efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

formation of buyer seller trade networks in a quality differentiated product market we examine the formation of buyer seller links when exchange can take place only if such a link exists sellers produce products of different qualities and multiple sellers can form a sellers association to pool their customers setting uniform prices buyers form trade links with individual sellers or sellers associations we show which buyer seller links will form and find the set of links that are stable and show how these links influence prices we also show that a trade network mismatch may occur where a high quality good remains unsold even without an economy wide excess supply of goods jel classification d40 d51 d82

of networks and markets the rise and rise of a south indian town the example of tiruppur s cotton knitwear industry abstract tiruppur town is the center of a tightly clustered range of activities related to the cotton knitwear industry the successful and dramatic expansion which has taken place over the last 15 years has meant many more jobs limited technological improvement improved quality in yarn and fabric and an increasingly diverse range of garments for the larger firms in the industry access to export markets has been the driving force to improving their competitiveness wages remain low and working conditions poor however perhaps partly because capital concentration has not on the whole been accompanied by centralized vertically integrated production nevertheless clustering and dense interfirm networks provide advantages for firms of all sizes since process specialization is spatially divisible

asymmetric international minimum quality standards and vertical differentiation this paper develops a two country model of a vertically differentiated duopoly that spans two countries which are not integrated without additional costs equilibrium qualities prices profits and consumer s surplus are compared when 1 minimum quality standards are identical and 2 standards differ across countries both markets turn out to be connected by the quality choices of the two firms both firms prices in the two countries and their profits are lower whereas consumer s surplus and the two offered qualities are higher in both countries if no firm is forced out of the country s market with the more demanding minimum quality standard copyright 1995 by blackwell publishing ltd

on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

influencing the influencers a theory of strategic diffusion the growth of the internet and assorted technologies has made it possible to collect and process detailed information on social networks this article investigates how firms and governments can harness the power of social networks to promote their goals we show that the optimal use of social networks leads to higher sales and greater profits however an increase in the level and dispersion of social interaction can increase or decrease the optimal influence strategy and profits of the player depending on the content of the interaction optimal influence strategies will target individuals with low or high connections depending on the content of interaction finally the returns to investing in market research on social networks are greater in more unequal networks

minimum quality standards with more than two firms abstract this paper studies the effects of introducing a minimum quality standard mqs in a vertically differentiated market it is shown that previous results indicating beneficial effects of a mqs heavily depend on the duopolistic set up they had been developed in an example with three firms is then provided showing that not all reaction functions in quality levels are increasing we also show that the introduction of the standard decreases the profit levels of all firms the maximum quality level and the average quality consumed as a consequence despite the increase in consumer surplus any effective mqs would reduce welfare

using price distributions to estimate search costs we show how the equilibrium restrictions implied by standard search models can be used to estimate search cost distributions using price data alone we consider both sequential and nonsequential search strategies and develop estimation methodologies that exploit equilibrium restrictions to recover estimates of search cost heterogeneity that are theoretically consistent with the search models we illustrate the method using online prices for several economics and statistics textbooks

public goods in networks this paper considers incentives to provide goods that are non excludable along social or geographic links we find first that networks can lead to specialization in public good provision in every social network there is an equilibrium where some individuals contribute and others free ride in many networks this extreme is the only outcome second specialization can benefit society as a whole this outcome arises when contributors are linked collectively to many agents finally a new link increases access to public goods but reduces individual incentives to contribute hence overall welfare can be higher when there are holes in a network

interfirm relationships and informal credit in vietnam trading relations in vietnam s emerging private sector are shaped by two market frictions the difficulty of locating trading partners and the absence of legal enforcement of contracts examining relational contracting we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier a longer duration of trading relationship is associated with larger credit as is prior information gathering customers identified through business networks receive more credit these network effects are enduring suggesting that networks are used to sanction defaulting customers

maximum likelihood estimation of search costs abstract in a recent paper hong and shum 2006 using price distributions to estimate search costs rand journal of economics 37 257 275 present a structural method to estimate search cost distributions we extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs we apply our method to a data set of online prices for different computer memory chips the estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs search frictions confer a significant amount of market power to the firms despite more than 20 firms operating in each of the markets we estimate price cost margins to be around 25 the paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax

rat race redux adverse selection in the determination of work hours in law firms this paper describes an organizational setting in which professional employees are required to work inefficiently long hours the focus of the authors investigation is large law firms the income sharing that characterizes legal partnerships creates incentives to promote associates who have a propensity to work very hard law firms use indicators of this propensity especially an associate s record of billable hours in promotion decisions reliance upon work hours as an indicator leads to a rat race equilibrium in which associates work too many hours the authors find evidence in support of this conclusion with data they collected from two large law firms copyright 1996 by american economic association

talking searching and pricing this paper studies a consumers search model with word of mouth communication firms market a homogeneous product and choose prices consumers obtain price information in two ways they can search on their own and they can talk to other consumers in the basic model word of mouth communication is exogenous and the focus is on how the level of word of mouth communication shapes market equilibrium outcomes when search costs are low an intensification in word of mouth communication decreases firms competition the opposite holds when search costs are high the model is then extended to allow for strategic word of mouth communication market equilibria with word of mouth communication have the feature that some consumers acquire information personally while other consumers obtain their information by networking with others a decrease in the costs of word of mouth communication relatively to the costs of searching reduces the fraction of consumers who acquire information personally consequently it decreases firms competition

