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

creative destruction and productive preemptive acquisitions we develop a model of entrepreneurial innovation for entry and sale into oligopolies suitable for welfare analysis we show that the expected consumer welfare can be higher under commercialization by sale than under commercialization by entry despite increased market power in the product market the reason is that when the quality of the invention is sufficiently high preemptive bidding competition among incumbents drives the acquisition price above the entry value entrepreneurs who sell their inventions will then have a stronger incentive to develop high quality inventions than entrepreneurs who aim at entering the product market incumbents are hurt by this creative destruction process ignited by the entrepreneurs and thus have an incentive to undertake research to block entrepreneurs research activities we show that incumbents own research effort can reduce but not eliminate the entrepreneurs incentives to innovate for entry or sale

multidimensional mechanism design for auctions with externalities abstract in an auction with externalities a buyer s type is multidimensional and specifies the payoff he would get for each of the n 1 possible outcomes the seller keeps the object or buyer i i 1 n gets the object we provide a characterization of multidimensional incentive compatible mechanisms similar to that for one dimensional mechanisms although reservation utilities are endogenous and type dependent the participation constraint is binding for only one critical type a main difficulty in a multidimensional setting is the integrability condition we present a geometric characterization for discontinuous conservative vector fields in auctions where the buyers submit scalar bids and the seller transfers the object to one of the buyers for sure a second price auction maximizes revenue with two buyers this auction remains optimal even if the seller can set a reservation price journal of economic literature classification numbers c7 c72

the control of technology alliances an empirical analysis of the biotechnology industry we examine the determinants of control rights in biotechnology alliances through three case studies and a quantitative analysis aghion and tirole 1994 argue that control rights will be assigned so as to maximize the value of the final output as long as the r d firm has sufficient financial resources consistent with this framework the allocation of control rights to the r d firm increases with the firm s financial resources the empirical evidence regarding the relationship between control rights and the stage of the project at the time the alliance is signed is more ambiguous

euro dollar real exchange rate dynamics in an estimated two country model an assessment abstract several theoretical contributions using two country models have combined alternative forms of pricing under nominal rigidities with different asset market structures to explain real exchange rate dynamics we estimate a two country model using data for the united states and the euro area and study the importance of such alternative assumptions in fitting the data a model with local currency pricing and incomplete markets does a good job in explaining real exchange rate volatility and fits the dynamics of domestic variables well the complete markets assumption delivers a similar fit only when the structure of shocks is rich enough

can entry or exit event studies inform horizontal merger analysis evidence from grocery retailing this study estimates how prices change following the entry and exit of grocery retailers we estimate the effects of entry exit by comparing affected markets to a set of unaffected markets using both a difference in difference estimator and a synthetic control estimator we find that entry typically results in reduced prices more surprisingly we find that exit is frequently associated with falling prices our estimated effects of entry on grocery prices are similar in magnitude to estimates of merger price effects in the supermarket industry this finding suggests that entry event studies may be a useful tool for horizontal merger analysis jel l11 l4 l81

explaining business cycles in small open economies abstract this paper analyzes the role of world price shocks fluctuations in the prices of capital intermediate and primary goods and in the world real interest rate in the generation and propagation of business cycles in small open developing countries i construct a stochastic dynamic multi sector small open economy model the model is a variant of the specific factors model and reflects the major structural characteristics of developing economies i utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks the results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries

