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

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

oligopoly game price makers meet price takers abstract the paper studies an oligopoly game where firms can choose between price taking and price making strategies on a mixed market price takers are always better off than price makers though the profits of both types decline in the number of price takers we investigate and confront two possibilities of firms decisions about their types forward looking equilibrium reasoning and backward looking individual learning we find that the cournot outcome is the only equilibrium prediction and it is learnable if firms are sufficiently sensitive to profit differences however with a larger number of firms a unilateral deviation from cournot behavior becomes profitable under learning this incentive creates a space for permanent oscillations over different markets with a positive but low number of price takers

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 chaotic duopolists revisited the adjustment process of three oligopolists is studied under cournot and stackelberg action it is demonstrated that with an iso elastic demand function and constant marginal costs the system can result in periodic or in chaotic behaviour in particular the case with two identical and one different oligopolists is focused which turns into a virtual duopoly though displaying a wider set of bifurcations than can occur in genuine duopoly

global analysis of an expectations augmented evolutionary dynamics we consider a deterministic evolutionary model where players form expectations about future play players are not fully rational and have expectations that change over time in response to current payoffs and feedback from the past we provide a complete characterization of the qualitative dynamics so induced for a two strategy population game and relate our findings to standard evolutionary dynamics and equilibrium selection when agents have rational forward looking expectations

mandated countertrade as a strategic commitment abstract mandated countertrade is a policy to restrict unilateral imports a country s government thereby in effect commits domestic firms not to purchase from a foreign trading partner unless there are reciprocal sales we argue that the policy may be a rational response to fundamental contracting failures our key assumption being that sellers are incompletely informed about buyers valuations in line with observed practices the analysis suggests that an optimal mandated countertrade policy will target high mark up imports and low mark up exports implications for global welfare are ambiguous and depend upon the extent of a double coincidence of wants

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

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

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

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

infant industry protection reconsidered the case of informational barriers to entry in industries with imperfect consumer information the lack of a reputation puts latecomers at a competitive disadvantage vis a vis established firms we consider whether the existence of such informational barriers to entry provides a valid reason for temporarily protecting infant producers of experience goods and services our model incorporates both moral hazard in an individual firm s choice of quality and adverse selection among potential entrants into the industry we find that infant industry protection often exacerbates the welfare loss associated with these market imperfections

dynamic complexity in duopoly games abstract we discuss the occurrence of periodic and chaotic phenomena in infinite horizon duopoly games where firms maximize their discounted sum of profits and use markov perfect equilibrium strategies in the alternating case their corresponding actions are then constrained orbits of a map similar to a cournot t tonnement we show that any behavior is possible for small discount factors and that one obtains the cournot t tonnement as the discount factor goes to zero in the simultaneous case we show by mean of an example that many cournot t tonnements can be viewed as markov perfect equilibria of an infinite horizon game and that one obtains the nash equilibrium of the static game as the discount parameter goes to zero we are thus led to study in detail the dynamical properties of a cournot t tonnement

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

caution implies profit abstract the paper illustrates by simple cobweb models that under certain circumstances fluctuations in perpetual disequilibrium may not only be viable but also preferable to a competitive equilibrium from the long run perspective

limited knowledge of demand and oligopoly equilibria abstract in a standard model of oligopoly with differentiated products the existence of an equilibrium at which the first order conditions for profit maximisation are simultaneously satisfied for all firms is proved and this is done without imposing any restrictions on the demand functions this is an equilibrium in the following sense although some firms may not necessarily be maximising their profits nevertheless if each firm s knowledge of demand is limited to the linear approximation of its own demand curve then it will believe that it is indeed maximising its profits

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

analysis of global bifurcations in a market share attraction model in this paper we demonstrate how the global dynamics of an economic model can be analyzed in particular as an application we consider a market share attraction model widely used in the analysis of interbrand competition in marketing theory we analyze the local and global dynamic properties of the resulting two dimensional noninvertible dynamical system in discrete time the main result of this paper is given by the study of some global bifurcations that change the structure of the attractors and their basins these bifurcations are investigated by the use of critical curves a powerful tool for the analysis of the global properties of noninvertible two dimensional maps 2000 elsevier science b v all rights reserved jel classixcation e32 m30

