advertising and prices as signals of quality in a regime of price rivalry abstract this paper addresses the issue of whether firms use price or advertising to signal quality and whether advertising has pro or anti competitive effects we show that when there is price rivalry advertising may be necessary to signal quality in contrast to single firm models signaling through price alone prevails for sufficient inter brand quality differentials joint price advertising signals prevail when the quality differential is small finally advertising in the form of variable rather than fixed costs is shown to increase the feasibility of signaling quality

can poorly informed regulators hinder competition this paper considers an entry deterrence game in which environmental policy is set without perfectly observing the incumbent firm s costs we investigate if regulators who can have an informational advantage relative to the potential entrant support entry deterring practices the paper demonstrates that while entry deterring equilibria only emerge under restrictive conditions when the regulator is perfectly informed these equilibria arise under larger settings as he becomes uninformed furthermore we show that the regulator is willing to support the incumbent s entry deterring practices regardless of his degree of information if entry costs are sufficiently high however when entry costs are lower the regulator only sustains this type of practices if he is poorly informed

assessing horizontal mergers under uncertain efficiency gains the analysis of horizontal mergers hinges on a tradeoff between unilateral effects and efficiency gains we examine the role of uncertainty in this tradeoff in theory the attitude towards uncertainty depends on the curvature of the social objective function on the one hand adjustment effects both on the consumers and firms sides tend to make consumers surplus and firms profits convex on the other hand pass through effects may act in the opposite direction we show that convexity prevails in a number of situations including the most general linear demand model implications for empirical merger analysis are exposed

public support for technical advance the role of firm size this article develops a model that shows how firm size that most important firm level correlate of r d moderates the impact of demand and supply side government policies that support r d the most robust result is that government support to product r d will elicit less of a response the greater is average firm size within the industry this result suggests for example that government support to upstream research in the life sciences will stimulate less downstream industrial investment in the development of new drugs to the extent that the firms in the downstream industry are larger the model also predicts that where entry is less encumbered we can expect demand side subsidies to elicit greater product r d within an industry thus to the degree that for example barriers to entering the solar panel manufacturing industry are lower we should expect r d on solar panel development to rise more in response to tax credits for their purchase

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

product innovation and firm growth evidence from the integrated circuit industry applied research on growth and innovation seems to suggest that successful innovations do not significantly enhance firm growth this paper tests the hypothesis that the level of observation at which applied research is typically conducted hampers identification of a significant association between innovation and sales growth rates exploiting a unique data set we find that product innovations commercialized in the immediate past positively affect the corporate revenue streams of semiconductor companies

equilibrium effects of potential entry when prices signal quality this paper analyses the effects of introducing potential entry by an uninformed high quality firm into a market where the privately informed incumbent already uses the price to signal product quality to uninformed consumers contrary to most of the literature on potential entry we show that the effect of potential entry may be to distort the first period price upwards compared to the no entry case and thus to decrease consumer surplus in the first period when separating equilibria exist the quality uncertainty is resolved in the unique self enforcing equilibrium and the pre entry limit pricing does not limit entry compared to the full information case hence not only the high quality incumbent but also the consumers suffer a decrease in the present value of payoffs as a result of potential entry by a high quality firm

on optimal legal standards for competition policy a general welfare based analysis we present a new welfare based framework for optimally choosing legal standards decision rules we formalise the decision theoretic considerations widely discussed in the existing literature by capturing the quality of the underlying analysis and information available to a regulatory authority and we obtain a precise necessary and sufficient set of conditions for determining when an economics or effects based approach would be able to discriminate effectively between benign and harmful actions and consequently dominate per se as a decision making procedure we then show that in a full welfare based approach the choice between legal standards must additionally take into account i indirect deterrence effects of the choice of standard on the behaviour of all firms when deciding whether or not to adopt a particular practice and ii procedural effects of certain features of the administrative process in particular delays in reaching decisions and the investigation of only a fraction of the actions taking place we therefore derive necessary and sufficient conditions for adopting discriminating rules as advocated by the effects based approach we also examine what type of discriminating rule will be optimal under different conditions that characterise different business practices we apply our framework to two recent landmark decisions microsoft vs eu commission 2007 and leegin vs psks 2007 in which a change in legal standards has been proposed and show that it can powerfully clarify and enhance the arguments deployed in these cases

advertising and pricing to deter or accommodate entry when demand is unknown abstract we consider the advertising and pricing strategies of an incumbent firm who is concerned with deterring or accommodating entry and privately informed as to the level of market demand our fundamental result is that a demand exaggerating distortion occurs if the incumbent seeks to signal a low high demand then he behaves as if there were complete information but demand were lower higher than it is pre entry pricing and demand enhancing advertising are therefore distorted downward upward as a consequence of signaling purely dissipative advertising is thus not employed as a signal refinements of sequential equilibrium are featured

legal uncertainty as a welfare enhancing screen consider legal uncertainty as uncertainty about the legality of a specific action in particular suppose that the threshold of legality is uncertain i show that this legal uncertainty raises welfare legal uncertainty changes deterrence in opposite directions the probability of conviction increases for firms below the threshold while the probability of conviction decreases for firms above the threshold hence legal uncertainty acts as a welfare enhancing screen and increases welfare legal uncertainty discourages some actions with low private benefits while it encourages other actions with high private benefits