raising retailers profits on vertical practices and the exclusion of rivals resale price maintenance rpm slotting fees loyalty rebates and other related vertical practices can allow an incumbent manufacturer to transfer profits to retailers if these retailers were to accommodate entry upstream competition could lead to lower industry profits and the breakdown of these profit transfers thus in equilibrium retailers can internalize the effect of accommodating entry on the incumbent s profits consequently if entry requires downstream accommodation entry can be deterred we discuss policy implications of this aspect of vertical contracting practices jel l14 l22 l25 l42 l81 this paper considers the upstream exclusionary effect of vertical practices that create rents for downstream retailers without carrying a contractual obligation for exclusivity 1 examples of interest include allowing the manufacturer to set the price at which a retailer sells to consumers resale price maintenance or rpm periodic lump sum payments to retailers through slotting fees or loyalty rebates and mar ket division schemes such as the allocation of clients to specific retailers or the use of exclusive territories we explore equilibria that can arise when an upstream incumbent uses a vertical practice of the sort outlined above to share industry profits with retailers we show that if entry by another upstream manufacturer leads to competition that reduces industry profits sufficiently and entry requires accommodation by retailers then equilibria exist in which retailers do not accommodate the entrant this results in exclusion in essence the vertical practice creates a quasi rent that retailers in equilibrium have an incentive to protect

rules communication and collusion narrative evidence from the sugar institute case detailed notes on weekly meetings of the sugar refining cartel show how communication helps firms collude and so highlight the deficiencies in the current formal theory of collusion the sugar institute did not fix prices or output prices were increased by homogenizing business practices to make price cutting more transparent meetings were used to interpret and adapt the agreement coordinate on jointly profitable actions ensure unilateral actions were not misconstrued as cheating and determine whether cheating had occurred in contrast to established theories cheating did occur but sparked only limited retaliation partly due to the contractual relations with selling agents jel l13 l41 this paper reexamines the cartel problem by studying the private discussions within one cartel while we find much that is in accord with george j stigler s 1964 basic insight that firms would structure an agreement conscious of their later incentive to cheat on it we also uncover puzzles for established theory and identify elements that a richer theory should encompass especially regarding the role of communication in collusion our window into the inner workings of a cartel is a remarkable series of notes on the weekly meetings of the sugar institute this trade association was formed in december 1927 in the wake of several years of falling margins and excess capacity by 14 firms comprising nearly all the cane sugar refining capacity in the united states it operated until 1936 when the supreme court ruled its practices illegal among the top executives in regular attendance at the meetings was louis v place vice president of mccahan a midsize refinery in philadelphia place who was in charge of all activities of the company except production and raw sugar purchases wrote over 500 pages of single spaced detailed

the butterfly effect of small open economies abstract the rational expectations equilibrium of a small open economy can be subject to indeterminacy if foreign monetary policy does not satisfy the taylor principle we study the implications of foreign induced indeterminacy in the two country version of the sticky price small open economy model our main finding is that smallness is a property of the unique rational expectations equilibrium of the large economy and not a general property of the small open economy model if the large economy fails to anchor expectations shocks to the small economy can affect the large one this form of indeterminacy gives rise to a butterfly effect additional assumptions are required to preserve the smallness of the small economy

how not to sell nuclear weapons we consider situations where a sale affects the ensuing interaction between potential buyers these situations are modeled by assuming that an agent who does not acquire the object for sale incurs an identity dependent externality we construct a revenue maximizing auction for the seller we observe that 1 outside options and participation constraints are endogenous 2 the seller extracts surplus also from agents who do not obtain the auctioned object 3 the seller is better off by not selling at all while obtaining some payments if externalities are much larger than valuations

exchange rate pass through exchange rate volatility and exchange rate disconnect abstract this paper explores the hypothesis that high volatility of real and nominal exchange rates may be due to the fact that local currency pricing eliminates the pass through from changes in exchange rates to consumer prices exchange rates may be highly volatile because in a sense they have little effect on macroeconomic variables the paper shows the ingredients necessary to construct such an explanation for exchange rate volatility in addition to the presence of local currency pricing we need a incomplete international financial markets b a structure of international pricing and product distribution such that wealth effects of exchange rate changes are minimized and c stochastic deviations from uncovered interest rate parity together it is shown that these elements can produce exchange rate volatility that is much higher than shocks to economic fundamentals and disconnected from the rest of the economy in the sense that the volatility of all other macroeconomic aggregates are of the same order as that of fundamentals

