price wars caused by switching costs in many markets consumers have switching costs for example learning costs or transaction costs of changing between functionally equivalent brands of a product or of using any brand for the first time we analyse a four period complete information model of a market with switching costs in which new entry occurs after the second period the new entry results in equilibrium in a price war that is the new entrants prices are higher in the post entry period than in the entry period and the incumbent s price falls in either the pre entry period or the entry period and subsequently rises we can interpret the incumbent s lowering its price in the pre entry period as limit pricing behaviour we distinguish between two types of price war that can occur and show how the type or mixture of types that arises depends on the size of switching costs

wicksell lindahl and the theory of public goods wicksell s and lindahl s ideas on public goods and decisions are reviewed in light of later developments in the theoretical economics literature i begin by discussing their normative ideals in particular the notion of justness and the sources of the difficulties in reaching them wicksell s and lindahl s ideal states as well as the obstacles that they perceive are compared to more recent views on free riding and on the behavior of elected representatives their views on political bargaining are then related to later concepts in particular to the core of the economy

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

testing for rational bubbles with exogenous or endogenous fundamentals the german hyperinflation once more abstract the presence of rational price bubbles during the german hyperinflation is tested under two different structural assumptions on the money process if the money supply is constrained to be exogenous to the current inflation rate the hypothesis of no bubble can be rejected however this is no longer found to be true when a feedback rule from inflation to money creation is allowed the analysis contradicts previous results presented in the literature

shared atm networks and banking competition abstract in this paper we study the incentives of banks to share their automatic teller machines atms when they are competitors in the market for deposits we construct a stylized model of banking competition which emphasises the distinctive features of atm compatibility we find that in equilibrium either a strict subset of banks share their atms or total incompatibility prevails we also derive the implications for atm compatibility of withdrawal fees interchange bank fees entry and depositor switching costs finally we investigate the normative implications of our model and draw some policy conclusions

a supergame theoretic model with consumer loyalty abstract the paper shows in a supergame theoretic framework how the relative market power firms achieve by having loyal consumers hinders collusion furthermore increasing concentration decreases the sustainability of the agreement

voluntariness and efficiency in the provision of public goods abstract this paper presents a characterization of lindahl allocations which makes no reference to personalized prices lindahl equilibria are characterized here by two conditions pareto efficiency and a voluntariness condition voluntariness requires that no consumer may benefit from a reduction in his contribution if this means that the vector of public goods must be reduced in the same proportion the intersection of the large set of voluntary allocations and that of efficient ones turns out to be under differentiability the set of lindahl allocations

the impact of burden sharing rules on the voluntary provision of public goods abstract we investigate how burden sharing rules impact the voluntary provision of a public good which generates heterogeneous benefits to agents we compare different rule based contribution schemes where agents can first suggest a minimum provision level of the public good before the smallest common denominator is implemented we find that rule based contribution schemes significantly increase payoff levels relative to the vcm while significant differences exist between the rules importantly the equal payoff rule maximizes payoffs for all player types this also holds relative to a scheme where different types of players separately can determine their minimum contribution levels our results lend insights into the efficient institutional design for voluntary private provision of public goods and how burden sharing rules interact with efficiency when agents are heterogeneous

speculative bubbles in u k house prices some new evidence in this article we test the view widely held among both academics and practitioners that speculative bubbles have characterized the time series behavior of u k house prices in recent times we motivate our empirical analysis using a stylized overlapping generations model which generates a housing demand function of the form assumed by a large literature illustrating how rational bubbles may arise as a solution to the house price determination equation employing two recently developed econometric techniques specifically designed to test for rational bubbles we then provide empirical evidence for the existence of bubbles in u k house prices over the sample period 1983 2002 a widely held view among academics and practitioners is that the time series behavior of house prices of several major industrialized countries may have been characterized by explosive bubbles which are not present in the underlying fundamentals and which therefore may drive an explosive wedge between house prices and their fundamental determinants in particular with regard to the united kingdom a large empirical literature has studied the determinants of the two booms experienced by house prices in the early 1970s and late 1980s providing some tentative evidence in support of the view that speculation on expected future house prices might have been an important force driving actual house prices see inter alia hendry 1984 muellbauer and murphy 1997 renaud 1997 teraisvirta 1998 more recently concerns of an ongoing house price bubble in the united kingdom have been repeatedly raised by the press and policymakers these concerns are well summarized in the following quote it will be different this time those are the most dangerous words in investment and in economic policy the u k is yet again in an unbalanced expansion behind it lies explosive household

