Debt financing,first-mover advantage,and vertical product differentiation

This paper examines the impact of the strategic use of debt financing as a commitment device, in a vertically differentiated duopoly with demand uncertainty. We consider various possible game sequences for two firms with asymmetric financial structures to enter the market. The results show that (i) having access to external debt does not necessarily promote the firm to provide a higher quality product; (ii) strategic debt improves the degree of product differentiation and benefits both firms; and (iii) a firm's optimal debt level is positively related to the first-mover advantage of introducing its product to the market.     

Information precision and asymptotic efficiency of industrial markets

I present a strategic model of a bilateral oligopoly with asymmetric information to examine (i) the validity of the conjecture of price-taking behavior in such markets as the number of agents becomes large and (ii) the effect of the rate that individual information precision decreases with increased number of agents on convergence to price-taking and efficiency. I show that with downstream competition, increasing the number of sellers may make all participants price-takers in the limit, but increasing the number of buyers may not. When the total precision of information in the market is high, price-taking and full social efficiency is achieved in the limit with large numbers of buyers and sellers. However, if the total precision of information in the market is poor, price-taking conjecture may fail and large inefficiencies, including full inefficiency, can occur in the limiting outcome. The rate of decrease of individual information precision with increased number of agents determines the rate of convergence to efficiency, and the convergence is slower than that predicted by single-unit auction models in the literature. I also demonstrate that when the number of sellers or both the number of buyers and the sellers go to infinity, price-taking and information aggregation tend to go together. When the number of buyers goes to infinity, however, information can get aggregated when the agents do not become price-takers in the limit. Albeit, in the latter case, the aggregated information is masked by the noise in the sellers’ signals and the cost variability.     

Information flows within and across sectors in Chinese stock markets

We examine the patterns of information flows within and across sectors of the two Chinese stock exchanges in Shanghai and Shenzhen during 1994–2001. Using the generalized forecast error variance decomposition, we find a high degree of interdependence, indicating that the sectors are highly integrated and sector prices reflect information from other sectors. Industry is the most influential sector in both exchanges, while Finance in Shenzhen is the least integrated with other sectors. Implications of the findings for investors and policymakers are also discussed.     

Firms,shareholders, and financial markets

We study the influence of the financial market on the decisions of firms in the real market. To that end, we present a model in which the shareholders’ portfolio selection of assets and the decisions of the publicly traded firms are integrated through the market process. Financial access alters the objective function of the firms, and the market interaction of shareholders substantially influences firms’ behavior in the real sector. After characterizing the unique equilibrium, we show that the financial sector integrates the preferences of all shareholders into the decisions for production and ownership structure. The participation from investors in the financial market also limits the firms’ ability to manipulate real prices, i.e., there is a loss of market power in the real sector. Note that, while the loss of market power changes expected profits, it is not detrimental to shareholders since the expected return of equity share depends on the variance (and not the mean) of profits. Indeed, any change in expected profits is absorbed by the financial price. We also show that financial access increases production, thereby altering the distribution of profits. In particular, financial access induces firms to take on more risk. Finally, financial access makes the relationship between risk-aversion and risk-taking ambiguous. For example, it is possible that an increase in risk-aversion leads to more risk-taking, i.e., the variance of real profits increases.     

Information flow between prediction markets,polls and media: Evidence from the 2008 presidential primaries

Are the forecast errors of election-eve polls themselves forecastable? We present evidence from the 2008 Democratic Party nomination race between Barack Obama and Hillary Clinton showing that the answer is yes. Both cross-sectional and time series evidence suggests that market prices contain information about election outcomes that polls taken shortly before the contests do not. Conversely, election surprises relative to polls too Granger cause subsequent price movements. We then investigate whether the additional information in prices could come from the media coverage of these campaigns, and uncover a set of complex relationships between pollster’s surprise, price movements, and various aspects of media coverage. Prices anticipate the balance and content of media coverage, but not the volume. On the other hand, it is the volume of media coverage, not the balance or content, that anticipates the surprise element in election outcomes. Moreover, Granger causality between prices and election surprises barely changes after controlling for media coverage, and causality from media volume to surprises persists too after controlling for price movements. Taken together, the results suggest that both prices and the volume of media coverage contain independent election-relevant information that is not captured in polls.     