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

do central banks react to house prices we estimate the federal reserve s the bank of england s and the bank of japan s responses to house prices we show that generalized method of moments estimates of a taylor rule augmented with house prices are biased and dispersed we then use full information methods and estimate the policy rule together with a var for the nonpolicy variables these estimates are also biased we propose an alternative approach and estimate a dynamic stochastic general equilibrium model embedded with a monetary rule with a direct response to house prices we find that house prices played a separate role in the reaction functions of these central banks

the unilateral incentives for technology transfers predation and deterrence by proxy abstract joint production between rival firms often entails knowledge transfers without direct compensation leaving the question as to why more efficient firms would give their rivals such an advantage we find that such transfers are credible mechanisms to make the market more competitive so as to deter entry or force exit we determine that with free entry such transfers are profitable and further it may be optimal to predate or deter every firm possible so that a market with many firms can become a duopoly while consumers are harmed by such action production efficiency normally increases sufficiently so that welfare increases

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

seasonality and the effect of advertising on price does advertising make markets more or less competitive this paper lays out an econometric strategy for estimating the effect of advertising on prices that exploits seasonal demand and imperfect targeting of consumers we find mostly negligible effects of advertising on prices at monthly frequency among the 35 of 131 product categories with sufficient advertising seasonality to justify second stage estimation only nine have a significant effect and those are typically small this finding is essentially the result of the much greater seasonality in advertising than price

gmm estimation of the new phillips curve abstract this paper applies test statistics developed by stock and wright econometrica 68 2000 1055 to examine the two specifications of the new keynesian phillips curve in gali and gertler journal of monetary economics 44 1999 195 the new test statistics demonstrate the inadequacy of conventional gmm methodology by indicating two features that are neglected by gali and gertler observational equivalence in the baseline model and weak identification in the hybrid model

new keynesian macroeconomics and the term structure this article complements the structural new keynesian macro framework with a no arbitrage affine term structure model whereas our methodology is general we focus on an extended macro model with an unobservable time varying inflation target and the natural rate of output which are filtered from macro and term structure data we obtain large and significant estimates of the phillips curve and real interest rate response parameters our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks the inflation target dominates the variation in the level factor whereas the monetary policy shocks dominate the variation in the slope and curvature factors

predatory pricing and the acquisition cost of competitors this paper investigates whether predatory price cutting reduces a trust s cost of acquiring its competitors a variant of the litzenberger rao valuation model is estimated with the expenditures for 43 rival firms purchased by the old american tobacco company between 1891 and 1906 the coefficient estimates indicate that ceteris paribus alleged predation significantly lowered the acquisition costs of the tobacco trust both for asserted victims and through reputation effects for competitors that sold out peacefully although qualified by data limitations these results support the classical view of predatory pricing as a systematic business practice

the yield curve in a small open economy abstract long term nominal interest rates in a number of inflation targeting small open economies have tended to be strongly correlated with those of the united states this observation has recently led support to the view that in these economies the long end of the yield curve has decoupled from its short end and naturally to a concern that monetary policy may have lost some of its autonomy we set up and estimate a two country small open economy model in which the expectations hypothesis and uncovered interest rate parity hold to study the co movement of long term nominal interest rates of different currencies we show that differences in the persistence of domestic and foreign disturbances a hypothesis for which we find support in recent data can explain the observed pattern of correlations these correlations are not evidence of weaker monetary policy

high exchange rate volatility and low pass through abstract two specifications of an open economy model are shown to generate high exchange rate volatility and low exchange rate pass through erpt in the model price discrimination causes erpt to be incomplete in both the short and the long run in the short run a small amount of nominal rigidities is enough to reduce erpt sharply still exchange rate depreciation worsens the terms of trade consistent with the evidence possible biases from omitted variables and measurement error in the erpt empirical literature due to data limitations are investigated using model generated time series estimates of erpt coefficients can be quite different from true parameters and are sensitive to the shocks driving the economies estimates can nonetheless detect key structural features of the models