bilateralism and free trade we study a setting with many countries in each country there are firms that can sell in the domestic as well as foreign markets countries can sign bilateral free trade agreements that lower import tariffs and thereby facilitate trade we allow a country to sign any number of bilateral free trade agreements a profile of free trade agreements defines the trading regime our principal finding is that in symmetric settings bilateralism is consistent with global free trade we also explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements

price competition under limited comparability this paper studies market competition when firms can influence consumers ability to compare market alternatives through their choice of price formats we introduce random graphs as a tool for modelling limited comparability of formats our main results concern the interaction between firms equilibrium price and format decisions and its implications for industry profits and consumer switching rates we show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare finally we argue that our limited comparability approach provides a new perspective into the phenomenon of product differentiation

local matching of flexible load in smart grids abstract today s power systems are experiencing a transition from primarily fossil fuel based generation toward greater shares of renewable energy sources it becomes increasingly costly to manage the resulting uncertainty and variability in power system operations solely through flexible generation assets incorporating demand side flexibility through appropriately designed incentive structures can add an additional lever to balance demand and supply based on a supply model using empirical wind generation data and a discrete model of flexible demand with temporal constraints we design and evaluate a local online market mechanism for matching flexible load and uncertain supply under this mechanism truthful reporting of flexibility is a dominant strategy for consumers reducing payments and increasing the likelihood of allocation suppliers during periods of scarce supply benefit from elevated critical value payments as a result of flexibility induced competition on the demand side we find that for a wide range of the key parameters supply capacity flexibility level the cost of ensuring incentive compatibility in a smart grid market relative to the welfare optimal matching is relatively small this suggests that local matching of demand and supply can be organized in a decentral manner in the presence of a sufficiently flexible demand side extending the stylized demand model to include complementary demand structures we demonstrate that decentral matching induces only minor efficiency losses if demand is sufficiently flexible furthermore by accounting for physical grid limitations we show that flexibility and grid capacity exhibit complementary characteristics

networks of collaboration in oligopoly abstract in an oligopoly prior to competing in the market firms have an opportunity to form pair wise collaborative links with other firms these pair wise links involve a commitment of resources and lead to lower costs of production of the collaborating firms we study the incentives of firms to form links and the architecture of the resulting collaboration network we find that incentives to form links are intimately related to the nature of market competition our analysis also suggests that collaborations are used by firms to generate competitive advantage and that strategically stable networks are often asymmetric with some firms having many links while others have few links or are isolated specifically we show that networks with the dominant group architecture stars and inter linked stars are stable we also present some results on the architecture of socially efficient networks

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

retrospectives pareto s law vilfredo pareto using data for england a number of italian cities several german states paris and peru plotted cumulative distributions of income for these countries on double logarithmic paper he claimed that in each case the result was a straight line with about the same slope thus he asserted a law of income distribution i discuss pareto s discovery of this relationship his theory of income distribution pareto s law and pareto optimality the attack on pareto s law the counterattack and the more recent literature for all the excesses of the paretian camp followers there remains the significant insight that the history of all hitherto existing society is a history of social hierarchies there is the feel of structure behind income distributions something is going on here

bargaining in a network of buyers and sellers abstract we analyze bargaining between buyers and sellers who are connected by an exogenously given network players can make repeated alternating public offers that may be accepted by any of the responders linked to each specific proposer our purpose is to find the conditions of the network which drive the price distribution in equilibrium this paper uses graph theory tools to provide necessary and sufficient conditions regarding the architecture of networks for the subgame perfect equilibrium of the bargaining game to coincide with the walrasian outcome

elicitation of honest preferences for the assignment of individuals to positions the problem of eliciting honest preferences from individuals who must be assigned to a set of positions is considered individuals know that they will be charged for the positions to which they are assigned a set of prices that provide no incentive for the individual to misrepresent his preferences is suggested it is shown that these prices constitute an element of the optimal solution to the dual of a linear programming assignment problem both the optimal allocation and the prices to be charged can be derived by solving two linear programming problems once preferences have been elicited the procedure can usefully be viewed as a simulation of a competitive market under conditions where such a market cannot be expected to function well it results in an efficient allocation where all resources are valued at their opportunity costs and consumer surplus is maximized its outcome thus has the desirable properties of competitive market equilibria

ethnic fractionalization in an african labour market abstract we find evidence of ethnic fractionalization and its consequences in an african labour market we consider earnings differentials between members of different ethnic groups and between employers relatives unrelated co ethnics and other workers in the ghanaian manufacturing sector variations in a standard set of observed workers characteristics explain a large proportion of the earnings differentials between ethnic groups however the greatest proportion is explained by the ethnic fractionalization of the labour market combined with variations in employers characteristics workers who are related to their employers earn a premium and there is statistical discrimination in favour of inexperienced co ethnic workers