the effects of american and japanese style employment and compensation practices on innovation success in the global marketplace increasingly requires that firms develop capabilities in innovation in this paper we argue that firms can use employment and compensation practices to foster innovation and support for innovation by employees conversely some employment and compensation systems will inhibit innovation a system that allows gain sharing by employees and provides employment assurance will foster innovation in the firm however a system that compensates employees with a fixed wage and allows for termination at will contains anti innovative incentives the former system is the prototypical japanese system particularly in large firms while the latter system is the prototypical american system the commercial success of japanese firms is increasingly attributed to successful innovation particularly in processes we argue that this success is partly attributable to the japanese style system of employment and compensation none of this suggests however that the japanese style practices c

regulatory risk vertical integration and upstream investment abstract we investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors regulatory risk reflects uncertainty about the regulator s commitment to a regulatory policy that promotes the regulated firm s noncontractible investment we show that when the regulator sets the regulatory policy after the vertical industry structure has been established some degree of regulatory risk is ex ante socially beneficial regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost this occurs for moderate costs of high investment and firms small risk aversion our analysis sheds new light on some relevant empirical patterns in vertically related markets

location choice product proliferation and entry deterrence within a slightly modified version of hotelling s model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise we show that entry deterrence although optimal need not be achieved through product proliferation in some cases the incumbent monopolist resorts to an entry deterring strategy based on location choice rather than product proliferation we also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry

imperfect information and dynamic conjectural variations this article analyzes oligopoly interaction in an environment where firms are imperfectly informed about the evolution of the market demand curve the analysis develops a two period cournot framework under the assumptions that demand shifts are positively serially correlated that firms never directly observe the demand curve and that firms never observe the previous quantity decisions of rivals firms do draw inferences about the position of the demand curve from past observations on prices consequently the current output of a firm will influence the current market price which will then influence rivals inferences about future demand the future output decisions of rivals will respond accordingly the theory predicts negative dynamic conjectural variations essentially a firm perceives that an increase in its output will lower the current market clearing price which will cause rival firms to think that the demand curve has shifted down and hence induce them to lower their outputs in the future

optimal proof burdens deterrence and the chilling of desirable behavior determination of the stringency of the burden of proof is a central design question in any system of adjudication including in many private settings employee promotion and firing product launches prior work oriented towards ex ante behavior focuses on deterrence using models in which individuals decide whether or not to commit a harmful act versus abstention or perhaps instead commission of a less harmful act such as when greater precaution is taken 1 in this setting the optimal proof burden maximizes deterrence which involves maximizing the difference between the ex ante likelihoods of correct and incorrect imposition of sanctions section i briefly derives this result and shows how contrary to some suggestions it differs from the familiar preponderance of the evidence rule under which sanctions are applied if and only if it is more likely than not that the individual before the tribunal committed the harmful act such analysis however omits a central concern with the mistaken imposition of sanctions that the prospect of such error will chill desir able behavior in competition law efficient procompetitive behavior e g promotional pricing may be discouraged with securities regulation the cost of capital may be raised if honest ipos often lead to successful class action suits under tort law health care providers might avoid treatment of high risk patients for fear of erroneous malpractice liability this dimension of the problem seems widespread and is likely to be

first mover disadvantages with private information we consider a leader follower game with output quantities as strategies so as to demonstrate the reduced advantages of the stackleberg leader in a stochastic environment with private information at the equilibrium the strategy of the leader reveals to the follower information about the demand in an attempt to signal low demand the leader contracts his output nevertheless unless the leader s information is infinitely noisy the follower can always correctly infer his signal we find a wide range of parameter values over which the follower is better off compared to the leader

national systems of biotechnology innovation complex interdependence in the global system this paper explores the relationship between national institutional context and the development of biotechnology in the united states united kingdom japan and germany national patterns in biotechnology r d are linked to the configuration of county specific institutional features into a system of innovation which supports or impedes the accumulation and diffusion of knowledge between the scientific and industrial communities building on this comparative analysis it is argued that the particular characteristics of national systems of biotechnology innovation form the basis for complex interdependence within the global system through international technological cooperation and the cross border adoption and adaptation of institutional forms and practices implications for national technological advantage and the stability of national institutional systems are discussed

can incomplete information lead to under exploitation in the commons abstract this paper analyzes the protection of a common pool resource cpr through the management of information specifically we examine an entry deterrence model between an incumbent perfectly informed about the initial stock of a cpr and an uninformed potential entrant in our model the appropriation of the cpr by the incumbent reduces both players future profits from exploiting the resource in the case of complete information we show that the incumbent operating in a high stock common pool overexploits the cpr during the first period since it does not internalize the negative external effect that its first period exploitation imposes on the entrant s future profits this inefficiency however is absent when the commons totally regenerate across periods under incomplete information we identify an additional form of inefficiency in particular the incumbent operating in a low stock cpr underexploits the resource in order to signal the low available stock to potential entrants deterring entry