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

the role of the exchange rate in monetary policy rules for a country that chooses not to permanently fix its exchange rate through a currency board or a common currency or some kind of dollarization the only alternative monetary policy that can work well in the long run is one based on the trinity of i a flexible exchange rate ii an inflation target and iii a monetary policy rule while not often put into this threepart format the desirability of such a monetary policy in an open economy is in my view the clear implication of three corresponding strands of recent monetary research i research on fixed exchange rates regimes including the influential 1995 article the mirage of fixed exchange rates by maurice obstfeld and kenneth rogoff and the many analyses of the breakdown of fixed exchange rate regimes in the late 1990 s ii research on the practical success with inflation targeting by ben bernanke et al 1999 and iii research on the benefits of simple monetary policy rules see e g taylor 1999a this clear policy implication however does not end the debate about how exchange rates should be taken into account in formulating monetary policy even if one excludes capital controls and sterilized exchange market intervention from consideration because they are not effective or attractive ways to de link exchangerate movements from the domestic interest rate a crucial question remains how should the instruments of monetary policy the interest rate or a monetary aggregate react to the exchange rate should policymakers avoid any reaction and focus instead on domestic indicators such as inflation and real gdp or is the rule of thumb that a substantial appreciation of the real exchange rate furnishes a prima facie case for relaxing monetary policy as characterized by obstfeld and rogoff 1995 p 93 a better monetary policy rule or perhaps policymakers should heed the obstfeld rogoff warning that substantial departures from ppp purchasing power parity in the short run and even over decades make such a policy reaction to the exchange rate undesirable more generally if one accepts the trinity concept of monetary policy in an open economy then what is the role of the exchange rate in the monetarypolicy rule

price wars triggered by entry abstract to attract customers who incur set up or switching costs new firms offer below market prices when entering a market the incumbent responds with discounts resulting in a price war once new entrants have locked in their customers the price warfare stops and all firms raise their prices during the price war the incumbent s price is not as low as the entrants after the price war the market price is lower and output is greater than the pre entry price and output entrants attract new buyers to the market and depending on the size distribution of set up costs we show that some of the incumbent s customers switch to entrants the model is shown to square with the price and output sequences observed in a price war that was the subject of a recent and prominent antitrust case in the cigarette market

testing static oligopoly models conduct and cost in the sugar industry 1890 1914 we explore the widespread methodology of using demand information to infer market conduct and unobserved cost components under the hypothesis of static oligopoly behavior direct measures of marginal cost and conduct indicating small market power serve as benchmarks the more competitive models yield better cost estimates the best cost estimates occur when conduct is estimated as a free parameter which in turn only slightly underestimates our direct measure it also tracks the decline in market power accompanying the industry s structural changes the methodology is largely validated although partial cost information can improve its predictive power conclusions are robust to demand function

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

business cycles through international shocks a structural investigation abstract this paper investigates the sources of output volatility by decomposing the international shocks into finance and trade shocks through structural bayesian estimations of an open economy dsge model on 16 countries on average international shocks explain around 70 of output fluctuations

when does predation dominate collusion i study repeated competition among oligopolists the only novelty is that firms may go bankrupt and permanently exit the probability that a firm survives a price war depends on its financial strength which varies stochastically over time under some conditions including no entry an anti folk theorem holds when firms are patient so that strength levels change relatively quickly every nash equilibrium involves an immediate price war that lasts until at most one firm remains surprisingly the possibility of entry may facilitate collusion as may impatience the model can explain some observed patterns of collusion and predation

changes in the federal reserve s inflation target causes and consequences this paper estimates a new keynesian model to draw inferences about the behavior of the federal reserve s unobserved inflation target the results indicate that the target rose from 1 1 4 percent in 1959 to over 8 percent in the mid to late 1970s before falling back below 2 1 2 percent in 2004 the results also provide some support for the hypothesis that over the entire postwar period federal reserve policy has systematically translated short run price pressures set off by supply side shocks into more persistent movements in inflation itself although considerable uncertainty remains about the true source of shifts in the inflation target jel e31 e32 e52