second sourcing as a commitment monopoly incentives to attract competition we show that a new product monopolist may benefit from delayed competition if consumers incur setup costs setup costs create a dynamic consistency problem the monopolist cannot guarantee low future prices once customers have incurred those costs we show that if customers anticipate this problem the monopolist s profits can be improved through ex ante commitment to competition in the post adoption market if setup costs are large if setup costs are small the monopolist can typically achieve the same level of profits without price commitment as with

contracting with qualified suppliers in an extension of the laffont tirole model a buyer fully qualifies a set of suppliers ex ante and awards production to the most efficient ex post the buyer s incomplete information about production costs biases ex ante market structure in favor of a greater number of qualified suppliers further extensions that allow product differentiation and learning by doing suggest explanations for split production awards and less than fully qualified suppliers it may be difficult to specify ex ante precisely how the assets will be employed in production grossman and hart 1986 once relationship specific assets are in place the characteristics of the transaction and the gains from trade will be determined by ex post contracting between the buyer and the seller a safeguard for the buyer is to contract with more than one potential supplier to invest in the relationship specific assets required for production then after production require ments become clear the buyer can structure a competition between these suppliers for the right to produce this article analyzes when a second sourcing policy is desirable and how the buyer should structure it asanuma s 1989 description of the two vendor policy of automobile manufac turers in japan provides a context for the analysis japanese automobile manufac turers contract out for various kinds of components for example headlamps brakes or steering columns the common practice is to purchase each component from a small and relatively stable group of qualified suppliers with the purposes of assuring supply and of creating competition moreover for a particular part for a particular model there is a tendency for an automobile manufacturer to purchase from a single supplier in the group for the life of the model my understanding from interviews and the trade press is that u s automobile manufacturers also sole source from a select group of qualified suppliers but with

the public demand for smoking bans smoking bans are gaining widespread support in the united states and other countries while supporters argue that bans are necessary to resolve market failures associated with negative externalities the coase theorem predicts that under various conditions private markets internalize negative externalities we examine the smoking issue within the framework of the coase theorem and hypothesize that smoking bans misallocate air space resources shared by smokers and nonsmokers because smoking bans shift ownership of scarce resources they are also hypothesized to transfer income from one party smokers to another party nonsmokers supporting evidence for these hypotheses is provided by an examination of a comprehensive smoking ban imposed in san luis obispo ca

consumer search with observational learning this article studies observational learning in a consumer search environment consumers observe the purchasing decision of a predecessor with similar preferences consumers rationally emulate by initiating their search at the firm from which their predecessor purchased free riding on search effort and reacting less to price changes prices are nonmonotone in search costs and may be as low as marginal costs we discuss several extensions and show that the effect of emulation on prices is stronger when i the number of firms increases ii consumers first visits are more elastic with respect to market shares and iii prices are adjusted more frequently

equilibrium in a market with sequential bargaining this paper considers a market where pairs of agents who are interested in carrying out a transaction are brought together by a stochastic process and upon meeting initiate a bargaining process over the terms of the transaction the basic bargaining problem is treated with the strategic approach the paper derives the steady state equilibrium agreements analyzes their dependence on market conditions such as the relative numbers of agents of different types and discusses their relations with the competitive equilibrium outcome and other results in the search equilibrium literature this paper considers a market that operates in the following way pairs of agents who have mutual interest in carrying out a transaction are brought together by a stochastic process when two agents meet they initiate a bargaining process over the terms of the transaction if two agents reach an agreement a transaction takes place and they leave the market of course the bargaining positions and hence the agreement reached in any particular meeting will be affected by the conditions prevailing in the market these will include the chances that each of the negotiating parties have of meeting other partners in the event that the agreement in the current negotiations is delayed also the expected length of time required to achieve an alternative transaction and the expected behavior of alternative partners the study of such a market mechanism is of interest for two reasons firstly it captures some realistic aspects of the trade in certain specific markets e g asset markets such as housing and some labor markets secondly it contributes to an understanding of the micro mechanisms of price formation and their role in shaping market outcomes in both cases the features studied are largely neglected in the traditional market equilibrium analyses the related literature includes the articles by diamond 4 5 diamond and maskin 6 mortensen 8 9 and zusman and bell 13 these articles consider markets of the type described above in which transactions are concluded at pairwise meetings of agents the major difference between our work and these articles is in the approach to the basic bargaining problem in the cited articles it is assumed that a meeting is concluded with an instantaneous agreement which divides the associated surplus in an arbitrary predetermined way when the surplus is assumed to be divided equally the division rule is in fact nash s axiomatic bargaining solution in contrast the present paper treats the basic bargaining problem with the strategic approach see rubinstein 19 which constitutes an attempt to look into the bargaining black box this approach explicitly models the time dimension of the bargaining process describes in detail the bargaining procedure and justifies the agreement as a perfect equilibrium in