trade association disclosure rules incentives to share information and welfare in this article i propose a monopolistic competition framework to analyze the effects of different disclosure rules used by trade associations on the incentives to share information and on the welfare of consumers firms and society this framework is appropriate whenever a single firm cannot influence aggregate market magnitudes and serves as a benchmark for the analysis of information pooling agreements abstracting from strategic considerations i report two main results first a policy of nonexclusionary disclosure destroys the incentives to share information while exclusionary disclosure preserves them second information sharing increases expected total surplus with cournot competition but decreases it with bertrand competition in the context of a quadratic normal model with demand uncertainty

oligopoly limit pricing we expand milgrom and roberts 1982 limit pricing model to allow for multiple incumbents each incumbent is informed as to the level of an industry cost parameter and selects a preentry price while a single entrant observes each incumbent s preentry price we find that incumbents are unable to coordinate deception which results in a separating equilibrium in which preentry prices are not distorted further introducing the refinement of unprejudiced beliefs we show that the no distortion equilibrium is the only refined separating equilibrium plausible pooling equilibria fail to exist or involve downward distortions in preentry prices

limit pricing when incumbents have conflicting interests abstract this paper considers entry into a market with two incumbents where one prefers entry and one dislikes it unlike the entrant incumbents know market demand in separating equilibria incumbents play full information nash equilibrium strategies when beliefs are unprejudiced separating equilibria only exist if entry is relatively unimportant for an incumbent in growing markets this condition will tend to be violated so that only pooling equilibria may exist

entry deterrence and the free rider problem the public good aspect of entry prevention is examined in an industry characterized by an established oligopoly facing a potential entrant although incumbent firms act noncooperatively underinvestment in entry deterrence does not occur and in fact incumbents may find themselves in a pareto dominated arrangement in terms of profits by preventing entry

regulatory risk under optimal monopoly regulation i develop a tractable framework to study regulatory risk under optimal monopoly regulation it captures increasing regulatory risk as mean preserving spreads of two regulatory variables weights attached to profits and costs of public funds the regulator s reaction to regulatory risk depends on the curvature of demand for convex concave demand it yields a positive negative information rent effect that benefits hurts the firm consumers dislike a positive information rent effect but their risk preferences also depend on their tendency to dislike fluctuations in consumption risk preference of benevolent regulators may contradict both those of the firm and consumers

the insurance is the lemon failing to index contracts we model the widespread failure of contracts to share risk using available indices a borrower and lender can share risk by conditioning repayments on an index the lender has private information about the ability of this index to measure the true state that the borrower would like to hedge the lender is risk averse and thus requires a premium to insure the borrower the borrower however might be paying something for nothing if the index is a poor measure of the true state we provide sufficient conditions for this effect to cause the borrower to choose a nonindexed contract instead

signalling and entry deterrence a multidimensional analysis i consider whether a privately informed incumbent can use limit pricing and upward distortions in advertising to deter profitable entry profitable entry is not deterred when the incumbent is privately informed only about its cost type profitable entry may be deterred however if the incumbent is privately informed about its cost type and its patience level an equilibrium foundation is thus provided for the traditional hypothesis that limit pricing and aggressive advertising by an incumbent may deter profitable entry at a methodological level the article contributes by characterizing the refined equilibria of a signalling model with multiple dimensions of private information and multiple signals

recent advances in oligopoly theory from a game theory perspective abstract this paper surveys the contribution that recent developments in game theory have made to the understanding of oligopoly theory it is argued that conventional models suffer from the problem that there are a number of solution concepts offered with little guidance as to which should be selected and this is related to the static nature of the models employed one important development in game theory has been the analysis of repeated games and when applied to oligopoly theory this suggests that outcomes may be more cooperative than conventional theory suggests related to this is the requirement that firms employ credible threats to punish cheating from cooperative outcomes and the paper examines the extent to which imperfect information may restrict the scope of firms to employ such punishments one way in which firms may seek to make threats credible is through strategic investments for example in production capacity and the paper explores how competition over price or output is integrated with competition over instruments for strategic investment

capital as a commitment strategic investment to deter mobility abstract this paper analyzes how an early entrant in a market can exploit its head start by strategic investment the analysis is based on spence s paper investment strategy and growth in a new market bell j econ 10 1979 1 19 we frist study the investment game in the no discounting case which embodies the key features of mobility deterrence we establish the existence of a set of perfect equilibria and suggest that one particular equilibrium is most reasonable this equilibrium also valid with discounting involves the follower firm being forever deterred from investing to its steady state reaction curve in contrast to spence s proposed solution

almost efficient information transmission in elections abstract we study a model in which two parties compete by announcing their policies after receiving conditionally independent private signals about the true state of the world parties are both office and policy motivated our model can explain radically different policy positions even when parties receive identical signals and have unbiased preferences this holds in an asymmetric equilibrium in which both parties reveal their private information to the voters and the implemented policy is almost first best for all possible realizations of parties signals in this equilibrium one party adopts extreme and the other one moderate policy positions