Optimal pricing of a conspicuous product during a recession that freezes capital markets

This paper considers the problem of how to price a conspicuous product when the economy is in a recession that disrupts capital markets. A conspicuous product in this context is a luxury good for which demand is increasing in brand image. Brand image here means the ability of a consumer to impress observers by conspicuously displaying consumption of the good. Brand image is built up when the good is priced high enough to make it exclusive, and eroded if the good is discounted.Recession is modeled as having two effects: it reduces demand and it freezes capital markets so borrowing is not possible. In pricing the conspicuous product the firm faces the following trade-off. Reducing price helps maintain sales volume and cash flow in the face of reduced demand, but it also damages brand image and thus long-term demand.The paper analyzes the firm's pricing policy facing scenarios of mild, intermediate and severe recessions, while taking the threat of bankruptcy into account. For an intermediate recession the optimal solution is history-dependent. The results have implications for policy interventions in capital markets and for timing of mergers and acquisitions.     

Prediction markets as meta-episteme: Artificial intelligence,forecasting tournaments,prediction markets,and economic growth

This paper presents a speculative framework suggesting that prediction markets (or its epistemic cousins such as artificial intelligence or forecasting tournaments) may constitute a break in the expansion of human knowledge in a manner similar to the impact of the Scientific and Industrial Revolutions. Just as the scientific understanding of the natural world facilitated the development of useful technologies to move far faster than what is allowed by blind evolution and tinkering, tools such as prediction markets allow for scientific knowledge to move faster than its current evolutionary process. The intellectual bases for these tools, such as the interpretation of probabilities as bets, are relatively recent additions to human knowledge, which may have significant implications for how we evaluate past thinkers, versus what is now possible or may be possible in the future.     

Incomplete markets, ambiguity, and irreversible investment

The problem of irreversible investment with idiosyncratic risk is studied by interpreting market incompleteness as a source of ambiguity over the appropriate no-arbitrage discount factor. The maxmin utility over multiple priors framework is used to model and solve the irreversible investment problem. Multiple priors are modeled using the notion of κ‐ignorance. This set-up is used to analyze finitely lived options. For infinitely lived options the notion of constant κ‐ignorance is introduced. For these sets of density generators the corresponding optimal stopping problem is solved for general (in-)finite horizon optimal stopping problems driven by geometric Brownian motion. It is argued that an increase in the set of priors delays investment, whereas an increase in the degree of market completeness can have a non-monotonic effect on investment.     

Information dynamics effects from major world markets to SAARC nations

This paper investigates the impact of major world equity markets on four founding countries of the South Asian Association for Regional Cooperation (SAARC). With a population of 1.47 billion, SAARC is the largest regional organization in the world. However, the issue of global integration of equity markets of the SAARC nations has largely been ignored. This study fills this important gap, adding results towards the ongoing debate concerning the issue of global market integration. After the onset of the financial crises of 2008, this issue is imperative. VAR analysis is used to determine whether there is any dependency of SAARC return on the performance of world equity markets. Further, GARCH-in-mean modeling is used to determine whether there is any evidence of Volatility spillover. It is found that volatility in major world markets do not impact returns in SAARC nation, but ample evidence of volatility spillover is found for India, Bangladesh and Sri Lanka. Similar results are not obtained for Pakistan.     

Depreciation,adverse selection and housing markets

Implications of incomplete buyer and seller information on product quality are considered for the durable goods market. Hypotheses on price paths over a working life for durables of a given vintage are formulated. Some empirical results for single-family dwellings are used to test the hypotheses.     