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that

price formation on the marseille fish market evidence from a network analysis abstract the empirical analysis of fish markets always reveals strong price dispersion for homogeneous or very similar goods the problem is how to explain this price dispersion on a market where there is no evident arbitrage explanations proposed by different authors include differences in organization the characteristics of the good and the influences of social interactions between buyers and sellers in line with the last of these three approaches we consider the fish market of marseille as a seller seller network we start by examining the influence of market interactions through a static and then a dynamic econometric model we then analyze the role of the seller s position in the network we bring to light a surprising paradox in that the sellers who share the most buyers with competitors i e the most central sellers charge the highest prices

a theory of buyer seller networks this paper introduces a new model of exchange networks rather than markets of buyers and sellers it begins with the empirically motivated premise that a buyer and seller must have a relationship a link to exchange goods networks buyers sellers and the pattern of links connecting them are common exchange environments this paper develops a methodology to study network structures and explains why agents may form networks in a model that captures characteristics of a variety of industries the paper shows that buyers and sellers acting strategically in their own self interests can form the network structures that maximize overall welfare

asymmetric price effects of competition when price dispersion is prevalent a relevant question is what happens to the whole distribution of equilibrium prices when the number of firms changes using data from the gasoline market in the netherlands we find first that markets with n competitors have price distributions that first order stochastically dominate the price distributions in markets with n 1 firms second the effect of competition is stronger for the medium to upper percentiles of the price distribution finally consumer gains from competition are larger for relatively well informed consumers to account for these empirical patterns we extend varian s 1980 model by allowing for richer heterogeneity in consumer price information

diffusion of behavior and equilibrium properties in network games situations in which agents choices depend on choices of those in close proximity be it social or geographic are ubiquitous selecting a new computer platform signing a political petition or even catching the flu are examples in which social interactions have a significant role while some behaviors or states propagate and explode within the population e g windows os the hiv virus others do not e g certain computer viruses our goal in this paper is twofold first we provide a general dynamic model in which agents choices depend on the underlying social network of connections second we show the usefulness of the model in determining when a given behavior expands within a population or disappears as a function of the environment s fundamentals we study a framework in which agents face a choice between two actions 0 and 1 e g whether to pursue a certain level of education switch to linux os etc agents are linked through a social network and an agent s payoffs from each action depend on the number of neighbors she has and her neighbors choices the diffusion process is defined so that at each period each agent best responds to the actions taken by her neighbors in the previous period assuming that her neighbors follow the population distribution of actions a mean field approximation steady states correspond to equilibria of the static game under some simple conditions equilibria take one of two forms some are stable so that a slight perturbation to any such equilibrium would lead the diffusion process to converge back to that equilibrium point other equilibria are unstable so that a slight change in the distribution of actions leads to a new distribution of actions and eventually to a stable steady state we call such equilibria tipping points we analyze how the environment s fundamentals cost distribution payoffs and network structure affect the set of equilibria and characterize the adoption patterns within the network the paper relates to recent work on network games and network diffusion including work by stephen morris 2000 pastor satorras and vespignani 2000 mark e j newman 2002 dunia lopez pintado 2004 jackson and brian w rogers 2007 jackson and yariv 2005 and andrea galeotti et al 2005 henceforth ggjvy its contribution is in characterizing diffusion of strategic behavior and analyzing the stability properties of equilibria and employing methods that allow us to make comparisons across general network structures and settings given that social networks differ substantially and systematically in structure across settings e g ethnic groups professions etc understanding the implications of social structure on diffusion is an important undertaking for a diverse set of applications

on the form of transfers to special interests an important question in political economy concerns the form of transfers to special interests the chicago view is that political competition leads politicians to make such transfers efficiently the virginia position is that lack of information on the part of voters leads politicians to favor inefficient sneaky methods of redistribution this paper analyzes the form of transfers in a model of political competition in which politicians have incentives to make transfers to special interests it shows that when voters have imperfect information about both the effects of policy and the predispositions of politicians inefficient methods of redistribution may be employed

learning from neighbours when payoffs from different actions are unknown agents use their own past experience as well as the experience of their neighbours to guide their decision making in this paper we develop a general framework to study the relationship between the structure of these neighbourhoods and the process of social learning we show that in a connected society local learning ensures that all agents obtain the same payoffs in the long run thus if actions have different payoffs then all agents choose the same action and social conformism obtains we develop conditions on the distribution of prior beliefs the structure of neighbourhoods and the informativeness of actions under which this action is optimal in particular we identify a property of neighbourhood structures local independencewhich greatly facilitates social learning simulations of the model generate spatial and temporal patterns of adoption that are consistent with empirical work

inequality amongst the wealthiest and its link with economic growth in this article we correlate the key features of the distribution of wealth of the 500 wealthiest individuals in the netherlands with economic growth and stock market returns for the period 1998 to 2009 we show that each year the distribution obeys a power law and that the key parameter measures the degree of inequality our main finding is that more inequality amongst the wealthiest is associated with higher economic growth