monetary policy delegation and polarisation there is by now a comprehensive literature beginning with rogoff 1985 arguing that a government should delegate monetary policy to a central banker who is independent and more conservative than the government itself this will reduce the inflationary bias typically at the cost of stabilisation for a democratic society this result would suggest that the median voter should prefer that monetary policy is delegated to an independent central banker who is more conservative than herself typically the central banker is chosen by the government and the government is chosen by the electorate thus there is some albeit perhaps a weak link between the preferences of the electorate and the central banker although the central banker presumably should be chosen for a long period of time waller and walsh 1996 he has to be chosen at some point in time this paper contains a political economy model where the central issue in politics is the choice of central banker and

antitrust enforcement under asymmetric information optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting the antitrust authority does not know cartel costs and so cannot distinguish between a high cost competitive industry and a low cost cartel the problem differs from principal agent models since firms can choose competitive or collusive behavior with costly enforcement the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price collusive firms moderate markups to reduce the risk of being prosecuted copyright 1989 by royal economic society

a theory of market structure with sequential entry this article sets out a theory of market structure with sequential entry we characterize the perfect nash equilibrium to the entry game in several propositions first equilibria never involve excess capacity second a sufficient statistic for the entry of any firm is that its profits are positive when computed myopically i e with no further entry third the equilibrium number of firms is the smallest number that can deter entry fourth aggregate output in equilibrium is no smaller than the limit output we calculate some explicit solutions to the model and examine comparative static properties

noncooperative entry deterrence uncertainty and the free rider problem previous authors who have considered the issue of noncooperative entry deterrence have not found the free rider problem to be a significant factor these authors however have only considered models in which the exact investment needed to deter entry is known with certainty in this paper i add uncertainty to the models investigated by these previous authors and demonstrate that the free rider problem can be significant but is not so in all cases that is for certain types of entry deterring investments the introduction of uncertainty causes the oligopoly to underinvest in entry deterrence however for other types no underinvestment result arises

demand signalling and screening in channels of distribution this paper examines two ways channel members at the manufacturing and retail ends deal with asymmetric information in the context of new product introduction a manufacturer who has private information that demand for a new product will be high can differentiate itself from a manufacturer less confident of demand by undertaking high levels of pre launch advertising and offering a high wholesale price a retailer for its part can screen potentially high demand from potentially low demand products by stipulating a take it or leave it slotting allowance the assumption being that the offer will be accepted only by manufacturers confident of sufficient demand to recover the high initial cost of slotting allowances it is shown that manufacturers prefer to signal demand through advance advertising and wholesale price retailers to screen demand through slotting allowances it is shown that unless advance advertising is sufficiently effective slotting allowances yield higher total channel profits and higher social welfare

oligopoly limit pricing strategic substitutes strategic complements abstract conditions are outlined under which it is a sequential equilibrium for firms to forgo current profit to reduce the likelihood of entry if firms are uncertain about rivals costs the assumptions about out of equilibrium beliefs that sustain such equilibria are more plausible if firms produce strategic substitutes than if firms produce strategic complements

oligopolistic entry deterrence under incomplete information recent work has investigated the effects of asymmetric information between an incumbent firm and a potential entrant this study extends the analysis to allow the initial market structure to be a noncooperative oligopoly we show that there is a bayesian nash equilibrium in which the incumbent firms although unable to collude strategically deter entry that would have occurred under complete information in contrast to the past limit pricing literature it is a high price that deters entry as it signals to the potential entrant that this is a high cost industry extending the model to allow for multiple potential entrants we find that increasing the degree of potential competition raises the preentry price and reduces the likelihood of entry

strategic entry deterrence in analyzing deterrence of large scale entry two classes of entry barriers may be distinguished an innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization in contrast a strategic entry barrier is purposely erected to reduce the possibility of entry two types of innocent barriers may also be distinguished a postentry absolute advantage has the property that if entry did occur the established firm would be at a profit advantage over the entrant examples are superior technology or product design patents and lower input prices a preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant before the entrant makes his entry decision the established firm has already committed resources this prior existence gives first move advantages the preentry asymmetry is independent of symmetry or asymmetry in the rules the equilibrium concept of the postentry game that might ensue even if the postentry game will be played according to nash cournot or entrant as leader rules the preentry leadership

sequential entry industry structure and welfare in this paper we reexamine the relationship between potential competition industry structure and welfare in a market subject to a sequential entry threat where firms can make quantity commitments and have access to a constant returns technology it is shown that provided entry is not blockaded the incumbent s will either prevent entry or allow all the potential entrants in furthermore actual entry may decrease but social welfare never goes down with more potential entrants nevertheless with a finite number of potential entrants policies which lower the cost of entry need not be beneficial in welfare terms

optimal export policy in the presence of informational barriers to entry and imperfect competition abstract this paper examines government intervention to help exporters overcome informational barriers to entry into foreign markets foreign consumers know the quality of a local good but not that of the imported substitute an exporter who chooses high quality needs to signal this choice to foreign consumers via a high introductory price export policy affects both the signaling distortion and competition between exporter and incumbent the signaling distortion may call for an export subsidy competition for an export tax which policy is adopted in equilibrium depends on industry characteristics over time the export tax tends to rise as the signaling distortion disappears