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

resale markets and the assignment of property rights the consumption of an indivisible good causes identity dependent externalities to non consumers we analyse resale markets where the current owner designs the trading procedure but cannot commit to future actions we ask the following questions 1 doer the identity of the initial owner matter for the determination of the final consumer 2 is the outcome always efficient the major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency this result complements the coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency

antitrust predation and the antitrust paradox abstractthe widely recognized influence that the chicago school of law and economics had on the institution of antitrust is nowhere more apparent than in predatory pricing law starting with aaron director this movement had many distinguished contributors but even in this company robert bork stands out for his part in persuading the judiciary to refocus antitrust law on the interests of consumers rather than on the interests of competing firms in the antitrust paradox and other writings bork advanced the chicago school insight that the kind of aggressive price cutting that at the time passed for predatory pricing is instead an essential and for consumers beneficial attribute of competition the resulting change in direction that antitrust has taken in predatory pricing cases culminated in the court s matsushita matsushita electric industrial co v zenith ratio corp 475 u s 574 1986 and brooke group brooke group ltd v brown williamson tobacco corp 509 u s 209 1993 opinions both

the fed and the new economy the views expressed herein are those of the authors and not necessarily those of the national bureau ofeconomic research 2002 by laurence ball and robert tchaidze all rights reserved short sections of text not to exceed twoparagraphs may be quoted without explicit permission provided that full credit including notice is givento the source

does the reserve bank of australia follow a forward looking nonlinear monetary policy rule abstractthe conventional monetary policy rule describes a simple linear relationship between the domestic interest rate inflation rate and output gap an important extension to this rule is to inc

how well can the new open economy macroeconomics explain the exchange rate and current account abstract this paper advances the new open economy macroeconomic literature in an empirical direction estimating and testing a two country model fit to u s and g7 data the model performs moderately well for the exchange rate and current account results offer guidance for future theoretical work parameter estimates lend support to the assumption of local currency pricing estimates are found for key parameters commonly calibrated in the theoretical literature such as the elasticity of substitution between home and foreign composite goods and the response of a country s risk premium to the net foreign asset position results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks as recently hypothesized but that these deviations are strongly related to shifts in the current account

the real thing nominal price rigidity of the nickel coke 1886 1959 we report that the price of a 6 5 oz coca cola was 5c from 1886 until 1959 thus we are documenting a nominal price rigidity that lasted more than 70 years the case of coca cola is particularly interesting because during the 70 year period there were substantial changes in the soft drink industry as well as two world wars the great depression and numerous regulatory interventions and lawsuits which led to substantial changes in the coca cola market conditions the nickel price of coke nevertheless remained unchanged we find that this unusual rigidity is best explained by 1 a contract between the company and its parent bottlers that encouraged retail price maintenance 2 a single coin vending machine technology which limited the company s price adjustment options due to limited availability and unreliability of the existing flexible price adjustment technologies and 3 a single coin monetary transaction technology which limited the company s price adjustment options due to the customer inconvenience cost we show that these price adjustment costs are of a different nature than the standard menu cost and their estimates exceed the existing estimates by an order of magnitude a possible broader relevance of the nickel coke phenomenon is discussed in the context of nickel and dime stores which were popular in the us in the late 1800s and the early 1900s

