spatial competition monopolistic competition and optimum product diversity abstract this is a republication of a passage from william vickrey s 1964 book microstatics which presents important results in spatial competition and monopolistic competition

bailey graham and kaplan s deregulating the airlines deregulating the airlines a this fine book represents the latest and in many ways the most complete report on the early experiences with u s airline deregulation like its predecessors the analysis covers essentially the first two years or so of deregulation experience most of the data series end either on or before june 1981 and thus before the traumas associated with the patco strike of august 1981 and the major economic recession of 1982 2 the authors were all actively involved in implementing u s airline deregulation bailey was a member of the civil aeronautics board graham was a cab staff economist and kaplan was the cab s director of economic analysis during the period just before and after formal enactment and signing of the airline deregulation act in october 1978 as a consequence the book is especially strong on reports and descriptions of the maneuvers and logic underlying the decisions of the cab during the transition to deregulation in particular the authors provide strong insights on how pre airline deregulation act decisions anticipated and were designed to help facilitate the process of deregulation in other respects however the book s contribution is not so distinct or original specifically most of the basic findings are not surprisingly consistent with those in earlier reports on the initial postderegulation experience in essence the book besides providing some new insights based upon the inside experience of the authors somewhat extends the data base upon which the earlier findings were founded and in a few instances particularly in the analysis of airline competitive behavior brings some new analytical tools or tests to bear on the problem for example with regard to what is probably the most important economic aspect of deregulation airline pricing policy bailey graham and kaplan find that 1 airline fares since deregulation have become more and more cost related 2 the airlines have made greater use of offpeak price concessions to improve capacity utilization and 3 more differentiated fares reflecting not only cost differences but demand elasticity and other market differences as well have generally emerged they also find that this differentiation has perhaps worked less to the advantage of small town travellers than to those living in and around major hub cities although their evidence on this is weaker than that found in some other

economies of traffic density in the deregulated airline industry this article estimates a structural model of competition among hub and spoke airlines in order to measure the strength of economies of traffic density on individual route segments we find that economies of density were strong during the sample period fourth quarter 1985 stronger than previous estimates by douglas caves laurits christensen and michael tretheway derived from traditional cost function methods we also find that the airlines competitive behavior was far from collusive in the markets under study markets requiring a connection at a hub airport our structural model also provides plausible estimates of demand elasticities we use our estimates to provide a cost based rationale for the major changes in the structure of the industry following deregulation for example the increase in airport and industry wide concentration and the increase in competition at the city pair market level and to simulate the effects of a merger of airlines that share a hub

the social costs of monopoly and regulation posner reconsidered focuses on social costs of monopoly and trade regulation in the united states benefit of marginal changes on antitrust activities equality of cost in obtaining monopoly and expected profit of monopolist elasticity of inputs in obtaining monopoly ebsco

deregulating european airlines deregulating european airlines francis mcgowan and paul seabright one of the industries with the greatest potential to benefit from the single european market is civil aviation which has been highly regulated by european governments the deregulation of civil aviation in the us since the late 1970s has provided valuable evidence about the nature of the airline industry and its response to the liberalization of conditions of entry by new carriers we examine the us experience and look at the changing regulatory framework for the european industry we also consider the main sources of market failure in air transport the lessons of the us experience are threefold first deregulation can in principle produce major gains to consumers without damaging the long run profitability of carriers by reducing the high costs of operation of european airlines second congestion problems especially the availability of landing slots at airports need to be managed effectively to prevent incumbent carriers squeezing out new entrants we recommend a system of slot auctions to achieve this third in spite of relatively low sunk costs of entry to the industry there remain significant opportunities for the exercise of market power by incumbent carriers deregulation of entry needs therefore to be supplemented by a vigorous competition policy especially with regard to the approval of mergers

understanding rent dissipation on the use of game theory in industrial organization game theory has had a deep impact on the theory of industrial organization in a similar but less controversial way as the rational expectations revolution in macroeconomics the reason it has been embraced by a majority of researchers in the field is that it imposes some discipline on theoretical thinking it forces economists to clearly specify the strategic variables their timing and the information structure faced by firms as is often the case in economics the researcher learns as much from constructing the model the extensive form as from