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

elections with privately informed parties and voters this paper studies a situation in which parties are betterinformed than voters about the optimal policies for voters weshow that voters are able to infer the parties information byobserving their electoral positions even if parties have policypreferences which differ substantially from the median voter s unlike previous work that reach opposite conclusions we assumethat voters have some private information of their own if theinformation available to voters is biased parties attempts toinfluence voters beliefs will result in less than fullconvergence even if parties know with certainty the optimalpolicy for the median voter

duopoly information equilibrium cournot and bertrand abstract in a duopoly model where firms have private information about an uncertain linear demand it is shown that if the goods are substitutes not to share information is a dominant strategy for each firm in bertrand cournot competition if the goods are complements the result is reversed furthermore the following welfare results are obtained 1 i with substitutes in cournot competition the market outcome is never optimal with respect to information sharing but it may be optimal in bertrand competition if the products are good substitutes with complements the market outcome is always optimal 2 ii bertrand competition is more efficient than cournot competition 3 iii the private value of information to the firms is always positive but the social value of information is positive in cournot and negative in bertrand competition

regulatory decision errors legal uncertainty and welfare a general treatment abstract we provide a general treatment of the implications for welfare of various sources of legal uncertainty facing agents about the decisions made by a regulatory authority we distinguish the legal uncertainty from the decision errors made by the authority while an increase in decision errors will always reduce welfare for any given level of decision errors information structures involving more legal uncertainty can improve welfare this holds always when sanctions are set at their optimal level this transforms radically one s perception about the costs of legal uncertainty we also provide general proofs for two results previously established under restrictive assumptions

pricing strategy quality signaling and entry deterrence abstract i investigate a pricing strategy that is aimed at deterring entry by applying a two period model of a durable goods monopolist there exists an incumbent that is of two types that is high and low quality types they differ in terms of their r d capabilities and the incumbent s type is assumed to be unknown to an entrant if the entrant decided to enter the market nash bertrand price competition ensues between the incumbent and the entrant i show that not only limit pricing but also prestige pricing signals the incumbent s quality type which serves to discourage entry in the prestige pricing the high quality type sells the products at an intentionally higher price i also show that although limit pricing is more desirable than prestige pricing from a social welfare viewpoint the incumbent can still choose prestige pricing

the impact of firmspecific capabilities on the amount of capital raised in an initial public offering evidence from the biotechnology industry abstract going public has a magical sound to most entrepreneurial managers by going public the firm increases its legitimacy in the business community improves access to debt financing and creates a means of exit for major shareholders however by far the most important reason for going public is to infuse a significant amount of investment capital into the firm it is well documented that small businesses frequently fail because of insufficient funding and heavy debt loads issuing an initial public offering ipo allows entrepreneurial firms to overcome these pitfalls clearly if access to capital is the major goal of going public then the success of an offering is measured by the amount of capital raised by the firm this study presents a model of the total amount of capital raised by a firm through an ipo the explanatory variables include several indicators of the scientific capabilities of the firm including the location of the firm the quality of the research staff the number of products under development the number of patents held by the firm and the firm s prior spending on research and development r d the model is empirically tested on a sample of 92 biotechnology ipos the results provide strong support for the hypothesized positive relationship between the total amount of capital raised by a firm s ipo and the scientific capabilities of the firm our results have important implications for entrepreneurs first an entrepreneur needs to develop and send credible signals indicating the value of the firm s intangible assets to the market second the market values as deep a product pipeline as possible given a firm s resource constraints third choice of location is a key strategic decision that should not be overlooked fourth the market values firm specific capabilities and will increase the capital it is willing to invest in a firm accordingly finally the amount of capital a firm raises in its ipo can be influenced by entrepreneurial managers strategic decisions

competitive pricing in markets with different overhead costs concealment or leakage of cost information this paper experimentally investigates how leaders and followers in a duopoly set prices for two product markets that have different overhead costs in a fully crossed two by two design we manipulate the participants private cost report quality as either low or high representing the extent to which these reports reveal that product markets have different overhead costs we show that when only the leader is given a high quality cost report private cost information of higher quality is better incorporated into market prices that are observable to participants both the leader and follower improve in profits and their prices better reflect the differences in overhead costs because the follower infers information from the leader s prices information leakage in contrast when only the follower receives a high quality cost report the leader s profits and prices do not improve this occurs because the follower conceals cost information when the leader has a low quality cost report

strategic deterrence of sequential entry into an industry industrial entry deterrence is typically studied in a setting where an established firm or firms confront and attempt to deter a single potential competitor during the evolution of most industries however a sequence of firms enters or attempts to enter at distinct points in time consideration of issues arising from sequential entry fundamentally alters the qualitative nature of the deterrence decision undertaken by incumbent firms within a sequential setting counterintuitive behavior may be observed specifically numerous government policies designed to decrease industrial concentration penalties for anticompetitive practices subsidization of entry consent decrees restructuring industries may have the opposite effect

cartel enforcement with uncertainty about costs what cartel agreements are possible when firms have private information about production costs in order for a cartel agreement to work it must take into account the incentives for firms to misrepresent their cost information and it must provide sufficient reward so that no firm wishes to defect for private cost uncertainty we characterize the set of cartel agreements with side payments that can be supported as bayesian nash equilibria we show that if defection results in either cournot or bertrand competition the incentive problems in large cartels are severe enough to prevent the cartel from achieving the monopoly outcome in contrast with common cost uncertainty the incentive problems become less severe in large cartels allowing perfect collusion