predation mergers and incomplete information this article examines the strategic pricing of duopolists in anticipation of a takeover of one by the other in equilibrium the acquiring firm may expand its output to signal that it is a low cost rival and thereby improve the takeover terms if the merged firm willface potential entry a premerger expansion of output may be necessary to deter entry and to make the merger profitable in that case the acquiringjirm s output expansion increases industry concentration by facilitating the takeover and by deterring entry this establishes the rationality of predatory output expansions even when a merger or a takeover is possible and indeed anticipated a voluminous literature is devoted to exploring the role of pricing in altering industry structure to achieve monopoly power that literature discusses both price cutting to drive existing rivals from the industry predatory pricing and setting low prices to deter potential entrants limit pricing the former has received the lion s share of the attention of antitrust commentators and enforcers but the rationality of predatory pricing has been seriously questioned the major criticism has two parts i takeovers are a superior means of achieving monopoly power and where legal should therefore be used instead of price cutting and ii if a takeover is anticipated premerger price cutting merely dissipates some of the value of the merging parties and would thus be irrational the first argument was originally advanced by mcgee 1958 and later by telser 1965 and bork 1978 the essential idea is that since predation is costly firms should realize that a more profitable arrangement in the form of a merger exists and ought to be negotiated the second argument is a natural extension of the first in response to this criticism yamey 1972 provides two arguments first the aggressor knows that he may face other rivals in the future entrants into this or other markets those potential rivals may draw inferences from his current behavior about the response they will face if they enter in that case the aggressor may wish to develop a reputation for aggressive behavior second even if a takeover is anticipated the terms of the takeover may be affected by the pretakeover pricing

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

targeting the real exchange rate theory and evidence abstract this paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate an intertemporal optimizing model suggests that in the absence of changes in fiscal policy a more depreciated level of the real exchange rate can only be attained temporarily this can be achieved by means of higher inflation and or higher real interest rates depending on the degree of capital mobility evidence for brazil chile and colombia supports the model s prediction that undervalued real exchange rates are associated with higher inflation

a macro finance model of the term structure monetary policy and the economy this paper develops and estimates a macro finance model that combines a canonical affine no arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation from this new empirical formulation we obtain several interesting results 1 the latent term structure factors from finance no arbitrage models appear to have important macroeconomic and monetary policy underpinnings 2 there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the federal reserve and 3 both forward looking and backward looking elements play important roles in macroeconomic dynamics

uncovering the hit list for small inflation targeters a bayesian structural analysis we estimate underlying structural macroeconomic policy objectives of three of the earliest explicit inflation targeters within the context of a small open economy dynamic stochastic general equilibrium model we assume central banks set policy optimally such that we can reverse engineer policy objectives from observed time series data joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective none of the central banks show a concern for stabilizing the real exchange rate all three central banks share a concern for minimizing the volatility in the change in the nominal interest rate we also show that the resulting optimal policy rule responds to exchange rate movements even in the case where the central banks do not explicitly care about exchange rate stabilization this result is also corroborated by results from an alternative simple rule characterization and estimation of central bank behavior these last two findings point to the pitfalls of making inferences from the level of ad hoc simple rules about what central banks may care about

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

predation and its rate of return the sugar industry 1887 1914 we show that the price wars following two major entry episodes were predatory our proof is twofold by direct comparison of price to marginal cost and by construction of a lower bound to predicted competitive price cost margins that we show to exceed observed margins predation occurred only when its relative cost to the dominant firm the american sugar refining company asrc was small its most clear effect was to lower the acquisition price of entrants and small incumbents it may also have deterred future capacity additions and raised asrc s share of industry profits predation operated by strengthening asrc s reputation as a willing predator

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

how to license intangible property we examine the optimal licensing strategy of a research lab selling to firms who are product market competitors we consider an independent lab as well as a research joint venture we show that 1 demands are interdependent and hence the standard price mechanism is not the profit maximizing licensing strategy 2 the seller s incentives to develop the innovation may be excessive 3 the seller s incentives to disseminate the innovation typically are too low 4 larger ventures are less likely to develop the innovation and more likely to restrict its dissemination in those cases where development occurs and 5 a downstream firm that is not a member of the research venture is worse off as a result of the innovation