a dynamic duopoly investment game without commitment under uncertain market expansion abstract we model capacity building investments in a homogeneous product duopoly facing uncertain demand growth capacity building is achieved through the addition of production units that are durable and lumpy and whose cost is irreversible while building their capacity over time firms compete a la cournot in the product market given their installed capacity there is no exogenous order of moves no commitment regarding future decisions and no finite horizon we investigate markov perfect equilibrium mpe paths of the investment game which may include episodes during which firms invest at different times a preemption pattern and episodes in which firms invest simultaneously a tacit collusion pattern these episodes may alternate and are typically several when firms have yet to invest in capacity the sole pattern that is mpe compatible is a preemption episode firms invest at different times but have equal value the first such investment may occur earlier and therefore be riskier than socially optimal when both firms hold capacity tacit collusion episodes may be mpe compatible firms invest simultaneously at a postponed time hence holding back production in the meantime thereby generating an investment wave in the industry such investment episodes are more likely with higher demand volatility faster market growth and lower cost of capital discount rate

the dynamic capabilities of firms an introduction an expanded paradigm is needed to explain how competitive advantage is gained and held firms resorting to resource bas ed strategy attempt to accumulate valuable technology assets and employ an aggressive intellectual property stance however winners in the global marketplace have been firms demonstrating timely responsiveness and rapid and flexible product innovation along with the management capability to effectively coordinate and redeploy internal and external competences this source of competitive advantage dynamic capabilities emphasizes two aspects first it refers to the shifting character of the environment second it emphasizes the key role of strategic management in appropriately adapting integrating and re configuring internal and external organizational skills resources and functional competences toward changing environment 3 only recently have researchers begun to focus on the specifics of developing firm specific capabilities and the manner in which competences are renewed to respond to shifts in the business environment the dynamic capabilities approach provides a coherent framework to integrate existing conceptual and empirical knowledge and facilitate prescription this paper argues that the competitive advanis tage of firms stems from dynamic capabilities rooted in high performance routines z operating inside the firm embedded in the firm s processes and conditioned by its history it offers dynamic capabilities as an emerging paradigm of the modern business j firm that draws on multiple disciplines and advances with the help of industry studies in the usa and elsewhere

u s airline deregulation its effects on passengers capital and labor his paper presents an analysis of the effects of airline deregulation on passengers business and personal first class and coach and explores how capital and labor have fared in a free market the evidence corroborates many benefits that proponents of deregulation predicted but it has not worked perfectly prices are not fully competitive and for certain dimensions service quality is down furthermore the contestability hypothesis as applied to the airline industry does not withstand statistical examination

acquisition of project specific assets with bayesian updating we study the impact of learning on the optimal policy and the time to decision in an infinite horizon bayesian sequential decision model with two irreversible alternatives exit and expansion in our model a firm undertakes a small scale pilot project to learn via bayesian updating about the project s profitability which is known to be in one of two possible states the firm continuously observes the project s cumulative profit but the true state of the profitability is not immediately revealed because of the inherent noise in the profit stream the firm bases its exit or expansion decision on the posterior probability distribution of the profitability the optimal policy is characterized by a pair of thresholds for the posterior probability we find that the time to decision does not necessarily have a monotonic relation with the arrival rate of new information

did railroad deregulation lead to monopoly pricing an application of q this paper asks whether given that railroads now have almost total freedom to set their rates competition is sufficie nt to keep railroads from making supracompetitive profits previous a ttempts to measure railroads profits rely on accounting measures of the rate of return but recent work raises serious doubts about the a ccuracy of these measures therefore this paper uses tobin s q the r atio of a firm s market value to the replacement cost of its assets the values of q show that railroads are not making supracompetitive p rofits thus there is no justification for increased regulation of ra ilroad rates copyright 1987 by the university of chicago

production costs and deregulation unlike some of the existing literature our discussion implies that either 1 regulation lowers production costs and makes the gains to deregulation relatively small or 2 regulation increases production costs and makes the social and political gains to deregulation relatively greater while some may not find alternative 1 credible one thing is clear claiming that the deregulatory gains are small because regulation increases costs is not an alternative society faces

concentration potential entry and performance in the airline industry airline markets do not satisfy the theoretical conditions for perfect contestability and theory does not indicate which deviations from perfect contestibilty significantly affect performance thus the effect of potential entry on performance in airline markets is explored empirically the best model for explaining fares is found to be one in which the measure of market concentration takes into account not only the number and size distribution of incumbents but also the number of potential entrants not significantly disadvantaged due to economies of scale and scope the hypothesis that all city pair markets are perfectly contestable is rejected coauthors are richard l johnson andrew s joskow gregory j werden and michael a williams copyright 1989 by blackwell publishing ltd