word of mouth communication and social learning this paper studies the way that word of mouth communication aggregates the information of individual agents we find that the structure of the communication process determines whether all agents end up making identical choices with less communication making this conformity more likely despite the players naive decision rules and the stochastic decision environment word of mouth communication may lead all players to adopt the action that is on average superior these socially efficient outcomes tend to occur when each agent samples only a few others i introduction economic agents must often make decisions without knowing the costs and benefits of the possible choices given the frequency with which such situations arise it is understandable that agents often choose not to perform studies or experiments but instead rely on whatever information they have obtained via casual word of mouth communication reliance on this sort of easily obtained information appears to be common in circumstances ranging from consumers choosing restaurants or auto mechanics to business managers evaluating alternative organizational structures this paper studies two related environments in arguing that individuals reliance on word of mouth communication has interesting implications for their aggregate behavior first motivated by the diffusion of new technologies we consider a choice between two competing products with unequal qualities or payoffs and show that the structure of communication is important in determining whether the population as a whole is likely to learn to use the superior product second we consider a choice between two products or practices that are equally good and ask whether consumers are likely to herd onto a single choice or whether diversity will obtain even in the long run we explore the implications of word of mouth communication in a simple nonstrategic environment there is a large population of identical players each of whom repeatedly chooses between two possible actions each player s payoff is determined by his own

making a market mass privatization in the czech and slovak republics the author assesses the czechoslovak mass privatization program for speed equity and corporate governance the program transferred claims on assets in 1 491 enterprises assets worth about 10 7 billion to the 8 5 million citizens who participated in the scheme the entire cycle of project preparation public information and nationwide simultaneous bidding took 14 months this was equivalent to privatizing more than three medium scale and large scale enterprises on average per day equity objectives were achieved by transferring equal claims equivalent to about 1 250 per person to all participants and by putting in place a transparent and decentralized process the government s role was simple to provide a framework and a set of rules for potential firms managers and shareholders to find each other the scheme s design based on simultaneous sequential bidding rounds worked to put information about enterprise values into the public domain by allowing increasingly informed bidders to interact the structure of ownership that emerged will have very different implications for corporate governance enterprises in the czech republic and those that sold for high prices in the bidding rounds are characterized by a greater concentration of shareholdings those in the slovak republic and those that sold for lower prices have more diffuse ownership structures the mass privatization scheme served to quickly differentiate the enterprises with favorable prospects from those with unfavorable prospects under current conditions but enterprises that could have survived in some form if they had been restructured before privatization or enterprises that could have been viable but lacked effective governance were sacrificed for the sake of speed and decentralization

minimum quality standards as a barrier to innovation abstract most models of minimum quality standards do not deal with the dynamic nature of regulation this note shows that presence of minimum quality standards may reduce firm incentives to innovate leading to a lower level of social welfare under regulation

oligopolistic pricing with heterogeneous consumer search abstract a finite number of identical stores sell a homogeneous good to consumers with heterogeneous search costs who search sequentially with perfect recall and without replacement consumers search rules are optimal with respect to the stores pricing strategies and consumers must visit a store to obtain information about its actual price a symmetric nash equilibrium sne always exists the model exhibits a variety of equilibrium behaviors between monopoly pricing and marginal cost pricing the competitiveness of a market depends crucially on the shape of the search cost distribution moreso than on the number of competing firms

warning labels as cheap talk why regulators ban drugs abstract one explanation for drug bans is that regulators know more than consumers about product quality but why not just communicate the information in their ban perhaps via a would have banned label because product labeling is cheap talk any small market failure tempts regulators to lie about quality inducing consumers who suspect such lies to not believe everything they are told in fact when regulators expect market failures to result in under consumption of a drug and so would not ban it for informed consumers regulators ex ante prefer to commit to not banning this drug for uninformed consumers

cheap talk and burned money we augment the standard crawford sobel 1982 econometrica 50 1431 1451 model of cheap talk communication by allowing the informed party to use both costless and costly messages the issues on which we focus are the consequences for cheap talk signaling of the option to burn money and the circumstances under which both cheap talk and burned money are used to signal information

cheap talk with two audiences these problems have in common a simple structure an informed sender says something to two interested but uninformed receivers who then take actions based on their beliefs these actions affect the sender as well as the receivers in this paper we study how costless nonverifiable claims cheap talk can affect these beliefs and hence the actions and how the incentives for truthful revelation to one receiver are affected by the presence of the other we then ask how welfare is affected by whether claims are made in public or in private as some of the above examples suggest public messages may be more credible than private messages addressed to either audience one possibility is that the presence of one audience can discipline the sender s relationship with the other we call this one sided

oligopolistic pricing with sequential consumer search n identical stores compete by choosing prices for a homogeneous good with constant marginal costs consumers search sequentially with perfect recall for the lowest price one class of consumers called shoppers have zero search costs while all other consumers have a positive search cost c there is a unique symmetric nash equilibrium price distribution with the property that it changes smoothly from marginal cost pricing when all consumers are shoppers and or c 0 and monopoly pricing when no consumers are shoppers remarkably as the number of stores increases the nash equilibrium becomes more monopolistic copyright 1989 by american economic association

buyers strategies entry barriers and competition in markets where sellers have customer specific investments and buyers can make credible but costly commitments to switch suppliers buyers strategies attenuate the market power of sellers furthermore since current prices and a buyer s decision to switch suppliers are related limit pricing becomes an equilibrium limit prices increase with the time it takes a buyer to switch suppliers and with buyers switching costs but fall with the level of sunk investments thus sunk investments may restrain the sellers ability to exert market power the paper questions then the standard inverse relationship between market performance and sunk investments