knowledge flows in the global innovation system do u s firms share more scientific knowledge than their japanese rivals in this paper i test the common assumption that japanese firms strive to appropriate knowledge from the global scientific community while sharing little in return i found no support for this conventional perspective in the flat panel display industry u s firms shared no more knowledge with their global scientific community than japanese firms similarly japanese firms appropriated no more knowledge from the global community than their u s counterparts

price and advertising signals of product quality we present a signaling model based on ideas of phillip nelson in which both the introductory price and the level of directly uninformative advertising or other dissipative marketing expenditures are choice variables and may be used as signals for the initially unobservable quality of a newly introduced experience good repeat purchases play a crucial role in our model a second focus of the paper is on illustrating an approach to refining the set of equilibria in signalling games with multiple potential signals

the entry deterring effects of inflexible regulation this paper investigates the signalling role of tax policy in promoting or hindering the ability of a monopolist to practise entry deterrence we show that environmental policy can facilitate the incumbent firm s concealment of information from potential entrants thus deterring entry and yet entail welfare improvements furthermore we demonstrate that entry deterrence is more likely to arise when environmental regulation cannot be rapidly revised across time if market conditions change inflexible regimes than when regulatory agencies can adjust environmental policy over time les effets de dissuasion de l entree d une reglementation inflexible ce texte examine le role de signalisation d une politique fiscale qui promeut ou reduit l habilete d un monopole a pratiquer la dissuasion de l entree de concurrents on montre qu une politique environnementale peut faciliter la dissimulation d information par la firme en place vis a vis les concurrents potentiels et donc les dissuader d entrer et pourtant engendrer des ameliorations de bien etre de plus on montre que la dissuasion de l entree est davantage susceptible d emerger quand la reglementation environnementale ne peut pas etre revisee rapidement dans le temps si les conditions de marche se modifient regimes inflexibles que quand les agences de reglementation environnementales peuvent ajuster la politiques dans le temps

securitization and lending competition we study the eects of securitization on interbank lending competition when banks see private signals of local applicants repayment chances if banks cannot securitize the outcome is e cient they lend to their most creditworthy local applicants with securitization banks lend also to remote applicants with strong observables in order to lessen the lemons problem they face in selling their securities this reliance on observables is ine cient raises the mean default risk and may lead to a deceptive rise in credit scores

imperfect competition law enforcement competition policy is a subject of often heated debate competition authorities seeking to prevent or battle anticompetitive acts in complex cases to the best of their abilities regularly find themselves advised by rival economic theories and disputed empirical analyses as a consequence there is a real possibility that they may occasionally err missing true violations of competition law or finding firms liable that actually had no other intentions than good competition in this paper possible consequences of such imperfect competition law enforcement on firm strategies are considered in a simple model of collusion it is found that the incidence of anti competitive behavior increases in both types of enforcement errors type ii errors decrease expected fines while type i errors encourage industries to collude precautionary when they face the risk of a false conviction hence fallible antitrust enforcement may stifle genuine competition thus stimulating the very behavior competition policy is meant to deter when enforcement errors are non negligible competition authorities run the risk of being over zealous in the sense that welfare is best served by an authority that is selective and conscientious in its targeting of alleged anticompetitive acts

when does environmental regulation facilitate entry deterring practices abstract this paper evaluates the welfare benefits of introducing environmental regulation in a market that is subject to the threat of entry we consider complete and incomplete information settings where potential entrants use the regulator s tax policy and the incumbent s output decisions in order to infer the incumbent s cost structure when the regulator is absent we show that firms entry deterring practices increase pollution relative to complete information hence under certain conditions environmental regulation becomes more beneficial in incomplete than in complete information contexts our results therefore identify under which cases an under or over estimation of the welfare benefits of environmental regulation arises from ignoring the information setting in which firms interact we also examine how this estimation error increases as firms become more symmetric in their production costs

entry deterrence and signaling in markets for search goods abstract this paper studies entry in markets for search goods signaling through prices is studied both when an entrant s quality is private information and when it is common knowledge to the entrant and incumbent when consumers visit a store they are assumed to observe quality and have the option of continuing to search but at a cost when search costs are low an entrant can signal high quality by setting a sufficiently high price so that consumers who find out that its quality is low visit the incumbent entry may be facilitated when search costs are sufficiently low or when the incumbent knows the quality of the entrant s product

competition and confidentiality signaling quality in a duopoly when there is universal private information abstract we model non cooperative signaling by two firms that compete over a continuum of consumers assuming each consumer has private information about the intensity of her preferences for the firms respective products and each firm has private information about its own product s quality we characterize a symmetric separating equilibrium in which each firm s price reveals its respective product quality we show that the equilibrium prices the difference between those prices the associated outputs and profits are all increasing functions of the ex ante probability of high safety if horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known thus while signaling imposes a distortionary loss on a monopolist using price to signal quality duopolists may benefit from the distortion as it can reduce competition finally average quality is lower since signaling quality redistributes demand towards low quality firms