innovation timing games a general framework with applications abstract we offer a new algorithm for analyzing innovation timing games its main advantage over the traditional approach is that it applies to problems that had previously been intractable we use the algorithm to examine two classical innovation problems we find that the competition takes the form of a waiting game with a second mover advantage either for any level of r d costs process innovation or for high r d costs product innovation moreover both models predict that the second mover advantage is monotonically increasing in the costs of r d

the relation between the return interval and betas abstract the size effect is sensitive to the length of the return interval used in estimating betas beta changes with the return interval because an asset s covariance with the market and the market s variance do not change proportionately as the return interval is changed we document beta sensitivity to the return interval evidence from cross sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer interval betas we provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns

are small stock returns achievable returns of the small company universe an examination of actual small company passive portfolios sheds some light on this issue these small stock portfolios deliver the returns of their targets within statistically acceptable bounds there are however significant differences across their returns and these differences appear to be related to management style pure indexers try to maintain perfect index like portfolio compositions minimizing trading cost is of secondary importance to them these portfolios have the lowest returns at the other extreme some portfolios emphasize minimizing trading costs at the expense of perfect portfolio composition these portfolios have the highest returns

selection in dynamic entry games abstract this paper proposes a game theoretic framework to study dynamic competition with entry deterrence sufficient conditions are given such that the competition process results in the most efficient firm being eventually selected we show this selection property for asymmetric firms to be the natural economic extension to the rent dissipation property obtained for symmetric firms this framework is used to discuss previous models in which the selection property had not been studied dynamic limit pricing and capacity renewal or may fail to hold quantity competition journal of economic literature classification numbers c73 d43 l12

entry exit and imperfect competition in the long run an infinite horizon stochastic model of entry and exit with sunk costs and imperfect competition is constructed simple examples provide insights into 1 the relationship between sunk costs and industry concentration 2 entry when current profits are negative and 3 the relationship between entry and the length of the product cycle a subgame perfect nash equilibrium for the general dynamic stochastic game is shown to exist as a limit of finite horizon equilibria this equilibrium has a relatively simple structure characterized by two numbers per finite history under very general conditions it tends to exhibit excessive entry and insufficient exit relative to a social optimum

efficiency with costly information a reinterpretation of evidence from managed portfolios we investigate the informational efficiency of mutual fund performance for the period 1965 84 results are shown to be sensitive to the measurement of performance chosen we find that returns on s p stocks returns on non s p stocks and returns on bonds are significant factors in performance assessment once we correct for the impact of non s p assets on mutual fund returns we find that mutual funds do not earn returns that justify their information acquisition costs this is consistent with results for prior periods coauthors are martin j gruber sanjiv das and matthew hlavka article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the limits to rent seeking waste the general equilibrium framework developed in this paper for analyzing the limits to rent seeking waste goes beyond the existing literature by incorporating tax financed public subsidies and rent protecting activities into a rent seeking environment we show that the limits to rent seeking waste depend on the extent to which government subsidizes rent seekers and rent defenders through tax financed grants contracts and favors as observed by tullock 1967 the diversion of resources toward efforts to acquire a monopoly rent causes a social waste in addition to the excess burden of monopoly pricing measured by the harberger triangle in the absence of government subsidies to rent seeking and under competitive conditions this additional waste cannot exceed the maximum monopoly rent attainable however if government subsidizes expenditures on rent seeking then the additional waste can exceed the tullock rectangle of monopoly rent and in the limit equal the economy s maximum potential social surplus

spatial preemption with finitely lived equipments abstract this paper proposes a dynamic approach to potential competition in a spatial framework where productive investments are location specific and have finite duration we define a notion of strategic sustainability against multiple entries in which spatial preemption comes from anticipated renewal policies of plants we show that in an infinite horizon model with no discounting potential competition leads to average cost renewal but a positive value can be attached to incumbency the conditions for the existence of such strategically sustainable structures are determined in the model of the circular city under mill or discriminatory pricing rules our results are finally related to the usual two stage notion of free entry equilibrium in spatial models

tirole s industrial regulation and organization legacy in economics jean tirole was awarded the 2014 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of market power and regulation this paper provides an overview of some of that work and of his related contributions to game theory

the impact of bad writing in economics we find significant style differences between articles written by economists for their professional journals and articles by the same economists in the wall street journal we find no evidence that style influences the professional success of economists which suggests that the private rewards to improving the quality of writing are low indeed each community of scholars has probably adopted a professionally correct writing style from which its members diverge little however scholars do alter their rhetorical style to communicate effectively with audiences other than the professional community this suggests that intra and inter group written communication by economists is efficient