principles of network development and evolution an experimental study this paper reports on an experimental investigation of the evolution of networks and the individual decision making processes that guide it inasmuch as there is no history of experimental work on network formation part of the paper is devoted to the formulation of problems that can be examined experimentally the results are that networks composed of decentralized decision makers are capable of overcoming complex coordination and learning problems and converge to stationary when it does not occur significant and persistent inefficiencies can result the models of equilibration based on the principle of nash equilibrium are more reliable than models based on the alternative principles of efficiency seeking or focalness of the network configuration however individual decision making within networks is not in accordance with the simple decision rules of nash best response instead we observed complicated strategies that appear to trade short term profits in order to signal to and teach other agents the strategies required for long term profit maximization

equilibria in networks we study a model in which two carriers choose networks to connect cities and compete for customers we show that if carriers compete aggressively e g bertrand like behavior one carrier operating a single hub spoke network is an equilibrium outcome competing hub spoke networks are not an equilibrium outcome although duopoly equilibria in nonhub networks can exist if carriers do not compete aggressively an equilibrium with competing hub spoke networks exists as long as the number of cities is not too small we provide conditions under which all equilibria consist of hub spoke networks

endogenous network formation in patent contests and its role as a barrier to entry in a setting of r d co opetition we study by using an all pay auction approach how collaboration affects strategic decisions during a patent contest and how the latter influences the possible collaboration network structures the firms can hope to form the all pay auction approach allows us to 1 endogenize both network formation and r d intensities and 2 take heterogeneous and private valuations for patents into account we find that different from previous literature the complete network is not always the only pairwise stable network even and especially if the benefits from cooperating are important interestingly the other possible stable networks all have the realistic property that some firms decide not to participate in the contest thus weak cooperation through network formation can serve as a barrier to entry on the market for innovation we further show that there need not be any network that survives a well known refinement of pairwise stability strong stability which imposes networks to be immune to coalitional deviations

on limiting the market for status signals abstract in many societies individuals care how others view them in their efforts to impress such individuals engage in consumption signals which attempt to establish higher levels of status than their true status type this leads to an inefficiency which offers the possibility of a pareto improving tax policy the impacts of tax policy and benefits on the signalling equilibrium are considered

cheap talk and the fed a theory of imprecise policy announcments this paper examines the problem faced by the federal reserve in announcing its private information about its future policies because it would like to manipulate expectations and pursue a time inconsistent policy the fed cannot reveal its policy objectives precisely and credibly it can however communicate some information about its goals through the cheap talk mechanism of vincent crawford and joel sobel making announcements that are imprecise and only giving ranges within which these goals may lie copyright 1989 by american economic association

the english auction with differentiated commodities abstract we study economies with indivisibilities that satisfy the gross substitutes gs condition we define an excess demand set with the property that increasing the prices of all goods in excess demand eventually leads to the smallest walrasian prices this procedure is a generalization of the auction studied by g demange d gale and m j sotomayor polit econ 94 1986 863 872 in our auction truthful revelation of demand is a perfect bayesian equilibrium if the smallest walrasian prices correspond to the vickrey clarke groves payments however no dynamic auction can reveal sufficient information to implement the vickrey mechanism if all gs preferences are allowed journal of economic literature classification numbers d4 d44 d5 d51

networks markets and inequality julien gagnon thanks the gates cambridge trust for financial support sanjeev goyal is grateful to the keynes fellowship and the cambridge inet institute for financial support

strategic pricing consumer search and the number of firms discover prices there are three distinct price dispersed equilibria characterized by low moderate and high search intensity the effects of an increase in the number of firms on search behaviour expected prices price dispersion and welfare are sensitive i to the equilibrium consumers search intensity and ii to the status quo number of firms for instance when consumers search with low intensity an increase in the number of firms reduces search does not affect expected price leads to greater price dispersion and reduces welfare in contrast when consumers search with high intensity increased competition results in more search and lower prices when the number of competitors in the market is low to begin with but in less search and higher prices when the number of competitors is large duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms a question that has received much attention in economic theory is how the number of competitors and market outcomes are related despite the existence of work showing the contrary see e g satterthwaite 1979 rosenthal 1980 the prediction that emerges from a market where firms interact in a cournot fashion has come to dominate economic thought namely that an increase in the number of competitors leads to larger aggregate production lower market price and improved market performance measured in terms of some social welfare criterion ruffin 1971 this paper challenges the generality of this belief by presenting an oligopoly model with consumer search where the equilibrium expected price may be constant increasing or nonmonotonic in the number of firms we present an economy with two types of consumers consumers who search for prices at no cost fully informed and consumers who must pay a fixed search cost for each price quotation they observe less informed 1 all buyers have the same willingness to pay for the good and buy either a single unit or nothing at all on the supply side of the market there are n firms producing a homogeneous good at constant marginal cost we analyse a one shot simultaneous move game firms set prices and consumers decide how many prices to search for at the same moment in time our model is essentially an oligopolistic version of burdett and judd 1983 where some consumers search costlessly in this model consumers search using a fixed sample size search strategy i e they choose the number of prices to observe before receiving any offer nonsequential search is appealing when consumers find it more advantageous to gather price information quickly morgan and manning 1985 this occurs when the search outcome is observed with delay and delay is costly for instance an mba graduate looking for a job 1 the presence in the model of consumers who search costlessly captures the fact that some people have a