entry deterrence in markets with consumer switching costs in many markets consumers have transaction or learning switching costs between functionally undifferentiated brands new entry into such markets may be deterred either by large customer bases and or large switching costs which deny customers to an entrant or by small customer bases and or small switching costs which mean an incumbent will respond aggressively to an entrant an incumbent threatened by entry may therefore price either lower or higher than otherwise a firm with the right to enter early may make less profits over time than an otherwise identical firm that is unable to enter the market until later

why competition may drive up prices abstract we show that the expected price of an incumbent firm may increase in response to increasing competition as it may become more profitable to exploit a rather immobile fraction of consumers instead of capturing a larger but more contested segment of the market to derive this result we consider two approaches of modelling the degree of competition first in a duopolistic setting competition is said to be more intense if the entrant s product becomes more attractive to the mobile fraction of buyers in this case we find that all buyers i e both the mobile and the immobile fraction may lose if the market becomes more competitive secondly in a model with two entrants competition is said to become intense if entrants serve an overlapping segment of the market for mobile buyers

cointegration and cagan s model of hyperinflation under rational expectations when money and prices are integrated of order two philip cagan s 1956 model of hyperinflation will give rise to two different levels of cointegration in most of the literature on the german hyperinflation one of these cointegrating relationships has been ruled out a priori by assuming that velocity shocks follow a random walk using data from the german hyperinflation the author finds this assumption to be unjustified based on a straightforward extension of the cointegrated var approach suggested by john y campbell and robert j shiller 1987 a method to evaluate the cagan model under rational expectations and no bubbles is proposed and implemented to the german data copyright 1993 by ohio state university press

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

justifying the lindahl solution as an outcome of fair cooperation the motivation for the lindahl equilibrium is mostly a rather artificial price mechanism even though the analogy to a competitive market was emphasised by lindahl himself his approach does not directly explain the normative ideas behind his concept in the present paper we therefore show how the lindahl equilibrium can be deduced from some simple equity axioms these normative assumptions are the benefit principle on the one hand and the equal sacrifice principle or equivalently a non envy condition as a postulate for distributional equity on the other fairness among agents with different preferences and incomes is taken into account by considering their marginal willingness to pay as shadow prices in this way the reason why the lindahl solution can be perceived as an outcome of fair cooperation might become more understandable

consumer myopia standardization and aftermarket monopolization abstract in this paper i show that the standard bertrand competition argument does not apply when firms compete for myopic consumers who optimize period by period i develop the model in the context of aftermarket with overlapping generations of consumers simultaneous product offerings in the primary market and aftermarket establishes a price floor for the primary good this constraint prevents aftermarket rents from being dissipated by the primary market competition duopoly firms earn positive profits despite price competition with undifferentiated products nonetheless government interventions to reinforce aftermarket competition such as a standardization requirement may lead to the partial collapse of the primary market