macroeconomic effects of nominal exchange rate regimes new insights into the role of price dynamics abstract this paper analyzes the effects of pegged and floating exchange rates using a two country dynamic general equilibrium model that is calibrated to the us and a european aggregate the model assumes shocks to money productivity and the interest rate parity condition it captures the fact that the sharp increase in nominal exchange rate volatility after the end of the bretton woods bw system was accompanied by a commensurate rise in real exchange rate volatility but had no pronounced effect on the volatility of gdp this holds irrespective of whether flexible or sticky prices are assumed which casts doubt on the widespread view that the roughly equal post bw rise in nominal and real exchange rate volatility reflects price stickiness a flex prices variant of the model captures better the fact that the correlation between us and european gdp has been higher in the post bw era than under bw

reputation and equilibrium selection in games with a patient player a single long run player plays a simultaneous move stage game against a sequence of opponents who play only once but observe all previous play let the stackelberg strategy be the pure strategy to which the long run player would most like to commit himself if there is positive prior probability that the long run player will always play the stackelberg strategy then his payoff in any nash equilibrium exceeds a bound that converges to the stackelberg payoff as his discount factor approaches one when the stage game is not simultaneous move this result must be modified to account for the possibility that distinct strategies of the long run player are observationally equivalent

preying for monopoly the case of southern bell telephone company 1894 1912 focusing on the southern bell telephone company we propose a modified version of the predation hypothesis to explain bell s natural monopoly over local telephone service southern bell effectively eliminated competition through a strategy of pricing below cost in response to entry which deprived competitors of the cash flow required for expansion even if it failed to induce exit investing in toll lines ahead of demand isolating independent companies in smaller towns and rural areas and forcing them to consolidate on favorable terms and influencing local regulatory policy in large cities to weaken rivals and ultimately to institutionalize the bell monopoly

explorations into factors explaining money market returns in this article we measure and interpret the common factors that describe money market returns results are presented for both three and four factor models we find that the three factor model explains on average 86 percent of the total variation in most money market returns while the four factor model explains on average 90 percent of this variation using mimicking portfolios we provide an interpretation of the systematic risks represented by these factors in this article we attempt to measure and interpret the common factors that describe money market returns the factor approach we employ assumes that the covariance matrix of a set of random variables in this case excess returns can be decomposed into common or systematic components and idiosyncratic or nonsystematic components this decomposition into systematic and nonsystematic components is based on an assumption of a linear relationship between the returns of each security and a set of common factors this is the assumption of linear return generating models which form an integral part of the structure of many asset pricing theories for example arbitrage pricing theory apt as developed by ross 1976 the interpretation is that the common factors represent sources of systematic or nondiversifiable risk and the idiosyncratic component of returns represents diversifiable risks our focus here is not on testing a particular asset pricing model per se but on developing empirical evidence for the existence of stylized facts regarding money market returns the stylized facts take the form of the existence measurement and interpretation of the common factors that are found in money markets our attempt to measure and interpret these sources of systematic risk may eventually lead to the construction of observable eco

maintaining a reputation when strategies are imperfectly observed this paper studies reputation effects in games with a single long run player whose choice of stage game strategy is imperfectly observed by his opponents we obtain lower and upper bounds on the long run player s payoff in any nash equilibrium of the game if the long run player s stage game strategy is statistically identified by the observed outcomes then for generic payoffs the upper and lower bounds both converge as the discount factor tends to 1 to the long run player s stackelberg payoff which is the most he could obtain by publicly committing himself to any strategy

putting the new open economy macroeconomics to a test abstract this paper explores one way to extend the new open economy macroeconomics in an empirical direction adapting maximum likelihood procedures it estimates and tests an intertemporal small open economy model with monetary shocks and nominal rigidities results offer mixed support for a benchmark model where prices are assumed to be sticky in the currency of the buyer price stickiness seems to be an important element as overall results are poorer for versions of the model in which prices either are flexible or are sticky in the currency of the producer the benchmark model does a better job explaining some variables than others in particular it does a poor job explaining exchange rate movements