anonymous market and group ties in international trade abstract history provides many examples of cohesive groups dispersed over several countries who exploit the ties between their members to gain entry into foreign markets the phenomenon is well established empirically and noteworthy because it suggests the importance of informational barriers in international transactions we present a simple model where output is produced through a joint venture and agents have complete information domestically but are unable to judge the quality of their match abroad a minority of individuals otherwise identical to all others can exploit complete information in international matches between group members if they so choose group ties increase aggregate trade and income but hurt the anonymous market because they deprive it disproportionately of the group s more productive members

an empirical examination of information barriers to trade in insurance this paper uses direct evidence to evaluate whether asymmetric information is a barrier to trade in the largest market for private insurance in the world life insurance we report several findings that seem difficult to reconcile with the conventional theory of insurance under asymmetric information we conjecture that sellers may know their costs of production better than consumers in this market as in those for most other products

investment moral hazard and occupational licensing i analyse occupational licensing as an input regulation that requires minimum levels of human capital investment by professionals by raising professionals training levels licensing helps alleviate moral hazard problems associated with the provision of high quality services i also consider certification whereby consumers are provided information about professionals training levels i show that licensing and certification tend to benefit consumers who value quality highly at the expense of those who do not licensing may raise total surplus if sellers investments are not observable but is pareto worsening if training levels are observable certification may however lead to excessive investment as a signalling device and thus be pareto inferior to either licensing or to a policy of laissez faire

trading networks with price setting agents abstract in a wide range of markets individual buyers and sellers trade through intermediaries who determine prices via strategic considerations typically not all buyers and sellers have access to the same intermediaries and they trade at correspondingly different prices that reflect their relative amounts of power in the market we model this phenomenon using a game in which buyers sellers and traders engage in trade on a graph that represents the access each buyer and seller has to the traders we show that the resulting game always has a subgame perfect nash equilibrium and that all equilibria lead to an efficient allocation of goods finally we analyze trader profits in terms of the graph structure roughly a trader can command a positive profit if and only if it has an essential connection in the network thus providing a graph theoretic basis for quantifying the amount of competition among traders

theorizing regional economic performance and the changing territorial division of labour dunford m 2003 theorizing regional economic performance and the changing territorial division of labour reg studies 37 839 854 after identifying the general mechanisms underling the centripetal and centrifugal forces whose interplay shapes the relative performance of regional economies a case is made for disaggregating macroeconomic indicators and examining the sectoral and occupational changes they conceal once regional performance is seen as reflecting underling changes in the profiles of regional economies it is clear that research should examine the forces that determine the changing territorial division of labour to explain the latter a conceptual framework is presented this framework combines value chain approaches to the strategies of individual enterprises and analyses of the impact on the performance of enterprises of their wider social environment explicit links are established between this framework and some of the insights of the new economic geography dunford m 2003 la theor

income taxation and job market signaling abstract this paper develops a model of taxation with asymmetric information between the worker and the employer as well as between the worker and the tax collector we show that if the informational asymmetry in the labour market is solved through signaling implications for taxation are strong taxing the signal directly as well as imposing a progressive tax on income are both shown to have favourable welfare consequences locally in contrast to the results obtained for the progressive income tax we show that taxing the signal directly is likely to reduce other distortions the optimal tax fully exploits the possibilities to tax the signal directly before using progression

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

consumer protection and the incentive to become informed we discuss the impact of consumer protection policies on consumer incentives to become informed of the best deals available in the market in a market with costly consumer search we find that imposing a cap on suppliers prices reduces the incentive to engage in search with the result that prices paid by consumers both informed and uninformed may rise in a related model where consumers have the ability to refuse to receive marketing we find that this ability softens price competition and can make all consumers worse off

the informational divide we propose a model of price competition where consumers exogenously differ in the number of prices they compare our model can be interpreted either as a non sequential search model or as a network model of price competition we show that i if consumers who previously just sampled one firm start to compare more prices all types of consumers will expect to pay a lower price and ii if consumers who already sampled more than one price sample even more prices then there exists a threshold the informational divide such that all consumers comparing fewer prices than this threshold will expect to pay a higher price whereas all consumers comparing more prices will expect to pay a lower price than before thus increased search can create a negative externality and it is not necessarily beneficial for all consumers

an experimental study of price dispersion abstract we report an experiment examining a simple clearinghouse model that generates price dispersion according to this model price dispersion arises because of consumer heterogeneity some consumers are informed and simply buy from the firm offering the lowest price while the remaining consumers are captive and shop based on considerations other than price in our experiment we observe substantial and persistent price dispersion we find that as predicted an increase in the fraction of informed consumers leads to more competitive pricing for all consumers we also find as predicted that when more firms enter the market prices to informed consumers become more competitive while prices to captive customers become less competitive thus our experiment provides strong support for the model s comparative static predictions about how changes in market structure affect pricing

multi item auctions a collection of items is to be distributed among several bidders and each bidder is to receive at most one item assuming that the bidders place some monetary value on each of the items it has been shown that there is a unique vector of equilibrium prices that is optimal in a suitable sense for the bidders in this paper we describe two dynamic auction mechanisms one achieves this equilibrium and the other approximates it to any desired degree of accuracy