exit in duopoly under uncertainty this paper examines a declining duopoly where the firms must choose when to exit from the market the uncertainty is modeled by letting the revenue stream follow a geometric brownian motion we consider the markovperfect equilibrium in firms exit strategies with a low degree of uncertainty there is a unique equilibrium where one of the fi rms always exits before the other however when uncertainty is increased another equilibrium with the reversed order of exit may appear ruining the uniqueness whether this happens or not depends on the degree of asymmetry in the firm specifi cp arameters

explaining and predicting airline yields with non parametric regression trees abstract recently developed non parametric regression trees are found both to explain more of the variation and to better predict airline yields on city pairs than linear regressions

clustering in n player preemption games we study a complete information preemption game in continuous time a finite number of firms decide when to make an irreversible observable investment upon investment a firm receives flow profits which decrease in the number of firms that have invested the cost of investment declines over time exogenously we characterize the subgame perfect equilibrium outcome which is unique up to a permutation of players when the preemption race among late investors is sufficiently intense the preemption incentive for earlier investors disappears and two or more investments occur at the same time we identify a sufficient condition in terms of model parameters clustering of investments occurs if the flow profits from consecutive investments are sufficiently close this shows how clustering can occur in the absence of coordination failures informational spillovers or positive payoff externalities

investment in oligopoly under uncertainty the accordion effect this paper studies investments in new markets where more than two anticipated identical competitors are present in case of three firms an accordion effect is detected an exogenous demand shock results in a change of the wedge between investment thresholds of the first and second investor that is qualitatively different from the change of the wedge between the second and third investment threshold furthermore it turns out that in the three firm case the investment timing of the first investor lies in between the one and the two firm case these results are numerically extended to the n firm case

quantity quality and the welfare effects of us airline deregulation in this paper we employ a method for estimationg quality adjusted demand to calculate measures of the change in consumer suruplus due to us airline deregulation the quality adjusted estimates of the price elasticity of demand indicate that consumers are from 25 to 50 more sensitive to changes in air fares than unadjusted estimates would suggest changes in unadjusted consumer surplus overstate the net welfare gains from deregulation by roughly a factor of two strongly suggesting that adjustments for quallity of service are essential to welfare analysis of regulatory changes in this industry

on the diffusion of new technology a game theoretic approach this paper is an attempt at a rigorous albeit not exceedingly general analysis of the diffusion of new technology in particular consider an industry composed of two firms each using the current best practice technology the firms are assumed to be operating at nash equilibrium output levels generating a market price given demand and profit allocations when a cost reducing innovation is announced each firm must determine when if ever to adopt it based in part upon the discounted cost of implementing the new technology and in part upon the behavior of the rival firm if either firm adopts before the other it can expect to make substantial profits at the expense of the other firm on the other hand the discounted sum of purchase price and adjustment costs may decline with the lengthening of the adjustment period as various quasi fixed factors become more easily variable therefore although waiting costs the firm more in terms of foregone profits it may save money on the cost of purchasing the new technology thus the firm must weigh the costs and benefits of delaying adoption as well as take account of its rival s strategic behavior

the cost of institutional equity trades presented are an overview of the findings from the recent literature on the cost of u s equity trades for institutional investors and new evidence on trading costs from a large sample of institutional trades the findings discussed have important implications for policymakers and investors implicit trading costs are economically significant equity trading costs vary considerably and vary systematically with trade difficulty and order placement strategy and whether a trade price represents best execution depends on detailed data for the trade s entire order submission process especially information on pretrade decision variables such as the trading horizon

preemption and rent equalization in the adoption of new technology we study the adoption of a new technology to illustrate the effects of preemption in games of timing we show that the threat of preemption equalizes rents in a duopoly but that this result does not extend to the general oligopoly game if the gain to preemption is sufficiently small then the optimal symmetric outcome which involves late adoption is an equilibrium this contrasts with reinganum s result that in precommitment equilibria there must be diffusion we develop a new and richer formalism for modeling games of timing which permits a continuoustime representation of the limit of discrete time mixed strategy equilibria

a theory of endogenous commitment commitment is typically modelled by assigning to one of the players the ability to take an initial binding action the weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed as it is assumed this paper presents a framework in which commitment power arises endogenously from the fundamentals of the model we construct a finite dynamic game in which players are given the option to change their minds as often as they wish but pay a switching cost if they do so we show that for games with two players and two actions there is a unique subgame perfect equilibrium with a simple structure this equilibrium is independent of the order and timing of moves and is robust to other protocol specifications moreover despite the perfect information nature of the model and the costly switches strategic delays may arise in equilibrium the flexibility of the model allows us to apply it to various environments in particular we study an entry deterrence situation its equilibrium is intuitive and illustrative of how commitment power is endogenously determined copyright 2008 wiley blackwell