Seniority, external labor markets, and faculty pay

We estimate the returns to seniority (the wage-tenure profile) for university faculty, and the degree to which these returns respond to entry-level salaries (or opportunity wages)—a relationship unexplored in work to date. Using data on faculty at a Big Ten university (ours), we estimate elasticities of senior-faculty salaries with respect to entry-level salaries, and find that these elasticities decline with seniority. The evidence provides an explanation of faculty salary compression and suggests the importance of controlling for entry-level salaries in obtaining estimates of the returns to seniority.     

Growing through the merger and acquisition

The paper studies with an endogenous growth model how the merger and acquisition (M&A) affects the aggregate growth rate. We model the M&A as a capital reallocation process, which can increase both productivity and growth rates of firms. The model is tractable and greatly consistent with patterns observed in the M&A at the micro level. Matching our model to the data, we find that prohibiting the M&A would lead to the reduction of the aggregate growth rate of US economy by 0.1% and the reduction of the aggregate TFP by 5%.     

Horizontal alliances and the merger paradox

Mergers and alliances are two organizational forms which allow firms to combine complementary capabilities to realize strategic goals; they are, in many cases, strategic substitutes. Managerial decision‐makers, therefore, require a framework for choosing between the two strategies. This paper contributes to this decision‐making process by highlighting one advantage of alliances over mergers. Specifically, while the profitability of a cost‐reducing horizontal merger is diminished by the resulting expansion of non‐merging competitor(s), an alliance, where partners collaborate to reduce costs but sell their product independently, enables its partners to realize the benefits of merging but avoid the problem of strengthening competitors. A model is developed which demonstrates the profitability of establishing such an alliance compared to a merger. The implications of this strategy for antitrust review are briefly discussed. Copyright © 2005 John Wiley & Sons, Ltd.     

Overeducation, regional labor markets, and spatial flexibility

For most workers, access to suitable employment is severely restricted by the fact that they look for jobs in the regional labor market rather than the global one. In this paper we analyze how macrolevel opportunities (regional market characteristics) and microlevel restrictions (the extent to which job searchers are restricted to the regional market) can help to explain the phenomenon of overeducation. We use a two-step procedure to control selective access to employment. The results show that the size of the labor market is an important factor in avoiding overeducation.     

试析并购价格与协同效应

协同效应是两个企业合并后的价值大于单个企业的价值之和的一种经济现象.过高的收购价格会损害股东的权益,企业应在计算目标企业与本企业协同价值的基础上确定恰当的收购价格.本文拟就企业并购定价中的相关价值概念及获取并购协同效应的并购定价策略进行探讨.     

Information versus imitation in a real-time agent-based model of financial markets

This paper presents an agent based model of a financial market with a real-time engine, whose operation replicates the official time schedule of Borsa Italiana S.p.A. Simulated time series are compared with empirical data at different time scales (ticks, 1 s, 1 min, 5 min) in order to check the compliance of the model with some stylized facts. The modeled market structure is a dynamic multiplex with two layers: the first one is a star network, whose hub is the market maker (i.e., the owner of the venue holding the order book), where transactions are executed; the second one is designed according to different topologies, representing social interactions, where investors decide their behavior according to informative flows. The effect of imitation on market stability is discussed and some policy implications are provided.

     

A note on the low‐quality advantage in vertical product differentiation

In this paper, we modify the analysis of Schubert (2017), who found low‐quality advantage arising from vertical differentiation. Here, we relax the assumption of a sufficiently high reservation utility (so that consumers will always buy the good) to include the case in which they can refrain from buying the good. We find an explicit solution to profit functions, with the result that low‐quality advantage disappears.     

Merger propensity and merger outcomes among British unions, 1986-1995

This article focuses on the relationship between merger propensity and merger success in British trade unions. Using survey data it reveals that more unions seek merger than achieve it; most mergers in the period are accounted for by few unions. However, some merger discussions are protracted and the determinants of propensity are distinct from those of success.