polarization and inefficient policies of the economy in this case the costs of producing a public good the parties each propose a policy an election is held and the policy of the winning party is implemented voters and parties care about the level of the public good and costs two kinds of sequential equilibria exist revealing where voters learn the true costs and the implemented policy adjusts to costs and non revealing if parties preferences are polarized only non revealing equilibria fulfill a refinement criterion like the intuitive criterion if they are alike only revealing equilibria fulfill this criterion thus less political polarization improves information revelation in electoral democracies policy motivated parties are likely to be better informed about the functioning of the economy than are voters this paper presents a model where two parties but not voters are informed about the cost of producing a public good we study whether an electoral democracy leads to efficient production of the public good given this asymmetry of information in particular under which circumstances will the implemented policy the level of the public good reflect actual costs the main result is that the policy will reflect costs if and only if at least one of the parties has preferences which are sufficiently similar to the median voter s in this sense polarization leads to inefficiency the public good can be for instance infrastructure medicare or military services both a continuum of voters and the parties have preferences over the amount of the good that is provided by the government the preferences of the two parties are situated on each side of those of the median voter the costs of providing the good are not precisely known to the voters who only know the distribution of costs and that they will pay for these costs as taxpayers on the other hand the parties know the costs

optimal law enforcement with sophisticated and naive offenders abstract research in criminology has shown that the perceived risk of apprehension often differs substantially from the true level to incorporate this insight we extend the standard economic model of law enforcement becker 1968 by considering two types of offenders sophisticates and naives sophisticates always fully take the actual enforcement effort into account while naives do so only when the effort is revealed by the authority otherwise naives rely on their fixed perceptions when the share of naives is high a welfare maximizing authority chooses a low enforcement effort which is over estimated by the naives otherwise it chooses a high effort which is then revealed to all potential offenders in three empirically relevant extensions we allow for lower efficacy of the effort due to avoidance activities endogenous fines and heterogeneity with respect to naives perceptions

why are japanese firms so innovative in engineering technology abstract japanese firms belonging to the electric and electronics industry have been producing a large number of innovations concentrated in the field of engineering technology and directly related to commercial products one reason why japanese firms have such characteristics can be explained by their unique behavior and organization of research and development r d the behavior of the r d division of japanese firms is characterized by less independence from other divisions of the firms a close relationship with other divisions and concerted behavior to maximize total corporate profits these are indicated by the fact that r d funds are allocated flexibly by taking into account the intentions of other operational divisions or the headquarter s office and the fact that there exists a unique career path in a japanese firm by which r d personnel do not always stay in the research division but are frequently assigned to other various divisions as they climb upward however these structural and behavioral characteristics of japanese corporate r d which so far have been efficient in applied research and product development are not adaptable to basic research recently japanese firms are seeking a new r d organization and management system to solve the problem

note the role of returns policies in pricing and inventory decisions for catalogue goods manufacturers often use returns policies to encourage retailers to stock and price items more aggressively we focus on the effect that such policies have on both a retailer s and a manufacturer s profits when the retailer must commit prior to the selling season to both a stocking quantity and a price at which to sell an item such a commitment is often necessary for retailers who sell primarily through catalogues

competition between insurers with superior information abstract we analyze markets where insurers are better informed about risk than consumers we show that even competitive markets may result in insufficient information revelation and inefficient insurance coverage this explains why certain risky consumers remain uninsured and why certain market segments are persistently profitable we also show robustness to competition in menus or mechanisms our analysis of the contrary of adverse selection competition between principals with common value and exclusivity is suitable for other markets lawyers doctors mechanics etc

the impact of information sharing opportunities on market outcomes an experimental study information regarding uncertain demand conditions or industry costs as well as the opportunity to share this information can have an important impact on firm behavior a series of recent game theoretic models have characterized the incentives for firms to share information regarding uncertain parameters 3 7 8 13 14 16 22 26 20 21 provide a comprehensive survey most of the models assume that behavior in the output market is noncooperative regardless of the firms information sharing decisions this paper reports a series of 15 laboratory sessions that test the noncooperative backward induction approach of these models the results suggest that pricing behavior may be influenced by the information sharing decision under most conditions the noncooperative nash model accurately describes average behavior although in certain conditions information sharing appears to facilitate tacit collusion the paper also estimates a simple behavioral model of learning that describes how experimental subjects learn the optimal information sharing decision as an alternative to the theories backward induction assumption the information sharing models tested here have been interpreted as identifying the incentives for competitive firms to form a trade association that reduces their uncertainty thousands of trade and professional associations are active worldwide and the majority collect information from their members that is aggregated and distributed through association statistical programs the theoretical models demonstrate how three variables influence the information sharing incentives 1 the type of competition bertrand or cournot 2 the nature of the goods substitutes or complements and 3 the source of uncertainty demand or cost the first two variables determine the slope of the firms reaction functions and the uncertainty source along with the information sharing decision determines the degree of correlation among the firms strategies the incentive for noncooperative firms to share information shifts as these three variables change because reduced correlation has a negative or positive effect on profit depending upon the slope of the reaction functions