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

do people play nash equilibrium lessons from evolutionary game theory evolutionary game theory provides an answer to two of the central questions in economic modeling when is it reasonable to assume that people are rational and when is it reasonable to assume that behavior is part of a nash equilibrium and if it is reasonable which equilibrium the traditional answers are not compelling and much of evolutionary modeling is motivated by the need for a better answer evolutionary game theory suggests that in a range of settings agents do eventually play a nash equilibrium moreover evolutionary modeling has shed light on the relative plausibility of different nash equilibria

oligopoly games with local monopolistic approximation we propose an oligopoly game where quantity setting firms have incomplete information about the demand function at each time step they solve a profit maximization problem assuming a linear demand function and ignoring the effects of the competitors outputs despite such a rough approximation that we call local monopolistic approximation lma the repeated game may converge at a nash equilibrium of the game played under the assumption of full information an explicit form of the dynamical system that describes the time evolution of oligopoly games with lma is given for arbitrary differentiable demand functions provided that the cost functions are linear or quadratic in the case of isoelastic demand we show that the game based on lma always converges to a nash equilibrium this result compared with best reply dynamics shows that in this particular case less information implies more stability

complicated endogenous business cycles under gross substitutability abstract in this paper we investigate the global behaviour of the output equilibrium time paths in a two dimensional overlapping generations model with productive investment and capital accumulation where agents behave rationally and markets are competitive we show that equilibrium time paths can converge to complicated chaotic attractors as well as periodic attractors when the substitution effect dominates the income effect everywhere the occurrence of complicated equilibrium paths is guaranteed by homoclinic intersections of the stable and unstable manifolds of the autarkic steady state journal of economic literature classificiation number e32

the coexistence of stable equilibria under least squares learning abstract in this paper we consider firms that learn about market conditions by estimating the demand function using past market data we show that learning may lead to suboptimal outcomes even when the estimated demand function perfectly fits the observations used in the regression and firms thus perceive to have learned the demand function correctly we consider the salop model with three firms and two types of consumers that differ in their sensitivity to product differences firms do not know the demand structure and they apply least squares learning to learn the demand function in each period firms estimate a linear perceived demand function and they play the perceived best response to the previous period price of the other firms this learning rule can lead to three different outcomes a self sustaining equilibrium the nash equilibrium or an asymmetric learning equilibrium in this last equilibrium one firm underestimates the demand for low prices and it attracts consumers with high sensitivity only this type of equilibrium has not been found in the literature on least squares learning before both the nash equilibrium and the asymmetric learning equilibrium are locally stable therefore the model has coexisting stable equilibria

selection dynamics asymptotic stability and adaptive behavior selection dynamics are often used to distinguish stable and unstable equilibria this is particularly useful when multiple equilibria prevent a priori comparative static analysis this paper reports an experiment designed to compare the accuracy of the myopic best response dynamic and an inertial selection dynamic the inertial selection dynamic makes more accurate predictions about the observed mutual best response outcomes

investment confidence corporate debt and income fluctuations in this paper we present a macroeconomic model with new keynesian features which endogenously generates dynamic paths of income and the stock of corporate debt of a cyclic and chaotic nature from the market clearing condition on goods and money markets we derive the dynamic paths of income and corporate debt whose stability properties depend upon the propensity to invest out of the flow of internally generated funds which in turn is a positive function of income if it is relatively low the dynamic paths on income and corporate debt converge to their steady state long run values when the propensity to invest is neither too low nor too high the system can exhibit either bounded cycles or chaotic dynamics finally if it exceeds a critical upper value an explosive growth of debt occurs and a financial crisis is likely to ensue

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

cournot duopoly when the competitors operate multiple production plants this article considers a cournot duopoly under an isoelastic demand function and cost functions with built in capacity limits the special feature is that each firm is assumed to operate multiple plants which can be run alone or in combination each firm has two plants with different capacity limits so each has three cost options the third being to run both plants dividing the load according to the principle of equal marginal costs as a consequence the marginal cost functions come in three disjoint pieces so the reaction functions derived on basis of global profit maximization may also consist of disjoint pieces this is reflected in a particular bifurcation structure due to border collision bifurcations and to particular basin boundaries related to the discontinuities it is shown that stable cycles may coexist and the non existence of unstable cycles constitutes a new property we also compare the coexistent short periodic solutions in terms of the resulting real profits

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

a dynamic model of quality competition with endogenous prices abstract we develop a dynamic model of price and quality competition in order to analyze the effects of competition on quality provision and to which extent an unregulated market is able to provide a socially optimal quality level our model combines a differential game approach with a hotelling spatial competition framework and our analysis applies in particular to industries such as long term care health care child care and education if providers nursing homes hospitals schools nurseries use closed loop decision rules which imply strategic interaction over time we show that although increased competition leads to higher quality in the steady state quality provision is nevertheless lower than under open loop rules and also suboptimally low from a welfare perspective thus our analysis identifies dynamic strategic interaction between competing providers as a potential source of inefficiency in quality provision