vertical integration and exclusivity contracts when consumers have switching costs 1 introductionthis article examines the endogenous formation of vertical contractual arrangements between producers and retailers when consumers face switching costs previous works on switching costs assume that the product is sold directly by the manufacturer to the public and no mention is made to upstream downstream activities as they are pooled together 1 on the other hand the distinction between manufacturers and retailers is central to an extensive literature on vertical arrangements that has focused on several issues including the elimination of successive markups or the attempt to raise rivals costs however no reference is made to the fact that market power may arise from the existence of consumer switching costs 2 this article would like to draw a line between these two streams in the literature by exploring the implications switching costs have for vertical relationships consider a framework where two upstream firms can supply two downstream firms and firms compete after having made their vertical contractual choice in the presence of consumer switching costs an integrated firm would face a typical trade off if it invests in market share by charging a low price it attracts customers that will be profitable repeat purchasers alternatively the firm can harvest profits by charging high prices to existing customers when independent retailers sell the product new factors enter the picture manufacturers may face the paradoxical problem of extracting too much surplus from the retailer if this happens then the latter is not interested in building a subscriber base resulting in foregone future profits this is a case of dynamic inconsistency and it is likely that firms would look for a suitable contractual solution for instance the problem could be reduced if retailers have the freedom to resort to alternative sources of input supply this ensures a reservation payoff to the retailer related to what he could get if he supplied the competing manufacturer s product to his customers such a reservation payoff depends also on the contract chosen by the rival pair for example if the rival manufacturer has signed an exclusivity deal then it cannot supply any other retailer alternatively vertical integration is a candidate to emerge so that the problem is internalized however it is not clear if independent pairs of firms are able to coordinate on the most profitable contractual choices i provide a framework suitable for analyzing equilibrium contracts and their properties with a particular focus on the incentive to invest in market share when long term contracts are not available 3the coexistence of vertical relationships and consumer switching costs can be found in the following business examples i telecoms in the telecommunications industry network operators can sell services directly to the final users or via service providers consumption in this industry involves consumer switching costs if they try to switch network users may face compatibility problems additional software or hardware needed transaction costs absence of number portability and contractual costs e g in mobile telephony sim cards are typically locked so that handsets only work on one network customers buy their product directly from the network operator if it has or is allowed by regulators to have a retailing division or from independent service providers who do not own their own network but provide services over other operator s networks ii durable goods and aftermarkets some goods e g a photocopier are durable and require use with a consumable e g toner cartridges cartridges may be supplied directly by the manufacturer of the durable good or by other independent firms independent suppliers may be required to carry only one particular cartridge compatible with a particular photocopier if incompatibility between cartridges is achieved by product design then the customer is locked with the upstream manufacturer and will need spare parts from a downstream service organization

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

testing for rational inflationary bubbles the case of argentina brazil and israel in this paper it is examined whether the existence of rational bubbles can explain the dynamics of the price level during the argentine brazilian and israeli high inflations in the first half of the 1980s based on the cagan 1956 money demand model the west 1987 specification test finds evidence of rational inflationary bubbles in the three countries when the money supply is assumed to be exogenous however if endogeneity of money is taken into account there is no evidence of rational bubbles

voluntary and efficient allocations are walrasian let f be a private ownership economy call an allocation w voluntary for a price vector p if no agent can benefit by trading less at p we prove that under differentiability and interiority if w is voluntary and pareto efficient it is a competitive equilibrium for w perhaps surprisingly production economies where some agents receive profit income require a stronger voluntariness condition than the one sufficient for exchange economies the stronger condition singles out a commodity as a medium of exchange

trading rules from forecasting the collapse of speculative bubbles for the s p 500 composite index many recent studies documented the presence of speculative bubbles defined as systematic and increasing deviations of actual prices from fundamentals in asset prices however thus far the usefulness of such models has been examined in the literature only from a statistical perspective in this paper we employ two regime switching models of periodically partially collapsing speculative bubbles and examine the risk adjusted profits of trading rules formed using inferences from them use of trading rules derived from an augmented model incorporating market volume leads to higher risk adjusted returns than those obtained employing existing models or a buy and hold strategy

mixed pricing in oligopoly with consumer switching costs abstract in this paper we develop an alternative and more natural two period model of duopolistic competition with switching costs we find that overall competition is always less severe when consumers find switching suppliers expensive however the relationship between the strength of competition and the importance of switching costs is not monotonic interestingly competition between ex ante identical firms naturally results in firms having asymmetric market shares in equilibrium

multi country tests for price level bubbles abstract flood and garber 1980 have examined data from the german hyperinflation to test for a price level bubble in this paper we extend this research to other episodes of hyperinflation by testing for a simultaneous bubble across countries we implement the conceptual experiment proposed by flood and garber to derive asymptotic distributions for the test statistics

robustness and local linearisation in economic models this paper discusses the importance of nonlinear dynamics from a theoretical and an empirical point of view it stresses the need for global as opposed to local analysis and develops the important concept of robustness using this concept the paper argues that much modern macroeconomics can be dismissed on methodological grounds alone the paper also deals with the empirics of hyperinflation and with the detection of chaos in financial markets