bertrand edgeworth equilibrium with a large number of firms abstract we examine a model of price competition with strictly convex costs where the firms simultaneously decide on both price and quantity are free to supply less than the quantity demanded and there is discrete pricing if firms are symmetric then for a large class of residual demand functions there is a unique equilibrium in pure strategies whenever for a fixed grid size the number of firms is sufficiently large moreover this equilibrium price is within a grid unit of the competitive price the results go through to a large extent when the firms are asymmetric or they are symmetric but play a two stage game and the tie breaking rule is weakly manipulable

the incidence of overdissipation in rent seeking contests tullock s analysis of rent seeking and overdissipation is reconsidered we show that while equilibrium strategies do not permit overdissipation in expectation for particular realizations of players mixed strategies the total amount spent competing for rents can exceed the value of the prize we also show that the cross sectional incidence of overdissipation in the perfectly discriminating contest ranges from 0 50 to 0 44 as the number of players increases from two to infinity thus even though the original analysis of overdissipation is flawed there are instances in which rent seekers spend more than the prize is worth

preemption and rent dissipation under price competition abstract we study a simple duopoly model of preemption with multiple investments and instantaneous price competition on a market of finite size driven by stochastic taste shocks different patterns of equilibria may arise depending on the importance of the real option effect if the average growth rate of the market is close to the risk free rate or if the volatility of demand shocks is high no dissipation of rents occurs in equilibrium despite instantaneous price competition if these conditions do not hold the equilibrium investment timing is suboptimal and the firms long run capacities may depend on the initial market conditions our conclusions contrast sharply with standard rent dissipation results

firms r d decisions under incomplete information abstract the paper considers a patent race in which firms do not know their relative positions in this setting firms that start in the same position proceed at the highest possible speed and if one firm has an initial advantage it preempts the rival but at the cost of dissipating a significant part of its monopoly rent so the paper shows that incomplete information in a patent race leads to rent dissipation the latter is higher the higher the value of the prize and the lower the cost of r d thus for innovations that provide relatively high profits the time to discovery is shortened but the social losses are likely to be high due to duplication of effort

entry and exit over the industry life cycle this article presents a theoretical model of the rivalry between two firms in a market that undergoes a life cycle of growth and eventual decline firms in this market have the option of exit and reentry in the equilibrium for the growth phase high entry costs can act like high exit costs thereby conveying a commitment advantage for some parameter configurations this advantage is sufficient to enable a high costfirm to preempt its lower cost rival during the decline phase the smaller duopolist is able to outlast its rival provided that the smaller firm s reentry costs are positive

preemption contests between groups we consider a preemption game between competing groups firms lobbying individually for their groups interests provide an empirical example among symmetric groups the first firm to take action bears an unobserved cost and wins the prize on behalf of its group in equilibrium the firm with the lowest cost takes action but with delay more competition and a smaller ratio of costs to benefits reduce delay firms in larger groups wait longer but group action can occur earlier as the probability of a low cost firm is higher asymmetries in group size or strength of externalities also matter

sunk costs firm size and firm growth for several decades the conventional wisdom has been that expected firm growth rates are independent of firm size a property known as gibrat s law however recent empirical work has found a negative relation between firm growth and firm size this paper provides a theoretical explanation for this negative relation in a model of new firm growth where capacity and technology choices involve some degree of sunkness additional empirical implications of the theory of sunk costs are also developed these relate to profit rates tobin s q exit rates degree of sunkness of capacity costs as well as size and growth rates copyright 1995 by blackwell publishing ltd

preemptive investments under uncertainty credibility and first mover advantages we present a continuous time game in which two firms must decide at each instant of time whether to be in or out of a market that expands up to a random maturity date and declines thereafter firms are initially inactive and they differ only in the opportunity costs of using their assets e g owing to different redeployment or resale values after characterizing the unique markov perfect equilibrium of the entry and exit game under demand uncertainty we challenge the result that the threat of preemption can partially or even totally dissipate a first mover advantage when post entry profits can be negative the preemption threat of a firm may become weaker because its rival may force it out of the market after entering as a result there may be little or no dissipation of the first mover advantage when post investment profits are not assumed to be always positive