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

an evolutionary cournot model with limited market knowledge abstract in this paper we analyze a dynamic game of cournot competition with heterogeneous firms choosing between two different adaptive behavioral rules in deciding output strategies the underlying oligopoly structure is standard using a constant return to scale technology n firms produce homogeneous goods which are sold in a market characterized by constant price elasticity in this setup we assume that a fraction of firms employs a quite rough rule of thumb the so called local monopolistic approximation lma whereas the complementary fraction plays best reply br a more demanding strategy in terms of information and computation requirements the model is first considered with exogenously fixed fractions of firms in the two complementary groups then it is generalized by considering an endogenous evolutionary switching process between the two behavioral strategies based on profit driven replicator dynamics the role of the number of firms information costs and inertia or anchoring attitude in production decisions is analyzed as well as the influence in the evolutionary process of random noise in the demand function and memory of past profits global properties of the oligopoly with evolutionary pressure between behavioral rules are discussed with particular regard to cases in which the nash equilibrium is unstable

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

best response dynamics with level n expectations in two stage games this paper analyzes behavior in repeatedly played two stage games where players choose actions in both stages according to best replies using level n expectations about the opponent s actions in both stages level n expectations are recursively defined in a way that a player holding level n expectations correctly predicts the action of an opponent holding level n 1 expectations a general conceptual framework to study such dynamics for two stage games is developed and it is shown that contrary to results for single stage games the fixed points of the dynamics depend on the level of the expectations in particular for level 0 expectation fixed points correspond to a nash equilibrium of a simultaneous move version of the game whereas under certain conditions fixed points converge towards the subgame perfect equilibrium of the two stage game if the level of expectations goes to infinity the approach is illustrated using a two stage duopoly game where firms in the first stage invest in activities reducing their marginal costs and in the second stage engage in cournot competition conditions for local stability of the fixed points are derived for different levels of expectations and it is shown that level 2 expectations are sufficient to move the fixed point of the dynamics to a close neighborhood of the subgame perfect equilibrium furthermore it is demonstrated that although firms benefit from unilateral increases in the level of expectations an increase of n by all firms reduces all profits

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 stability of the cournot oligopoly model a reassessment abstract the stability properties of the cournot oligopoly model are examined for the continuous adjustment process sufficient conditions for instability are established which are shown to be of significance when the number of firms n is small local and global stability are shown under appropriate conditions which for global stability include the restriction n 5 the proof of global stability corrects a well known proof by f hahn rev econ stud 29 1962 329 331 results for the discrete time adjustment process are reported and the restrictiveness of the model s assumptions are discussed

learning to play cournot duopoly strategies abstract the paper reports results from experiments designed to determine whether subjects can learn to play cournot duopoly strategies and whether their out of equilibrium play is consistent with the predictions of learning models the experiments include duopolies with constant and with decreasing marginal costs and with theoretically stable and unstable equilibria after a few periods subjects do play stable interior equilibria but they do not play stable boundary equilibria nor unstable interior equilibria subjects out of equilibrium play is inconsistent with the predictions of the learning models

holding idle capacity to deter entry in this journal dixit i980 carefully analysed the extent to which an established firm facing a prospective entrant might make an investment in capacity beyond that which is optimal for its pre entry output in his model both the established firm and prospective entrants understand that a quantity setting nash equilibrium would be established in any post entry game dixit showed that spence i977 had studied an imperfect equilibrium that is an equilibrium that depended upon a threat that was not credible to obtain his result that firms might hold excess capacity to deter entry in a perfect equilibrium a firm would not wish to install capacity that would be left idle if entry did not occur dixit s conclusion however depends on his assumption that each firm s marginal revenue is always decreasing in the other s output this is quite a restrictive assumption for example it is never satisfied in the relevant range for economists second favourite demand curve constant elasticity demand the basic point is unchanged if the firms anticipate price competition with differentiated products rather thanquantity competition in any post entry game under quite plausible conditions rational firms facing rational potential entrants may install capacity that will certainly be left idle we are thus able to rehabilitate spence s original proposition in a perfect equilibrium setting

harvesting dynamics in protected and unprotected areas we propose a dynamic model for studying the time evolution of fish stocks in an environment divided into two adjacent zones with different fishing policies we analyze two particular harvesting methods constant fishing effort and profit maximization in this case some agents engage in competition based on maximization of individual profit whereas others cooperate the asymptotic behavior of the system pinpoints that even if the presence of a reserve area leads to higher levels of sustainability in exploiting fish stocks attention should be paid in properly regulating the harvesting activity in order to avoid severe depletion of the resource

indeterminacy of equilibria in a hyperinflationary world experimental evidence the authors design and study an olg experimental economy where the government finances a fixed real deficit through seigniorage the economy has continua of nonstationary rational expectations equilibria and two stationary rational expectations equilibria the authors do not observe nonstationary rational expectations paths observed paths tend to converge close to or somewhat below the low inflation stationary state the adaptive learning hypothesis is consistent with the data in selecting the low inflation stationary state rational expectations equilibrium as a long run stationary equilibrium nevertheless simple adaptive learning models do not capture the market uncertainty or the biases observed in the data copyright 1993 by the econometric society