networks versus vertical integration we construct a theory to compare vertically integrated firms to networks of manufacturers and suppliers vertically integrated firms make their own specialized inputs in networks manufacturers procure specialized inputs from suppliers that in turn sell to several manufacturers the analysis shows that networks can yield greater social welfare when manufacturers experience large idiosyncratic demand shocks individual firms may also have the incentive to form networks despite the lack of long term contracts the analysis is supported by existing evidence and provides predictions as to the shape of different industries

turnover activity in wealth portfolios we examine several subsets of the wealthiest individuals in the us and the uk that are compiled by forbes magazine and the sunday times since these are named subsets we can calculate the returns to wealth portfolios and calibrate a statistical equilibrium model of wealth distribution that accounts for the power law of wealth and the asymmetric laplace distribution of portfolio returns the model provides a relative measure of turnover activity that indicates how often changes in the composition of the wealthiest portfolios occur finally we investigate trends in equality mobility and turnover activity

monotone comparative statics under uncertainty this paper analyzes monotone comparative statics predictions in several classes of stochastic optimization problems the main results characterize necessary and sufficient conditions for comparative statics predictions to hold based on properties of primitive functions that is utility functions and probability distributions the results apply when the primitives satisfy one of the following two properties i a single crossing property which arises in applications such as portfolio investment problems and auctions or ii log supermodularity which arises in the analysis of demand functions affiliated random variables stochastic orders and orders over risk aversion

does competition solve the hold up problem in an environment in which heterogeneous buyers and sellers undertake ex ante investments the presence of market competition for matches provides incentives for investment but may leave inefficiencies namely hold up and coordination problems this paper shows using an explicitly non cooperative model that when matching is assortative and investments precede market competition buyers investments are constrained efficient while sellers marginally underinvest with respect to what would be constrained efficient however the overall extent of this inefficiency may be large multiple equilibria may arise one equilibrium is characterized by efficient matches but there can be additional equilibria with coordination failures

a decentralized model of information pricing in networks we propose a recursive method of pricing an information good in a network of holders and demanders of this good the prices are determined via a unique equilibrium outcome in a sequence of bilateral bargaining games that are played by connected agents if the information is a homogenous non depreciating good without network effects we derive explicit formulae which elucidate the role of the link pattern among the players particularly we find out that the equilibrium price is intimately related to the existence of cycles in the network it is zero if a cycle covers the trading pair and it is proportional to the direct and indirect utility that the good generates otherwise

systems competition and network effects this paper discusses firm behavior market performance and the public and private institutions that arise in systems markets i e markets where consumers use compatible components together to generate benefits in such markets which include communications networks and hardware software networks popular products are inherently more valuable these network effects can drive corporate strategies and are critical in understanding innovation in many high technology markets the discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects competition between incompatible systems and how suppliers choose which components are compatible and which are not

price distributions and competition considerable evidence demonstrates that significant dispersion exists in the prices charged for seemingly homogeneous goods this paper adopts a simple flexible equilibrium model of search to investigate the way the market structure influences price dispersion using the noisy search approach the paper demonstrates the effects of having a single large price leading firm with multiple outlets and a competitive fringe of small firms with one retail outlet each

formal and informal job search i develop a model where workers decide how hard to look for a job via formal and informal search channels the intensity of formal search determines an individual s arrival rate of offers the strength of investment in informal search translates into a job contact network in which job offers are transmitted there are two equilibria one with high formal search and one with high informal search the former pareto dominates the latter

search and price competition abstract this paper qualifies and quantifies what is meant by higher price level and dispersion in an oligopoly market with imperfectly informed consumers for both fixed sample search and sequential search the objective is to identify the conditions under which prices become lower and price dispersion reduces as a function of consumers information surprisingly the mean price is an increasing function of search intensity and price dispersion is an inverse u shaped function of the proportion of informed consumers

the self regulating profession slayton and treblicock 1978 the formal analysis of the economics of the self regulating profession has received little attention from theorists if a profession is self regulating in the sense that its current members being the sole suppliers of a certain type of service are free to determine in one way or another whether or not to admit a potential recruit then it might seem prima facie that such a profession could simply be regarded as a monopolistic seller of the service in question so that the effects of self regulation would appear to involve an unambiguous welfare loss the whole rationale for self regulation however rests on the notion that it provides a vehicle through which the quality of the service may be maintained in markets where the consumer cannot readily measure this quality himself it is the analysis of the interplay of these two elements the enhanced price of such services associated with the monopolistic power of the profession and the improved quality of the service which may accompany a reduction in supply which forms the focus of the present paper it is tempting to begin the analysis of such a profession by first positing some particular

on the informational role of quantities durable goods and consumers word of mouth communication a dynamic incomplete information game is set up to study the introduction of a durable good when consumers can learn its quality from previous buyers high sales today imply fewer potential buyers tomorrow but each buyer will have better information about the good consumers are fully rational and can update their beliefs even when they do not directly receive information in equilibrium no news is bad news a low quality firm follows a fly by night strategy randomizing over the timing of sales a high quality firm spreads out its sales more smoothly solving a stochastic dynamic programming problem copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association