Price leadership in a duopoly with capacity constraints and product differentiation

This paper analyzes Stackelberg price leadership in a duopoly in which firms are capacity constrained and products are imperfect substitutes. Assuming symmetric substitutes, linear demand, and efficient rationing, we characterize the equilibria with an exogenously specified leader. Using the equilibrium profits derived from these games, we argue that over certain ranges of asymmetric capacities an endogenous price leader will emerge. When endogenous leadership does arise, it is the large capacity firm which is the leader. We thus provide a game theoretic model of dominant firm price leadership.Dave Furth's research has been undertaken as a part of the project Competition and Cooperation. Dan Kovenock has benefited from financial support from Erasmus University Rotterdam, the Krannert School of Management, and the Jay N. Ross Young Faculty Research Fellowship. We are grateful to Tom Faith for valuable research assistance. We have benefited from the comments of the editor, two anonymous referees, and participants at the European meetings of the Econometric Society in September 1989 and the North American Winter Meetings of the Econometric Society in December 1989.     

The LeChatelier-Samuelson principle revisited

Within the context of a linear Leontief model, the LeChatelier-Samuelson principle examines the effects of an increase in some final demand on the output levels under the constraint that the production of certain goods is held at its original value. The principle states that the increase in any output is larger when fewer output levels are kept constant. The present paper discusses bounds for such incremental changes, second-order effects, the consequences on the markets for the products with restricted output levels, and generalizations of the original assumptions.I would like to thank two anonymous referees for their helpful comments.     

Sector-specific capital, “Bang-bang” investment,and the Filippov solution

Bang-bang investment in a two-sector growth model with immobile capital is rational and leads to a unique and globally stable long-run equilibrium along a sliding trajectory. This steady state coincides with the stationary equilibrium in the traditional model with non-sector-specific capital.This article was written while the authors were visiting scholars at Cornell University. We gratefully acknowledge financial assistance from the Erasmus University Trust Fund and the Netherlands Scientific Organization. We would like to thank, without implicating, two anonymous referees, Martijn Herrmann, Jean-Marie Viaene, Claus Weddepohl, and the participants of seminars at the University of Maryland, the University of Montreal, and Erasmus University Rotterdam for perceptive remarks and useful comments. Jeroen Hinloopen and Rien Wagenvoort provided able graphical assistance. The views expressed in this article are those of the authors and not necessarily those of the World Bank.     

Conditional utility

Summary The motivation for this paper starts out with a decision situation under risk where the decision-maker has to choose among various lottery tickets. We will ask what happens to a person's lottery choice if he is given additional information in terms of probabilities on some states of nature which might affect his choice among lottery tickets. In other words, in evaluating his decision situation, a person should not only consider the probability of a certain prospect to be realized but also the problem how and to which extent some state(s) of nature modify the utility of this prospect. This problem has not been dealt with in Bernoullian utility theory.We state several conditions which are necessary and sufficient to treat conditional utility as Bernoullian utility. Then we show as a main result that it is possible to represent expected utility of decision acts (in Savage's terminology) by conditional expected utility of prospects which preserves well-known properties of expected utility with the exception of linearity.We give a potential application of the notion of conditional utility to the estimation of the value of information as a residual value of prior and posterior utility.     

Some economics of content protection

We are grateful to a perceptive referee for many constructive comments on an earlier version of this paper entitled The Economics of Content Protection: A Dual Approach. The usual disclaimer applies.     

Learning to Argue with Intermediate Macro Theory: A Semester-Long Team Writing Project

The authors describe their experience with integrating a semester-long economic analysis project into an intermediate macroeconomic theory course. Students work in teams of “economic advisors” to write a series of nested reports that analyze the current state of the economy, and propose and evaluate policies for a decision-maker. The project simulates real-world policy consulting with an emphasis on applying economic theory and models. The authors describe the project setup and how to tailor its theme to current events, explain methods for keeping it manageable in larger classes, discuss student learning outcomes, and document course evaluation results. Besides improving the learning experience, this project prepares economics students to contribute their own views to policy debates and buttress them with tight macroeconomic reasoning.     

Analysis of Austrian stocks: Testing for stability and randomness

This paper is concerned with subjecting two popular assumptions about the behavior of stock market prices to empirical tests: first, the random walk hypothesis developed by Bachelier (1900), Osborne (1959), and Mandelbrot (1963); second, the stable distributions hypothesis by Mandelbrot (1963) and Fama (1965). For this purpose, ten time series from the Vienna Stock Exchange were used. The first hypothesis was tested using both non-parametric and parametric methods. To obtain evidence with regard to the seond hypothesis, a graphical procedure and statistical estimation on the basis of the empirical characteristic function were applied. On analysis of our data, it turned out that, at least for the time period under consideration (1985–1990), severe doubts are cast on the above assumptions.We gratefully acknowledge the help of Peter Mitter, Institute for Advanced Studies, and Franz Köstl, Österreichische Kontrollbank, who provided us with the necessary data, and the comments of the anonymous referees.