When should a firm expand its business? : The signaling implications of business expansion

We examine an incumbent's trade-off between the improved efficiency that business expansion facilitates and the signaling role that business expansion plays in conveying information to potential entrants about the state of demand. We demonstrate that both separating and pooling equilibria survive the Intuitive Criterion. Essentially, in contrast to models with asymmetric information about unit cost, incumbents' benefits from investing in a signal are not necessarily monotonic in the state of demand. We investigate how the extent of informativeness of the outcome depends on the enhanced efficiency that the incumbent's expansion facilitates and the priors of the entrant.     

Regulatory regimes in the electric power industry: Implications for capacity

We construct a model of the electric power industry which consists of two utilities faced with uncertain demand and a variety of regulatory regimes. Two technologies are considered, base-load and peaking, and the transfer of bulk electricity among utilities is permitted. The purpose of the paper is not to determine optimal regulatory regimes but to provide a framework for analyzing existing and contemplated regulatory initiatives. The conclusions are that long run survival mandates an authorized rate of return above the cost of capital and that excess investment will result. Furthermore, it is highly unlikely that current regulatory instruments such as Used and Useful, distribution of profits from bulk sales, and pricing of wholesale electricity can lead to a socially optimal capital stock.     

Minimum Differentiation in Commercial Media Markets

We examine a model of locational choice in commercial media markets. Commercial media (stations) compete for audiences with their choice of programming variety in order to attract advertising revenues from advertisers. These advertisers (producers) compete in a differentiated product market and rely on advertising to inform consumers about their product. We use the model to show that media have incentives to minimize the extent of differentiation between them. This incentive is an implication of the assumed role of advertising as information and as an ultimate nuisance to the audience. When stations minimally differentiate their programming offerings, producers choose lower levels of advertising. Consequently, lower levels of product information are available to consumers, permitting producers to gain higher margins on product sales. As a result, stations can negotiate higher payments for advertising space.     

Excessive Investment in Hospital Capacities

In the present study I identify an inherent characteristic of health care markets that may lead to excessive investment by hospitals even when compensated according to a prospective reimbursement rule. It is demonstrated that the stochastic nature of the demand for medical services combined with the lumpiness of investment decisions may give rise to excessive investment when multiple hospitals select independently their levels of capacities. The source for the excessive incentives to invest is the difficulty of one hospital to internalize properly the externality generated by its investment decisions. Such an externality arises because when one hospital expands its capacity, it is more likely to be able to serve not only patients residing in its region but patients residing in neighboring regions as well.     

Multiprincipal Agency Relationships as Implied by Product Market Competition

This paper surveys recent work in contract theory that relates to the allocation of tasks among agents within an organization as well as to the effect of product market competition upon optimal contracting and agency costs.     

Differentiated industries without entry barriers

Our objective is to predict the evolution of an industry without entry barriers where products are differentiated on the basis of quality. Each firm chooses a single brand whose characteristics and amount of production is determined by the firm. The analysis suggests two different stages in the evolution. The first is a stage of growth and the second is a stationary stage in terms of aggregate production. While during the first stage the entry of additional brands results in the reduction of average quality, during the second stage entry leads to increased average quality. Hotelling's principle of “minimum differentiation” is contradicted in the model.     

Optimal Reimbursement and Malpractice Sharing Rules in Health Care Markets

When health care sponsors such as HMOs or PPOs can use "utilization reviews" in order to indicate to the provider what type of treatment to administer to the patient based upon a diagnosis that is established by the provider, it is possible to implement the "first best" levels of investment in cost control efforts and in aggressiveness of treatment. The implementation of the "first best" requires the utilization of the prospective reimbursement rule accompanied by the removal of all malpractice liabilities from the provider. In contrast, when the type of treatment cannot be enforced by the payer, implementation of the "first best" is not feasible if the payer places a higher weight on the welfare of consumers than that of providers in its objective function. In this case, the reimbursement scheme deviates from the prospective rule, and the provider assumes liability to part of the cost incurred by society as a result of unsuccessful medical outcomes. When the payer can enforce treatment only partially by establishing bounds on the range of acceptable treatments, a minimal acceptable standard will be established and the outcome will be an intermediate case between the above two extremes.     

Mergers and Exclusionary Practices in Health Care Markets

We evaluate the relationship between insurers (payers) and providers of health care (hospitals) when they each have a nonnegligible share of the market. We focus in particular on their incentives to merge and the existence of equilibria where payers offer preferential treatment to a subset of hospitals. We demonstrate that hospitals are more likely to merge without consolidating their capacities the less competitive they are vis-à-vis the payer's market. Payers are more likely to merge without consolidating their capacities the less competitive either the hospitals' or the payers' market is. A given payer follows an exclusionary strategy when its starting bargaining position vis-à-vis hospitals is weak. At such exclusionary equilibria, payers tend to distinguish themselves from neighboring payers by contracting with a different subset of hospitals.     

Allocative and distributional effects of a monopolistic cooperative firm in a capitalist economy

It is well known that labor-managed firms operating under socialism exhibit “bizarre” behavior with respect to their production strategy. We prove that under capitalism most of these distortions disappear, consequently, the production strategies of an entrepreneurial monopoly and of the labor-managed firm become indistinguishable. However, there appears an almost inherent instability in the distribution of profits. The degree of instability depends on the existence of some sort of supportive legislation. Thus, unlike under socialism, in a capitalistic economy the labor-managed firm may have an effect on the distribution of profits at most.