information, even if there is full agreement on the choice of optimal information quality, entrusting the choice of (unverifiable) public information quality to traders who benefit from such information leads to inefficiencies. However, delegation of information quality choice to an independent agent who is precluded from sharing in trading profits results in efficient implementation. This result provides a game-theoretic rationale for current institutional arrangements where a private organization that is independent of market traders, the Financial Accounting Standards Board, determines the standards for public disclosures.Journal of Economic LiteratureClassification Numbers: D41, D42, D82.     

Strategic freedom, constraint, and symmetry in one-period markets with cash and credit payment

Summary. In order to explain in a systematic way why certain combinations of market, financial, and legal structures may be intrinsic to certain capabilities to exchange real goods, we introduce criteria for abstracting the qualitative functions of markets. The criteria involve the number of strategic freedoms the combined institutions, considered as formalized strategic games, present to traders, the constraints they impose, and the symmetry with which those constraints are applied to the traders. We pay particular attention to what is required to make these strategic market games well-defined, and to make various solutions computable by the agents within the bounds on information and control they are assumed to have. As an application of these criteria, we present a complete taxonomy of the minimal one-period exchange economies with symmetric information and inside money. A natural hierarchy of market forms is observed to emerge, in which institutionally simpler markets are often found to be more suitable to fewer and less-diversified traders, while the institutionally richer markets only become functional as the size and diversity of their users gets large.Received: 5 June 2003, Revised: 18 November 2003, JEL Classification Numbers: C7, G10, G20, L10, D40, D50. Correspondence to: Eric SmithEric Smith, Martin Shubik: We are grateful to Lloyd Shapley, Duncan Foley, and Doyne Farmer for discussions in the course of this work.     

Endogenous market segmentation with heterogeneous agents

Summary. An explanation is provided for the evolution of segmented marketplaces in a pairwise exchange economy. Large traders operating in a pairwise exchange market prefer to meet other similar traders, because this enables them to trade their endowments in a smaller number of encounters. Large and small traders, however, cannot be distinguished a priori, and the existence of the small traders imposes a negative externality on the large traders. We show that, under conditions which are not very restrictive, establishing a separate market (perhaps with an entry fee) designated for the large traders induces the two types of traders to segment themselves. However, this segmentation is not necessarily welfare improving. Received: January 12, 2001; revised version: July 17, 2002 RID="*" ID="*" I wish to thank the participants in the Friday Theory Workshop at the University of Sydney, and the participants at the 17th Australian Theory Workshop at the University of Melbourne for comments and discussion. John Hillas and Stephen King pointed out an omission in an earlier version, and Catherine de Fontenay and Hodaka Morita made extensive comments on earlier drafts. This work was initiated while I was a short-term visitor at the University of Southern California.     

Volatility and Market Risk of Rubber Price in Malaysia: Pre- and Post-Global Financial Crisis

The volatility in rubber price is a significant risk to producers, traders, consumers and others who are involved in the production and marketing of natural rubber. Such being the case, forecasting the rubber price volatility is desired to assist in decision-making in this uncertain situation. The 2008 Global Financial Crisis caused some disruptions and uncertainties in the future supply or demand for natural rubber and thus leading to higher rubber price volatility. Using ARCH-type models, this paper intends to model the dynamics of the price volatility of Standard Malaysia Rubber Grade 20 (SMR 20) in the Malaysian market before and after the Global Financial Crisis. Additionally, Value-at-Risk (VaR) approach is implemented to evaluate the market risk of SMR 20. Our empirical result denotes the existence of volatility clustering and long memory volatility in the SMR 20 market for both crisis periods. Leverage effect is also detected in the SMR 20 market where negative innovations (bad news) have a larger impact on the volatility than positive innovations (good news) for post-crisis period. When tested with Superior Predictive Ability (SPA) test, FIGARCH model is the best model across five loss functions for short- and long-term forecasts for pre-crisis period. Meanwhile, over post-crisis period, FIGARCH and GJR GARCH indicate the superior out-of-sample-forecast results and better forecasting accuracy over short- and long-term horizons, respectively. In terms of market risk, the short trading position encounters higher risk or greater losses than the long trading position at both 1 and 5 % VaR quantile for pre-crisis period. In contrast, over post-crisis period, long traders of rubber SMR 20 tend to face limited gains but unlimited losses.

     

Optimality versus practicality in market design: A comparison of two double auctions

We consider a market for indivisible items with m buyers and m sellers. Traders privately know their values/costs, which are statistically dependent. Two mechanisms are considered. The buyer's bid double auction collects bids and asks from traders and determines the allocation by selecting a market-clearing price. It fails to achieve all possible gains from trade because of strategic bidding. The designed mechanism is a revelation mechanism in which honest reporting of values/costs is incentive compatible and all gains from trade are achieved. This optimality, however, comes at the expense of plausibility: (i) the monetary transfers among the traders are defined in terms of the traders' beliefs about each other's value/cost; (ii) a trader may suffer a loss ex post; (iii) the mechanism may run a surplus/deficit ex post. We compare the virtues of the simple yet mildly inefficient buyer's bid double auction to the flawed yet perfectly efficient designed mechanism.     