oligopoly limit pricing in the lab we examine the behavior of senders and receivers in the context of oligopoly limit pricing experiments in which high prices chosen by two privately informed incumbents may signal to a potential entrant that the industry wide costs are high and that entry is unprofitable the results provide strong support for the theoretical prediction that the incumbents can credibly deter unprofitable entry without having to distort their prices away from their full information levels yet in a large number of cases asymmetric information induces incumbents to raise prices when costs are low the results also show that the entrants behavior is by and large bi polar entrants tend to enter when the incumbents prices are low but tend to stay out when the incumbents prices are high

strategic wholesale pricing in a supply chain with a potential entrant this paper develops an adverse selection model for a two stage supply chain with one supplier one retailer and a potential outside entrant supplier who makes a partially substitutable product the work is different from most research on entry deterrence that only considers a single stage model our main interest is to investigate how the incumbent supplier can strategically maximize her profit by a wholesale pricing policy when facing the potential entrant we focus on a model where the entrant supplier will sell her product through the same incumbent retailer we derive the optimal decisions for each player and study the comparative statics of the equilibrium to investigate how the supply chain structure may affect the deterrence strategy of the incumbent supplier we also consider three alternative models with different channel structures when both suppliers sell their products directly when the entrant has another independent retailer and when the entrant sells her product directly through the comparison we find that the existence of the common downstream retailer often enhances the deterring motivation of the incumbent supplier

dynamic capabilities and new product development in high technology ventures an empirical analysis of new biotechnology firms abstract in industries populated by entrepreneurial high technology firms the rapid development of new products is viewed as a key determinant of success developing a portfolio of new products is necessary to gain early cash flows external visibility and legitimacy early market share and increase the likelihood of survival schoonhoven eisenhardt and lymman 1990 in addition recent research has shown that new product development improves a firm s ability to raise money through an initial public offering deeds decarolis and coombs 1997 this paper develops a model of new product development which is tested on a sample of 94 pharmaceutical biotechnology companies we hypothesize that new product development capabilities are a function of a firm s scientific technological and managerial skills to test this relationship we develop several firm specific measures in an attempt to triangulate in on the core construct of firm specific new product development capabilities some important implications for entrepreneurs managers of high technology firms flow from our results first entrepreneur managers need to view the choice of geographic location as an important strategic decision which will impact their firm s access to the skilled technical personnel and the streams of knowledge our results indicate that a choice location has a significant concentration of similar firms but the level has not yet reached a point where competition for resources in the local environment offsets any advantages of the location in the case of biotechnology this would seem to indicate that the prime locations would be expanding areas such as san diego seattle and philadelphia rather then the established locations of silicon valley and boston second as scientific knowledge plays an ever more important role in a firm s success the quality of the firm s scientific team is a critical ingredient in a firm s new product development capability but how do you evaluate the quality of scientific personnel our results indicate that there is a strong positive relationship between the impact as measured by citations of a team s prior research in the academic community and the productivity of that team in a commercial research laboratory therefore the judgement of a scientific field captured by citations or perhaps expert judgement should prove to be a useful tool when evaluating personnel for a firm s research team third the results from our measures of ceo experience and the percentage of the top management team with a ph d are interesting as expected the prior experience of ceo in managing a commercial research facility enhances a firm s new product development capabilities however results for our top management team variable appears to indicate that the over reliance on technical personnel in the management of the organization detracts from the product development process taken together these results seem to imply that it is important that the leadership of the organization have knowledge of and experience in managing the new product development process but that diverting the firm s scientific personnel s energies away from the laboratory and into the management of the organization maybe counter productive therefore what a high technology venture appears to need is leadership that understands and has experience in the new product development process but which is separate and distinct from the scientific team this type of leadership keeps the scientific team focused on research and development and out of the boardroom

search bargaining and signalling in the market for legal services over the last eight centuries lawyers in common law countries have generally been precluded from buying their clients cases recently a number of economists and lawyers have argued that sale should be allowed so as to eliminate moral hazard particularly when contingent fees are used this argument is based on full information reasoning however if the lawyer has private information about the case value then compensation demands potentially signal this value when the client can search over lawyers we provide a formal model and a family of computational examples that show that allowing possibly partial purchase can reduce expected social efficiency

industry structure with sequential technology choice abstract noncooperative entry deterrence arises in a market where firms enter sequentially and irreversibly choose a technology in the case of delegated entry deterrence the earliest firms enter with a normal technology and pass on entry deterrence responsibilities to subsequent entrants in the case of partial entry deterrence the earlliest firms choose an inferior technology that allows some but not full entry of later firms with a normal technology in both cases entry is deterred in that the equilibrium number of firms is smaller than would prevail if all firms were to choose a normal technology

advertising and limit pricing we enrich milgrom and roberts 1982 limit pricing model to allow an incumbent to signal his costs with both price and advertisements our fundamental result is that a cost reducing distortion occurs in that the incumbent behaves as if there were complete information but his costs were lower than they are preentry price is therefore distorted downward and demand enhancing advertising is distorted upward as a consequence of signalling if advertising is a purely dissipative signal it is not used nor therefore distorted recent refinements of the sequential equilibrium concept are featured