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

endogenous fluctuations under evolutionary pressure in cournot competition abstract an evolutionary game theoretic model of cournot competition is investigated individuals choose from a finite set of different behavioral rules each rule specifies the quantity to be produced in the current period as a function of past quantities using more sophisticated rules may require extra information costs based upon realized payoffs the fractions of the population choosing a certain behavioral rule are updated according to the replicator equation with noise the long run behavior of the evolutionary system consisting of the population dynamics coupled with the quantity dynamics of the cournot game may be complicated and endogenous fluctuations may arise we consider a typical example where firms can choose between two rules the nash rule and the best reply rule we show that a homoclinic tangency between the stable and unstable manifold of the equilibrium occurs as evolutionary pressure increases implying bifurcation routes to complicated dynamics and strange attractors

money is memory abstract this paper examines the sets of feasible allocations in a large class of economic environments in which commitment is impossible following myerson 8 the standard definition of feasibility is adapted to take account of the lack of commitment the environments feature either memory or money memory is defined as knowledge on the part of an agent of the full histories of all agents with whom he has had direct or indirect contact in the past money is defined as an object that does not enter utility or production functions and is available in fixed supply the main proposition is that any allocation that is feasible in an environment with money is also feasible in the same environment with memory depending on the environment the converse may or may not be true hence from a technological point of view money is equivalent to a primitive form of memory journal of economic literature classification numbers e40 c73 d82

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

the signalling role of municipal currencies in local development the last decade has seen the burgeoning of several hundred local community currency institutions in cities across the world although residents of these communities claim that local currency promotes local development how it does so has hitherto been unexplored we argue that the introduction of a municipal currency may serve as a signal of demand for local goods where demand uncertainty deters firms from investing in more productive technologies such a signal improves the chances that technology choice will be optimal the introduction of a local currency therefore always improves ex ante efficiency and may lead to ex post efficiency with strictly higher levels of productivity and welfare

equilibrium selection in a nonlinear duopoly game with adaptive expectations abstract we analyze a nonlinear discrete time cournot duopoly game where players have adaptive expectations the evolution of expected outputs over time is generated by the iteration of a noninvertible two dimensional map the long run behavior is characterized by multistability that is the presence of coexisting stable consistent beliefs which correspond to nash equilibria in the quantity space hence a problem of equilibrium selection arises and the long run outcome strongly depends on the choice of the players initial beliefs we analyze the basins of attraction and their qualitative changes as the model parameters vary we illustrate that the basins might be nonconnected sets and reveal the mechanism which is responsible for this often neglected kind of complexity the analysis of the global bifurcations which cause qualitative changes in the topological structure of the basins is carried out by the method of critical curves

on the consistency of backward looking expectations the case of the cobweb in dynamic models of economic fluctuations backward looking expectations with systematic forecasting errors are inconsistent with rational behaviour in non linear dynamic models exhibiting seemingly unpredictable chaotic fluctuations however simple habitual rule of thumb backward looking expectation rules may yield non zero but nevertheless non systematic forecasting errors in a chaotic model expectational forecasting errors may have zero autocorrelations at all lags even for rational agents patterns in these forecasting errors may be very difficult to detect especially in the presence of small noise backward looking expectations are then not necessarily inconsistent with rational behaviour we investigate whether simple expectation schemes such as naive or adaptive expectations can be consistent with rational behaviour in the simplest of all non linear dynamic economic models the non linear cobweb model

cournot competition organization and learning abstract we model firms output decisions in a repeated duopoly framework focusing on three interrelated issues 1 the role of learning in the adjustment process toward equilibrium 2 the role of organizational structure in the firm s decision making and 3 the role of changing environmental conditions on learning and output decisions we characterize the firm as a type of artificial neural network which must estimate its optimal output decision based on signals it receives from the economic environment which influences the demand function via simulation analysis we show 1 how organizations learn to estimate the optimal output over time as a function of the environmental dynamics 2 which networks are optimal for each level of environmental complexity and 3 the equilibrium industry structure