Verifying gross substitutability

Summary. In labor market models as well as in exchange economies with indivisible goods gross substitutability is used as a property to guarantee the existence of competitive equilibria. This paper develops an easy way to check gross substitutability for utility functions concerning a finite set of indivisible goods (or employees) and money. Concavity is one of the conditions that has to be satisfied. Only one other, but similar, type of relation must be checked to guarantee gross substitutability. Received: 21 August 2000; revised version: 28 November 2001     

R&D COOPERATION BETWEEN IMPATIENT RIVALS

We analyse R&D cooperation between product‐market competitors within a repeated‐game framework with imperfect monitoring. When firms are patient enough, R&D cooperation is attainable without product‐market collusion. However, if firms are less patient, we show that collusion in the product market is necessary to sustain R&D cooperation. Moreover, consumers can be better off when collusion is allowed in this case.     

Endogenizing market institutions: An experimental approach

We study experimental two-sided markets in which the information structure is endogenous. When submitting an offer, a trader decides which other traders will be informed about the offer. This setup allows both a decentralized bargaining market (Chamberlin, J. Polit. Econ. 56 (1948) 95), and a double auction market (Smith J. Polit. Econ. 70 (1962) 111) as special cases. The results show that offers are typically directed to all traders of the other side of the market, but to none of the traders of the same side of the market. Even though traders receive much less information, the resulting market institution leads to the same outcomes in terms of prices and efficiency as a double auction market. In two additional treatments we examine the robustness of these results. First, it is found that the market institution adapts predictably, but not necessarily efficiently, to the imposition of transaction costs. Second, we find that the preference of sellers to conceal offers from competitors is strict. At the same time, sellers benefit collectively when they reveal offers to each other.     

Games of Fair Division

We consider the problem of fairly allocating an indivisible good to one of several agents equally entitled to it when monetary compensations to the others are possible. Our primary normative concept is no-envy. First, we show that there is no non-manipulable selection from the no-envy solution. Then we study the direct revelation games associated with subsolutions of the no-envy solution. The set of equilibrium allocations of any one of them coincides with the set of envy-free allocations for the true preferences. Journal of Economic Literature Classification Numbers: C72, D63, D7l, D82.     

Incentive compatibility in a market with indivisible goods

In a market in which each trader's initial endowment is one unit of an indivisible good, there exists an incentive compatible procedure for reaching a competitive allocation. This contrasts with some recent results for similar problems.     

TALKING,SEARCHING, AND PRICING*

I study the implications of interpersonal communication for incentives for consumers to acquire information and firms’ pricing behavior. Firms market a homogeneous product and choose its price; consumers acquire price information at some cost to themselves. Also, each consumer accesses the information acquired by a sample of other consumers—interpersonal communication. An exogenous increase in the level of interpersonal communication decreases the information that consumers acquire, and, when search costs are low, firms price less aggressively. In an extension, consumers may choose to invest in interpersonal communication at some cost. A decrease in the costs of interpersonal communication decreases firms’ competition.     

On price competition with complementary goods

We consider a duopoly industry with two separate firms each selling an indivisible product. The joint consumption of these goods has a specific value for the consumers which exceeds the mere addition of utilities when products are consumed in isolation: the higher this excess, the larger the complementarity between the goods. We analyse price equilibria in this market as related to the degree of complementarity existing between the two products.     

STRATEGY‐PROOF ALLOCATION OF INDIVISIBLE GOODS AMONG COUPLES

We consider the problem of allocating indivisible goods among couples. Agents in a couple share the indivisible good assigned to them. The main result is that an allocation rule is strategy‐proof, neutral and non‐bossy if and only if it is serially dictatorial. An allocation rule is serially dictatorial if there is a priority order of couples and a function that identifies who chooses in each couple, such that for all preference profiles, a good assigned to couple i is the best element according to the preference of the identified agent in couple i among the remaining goods when the couples with higher priorities have made their choice.     

MOVIES,MASS CONSUMERS,AND CRITICS: ECONOMICS AND POLITICS OF A TWO‐SIDED MARKET

Most analyses of the film market treat it as a single entity where producers make films based on average consumer interest while critics serve as forecasters or signalers of film quality to these consumers. We describe the film market as two‐sided—a mass market (average consumer) side and a high quality/artistic (cineaste) side—that each influence film maker production decisions and critical reviews as critics balance the preferences of mass market consumers and their own more artistic inclination. Using 1,824 films released during 2000–2014, we examine determinants of box office revenues and critical reviews, while addressing the overlap between them. Our results indicate that consumers and critics respond differently not only to film rating but also to film budgets, story sources, genre, and political content. We then use the dichotomy between average and high quality, artistic film consumers as a basis for understanding the normative views of the film markets relative to other two‐sided markets as well as the political economy of film regulation. (JEL C30, D10, Z11)     

Conservative traders,natural selection and market efficiency

This paper examines the impact of conservative traders on market efficiency in an evolutionary model of a commodity futures market. This paper shows that the long-run market outcome is informationally efficient, as long as in every period there is a positive probability that entering traders are more conservative than their predecessors. Conservative traders are those who correctly predict the spot price with a positive probability, and more importantly, who in their mistakes err on the side of caution, and rarely overpredict the spot price as buyers, and underpredict the spot price as sellers. This result does not require entry of traders with better information than their predecessors.     

Do traders learn to select efficient market institutions?

Experimental Economics - When alternative market institutions are available, traders have to decide both where and how much to trade. We conducted an experiment where traders decided first whether...     

Approximate equilibria in markets with indivisible commodities

This paper presents results on the existence of approximate equilibria in large but finite exchange economies in which all the traders have non-convex consumption sets. As such, the paper gives a natural extension, to the finite economy, of Mas-Colell's results on existence with indivisible commodities and a continuum of agents. It also presents an approximate equilibrium theorem without any assumption of compactness or bounded non-convexity of preferences.