interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

rules with discretion and local information to ensure that individual actors take certain actions community enforcement may be required this can present a rules versus discretion dilemma it can become impossible to employ discretion based on information that is not widely held because the wider community is unable to verify how the information was used instead actions may need to conform to simple and widely verifiable rules we study when discretion in the form of exceptions to a simple rule can be implemented if the information is shared by the action taker and a second party who is able to verify for the larger group that an exception is warranted in particular we compare protocols where the second party excuses the action taker from taking the action ex ante with protocols where the second party instead forgives a rule breaking actor ex post jel codes c73 d82

tying and innovation a dynamic analysis of tying arrangements this paper analyses the effects of tying arrangements on r d incentives it shows that tying is a means through which a firm can commit to more aggressive r d investment in the tied goods market tying also has the strategic effect of reducing rivals incentives to invest in r d the strategy of tying is a profitable one if the gains via an increased share of dynamic rents in the tied goods market exceed the losses that result from intensified price competition in the market the welfare implications of tying and consequently the appropriate antitrust policy are discussed

optimal strategic oil stockpiling and import tariffs the case of china abstract as two of the most important instruments for dealing with the issues of energy supply security strategic petroleum reserves sprs and oil import tariffs have been proven effective in developed countries while china is currently building up its strategic oil reserves to ensure energy security it is of great importance to investigate china s optimal oil stockpiling policies while taking into account the possibility of imposing an import tariff or quota which can also be used for alleviating the energy insecurity of an oil importing country employing a dynamic programming framework this paper examines the optimal spr policies and oil import tariffs or quotas for china and the interactions between the two instruments under different scenarios for the world oil market the results show that the combination of optimal tariffs and spr policies can substantially reduce the expected oil insecurity cost for china the effect is larger when the probability that a disruption will continue is higher

analyzing the welfare impacts of full line forcing contracts theoretical investigations have examined both anti competitive and efficiency inducing rationales for vertical bundling making empirical evidence important to understanding its welfare implications we use an extensive dataset on full line forcing contracts between movie distributors and video retailers to empirically measure the impact of vertical bundling on welfare we identify and measure three primary effects of full line forcing contracts market coverage leverage and efficiency we find that bundling increases market coverage and efficiency but has little impact on one distributor s gaining leverage over another as a result we estimate that full line forcing contracts increased consumer and producer surplus in this application

social networks and the process of globalization we propose a stylised dynamic model to understand the role of social networks in the phenomenon we call globalization this term refers to the process by which even agents who are geographically far apart come to interact thus being able to overcome what would otherwise be a fast saturation of local opportunities a key feature of our model is that the social network is the main channel through which agents exploit new opportunities therefore only if the social network becomes global heuristically it reaches far in few steps can global interaction be steadily sustained to shed light on the conditions under which such a transformation may or may not take place is the main objective of the paper one of the main insights arising from the model is that in order for the social network to turn global the economy needs to display a degree of geographical cohesion that is neither too high for then global opportunities simply do not arise nor too low then the meeting mechanism displays too little structure for the process to take off but if globalization does materialize we show that it is a robust state of affairs that often arises abruptly as key parameters change this occurs in particular as the rate of arrival of ideas rises or when there is a high enough increase in the range at which the network transmits information

the effect of entry on r d networks we investigate the effect of potential entry on the formation and stability of r d networks considering farsighted firms we show that the presence of a potential entrant often alters the incentives of incumbent firms to establish an r d link in particular incumbent firms may choose to form an otherwise undesirable r d collaboration in order to deter the entry of a new firm moreover an incumbent firm may refrain from establishing an otherwise desirable r d collaboration expecting to form a more profitable r d link with the entrant finally potential entry may lead an inefficient incumbent to exit the market we also perform a welfare analysisand show that market and societal incentives are often misaligned

preemptive r d rent dissipation and the leverage theory this paper provides a new perspective on the validity of the so called leverage theory in a model of preemptive innovation in systems markets i examine the effect of bundling on r d incentives i find that bundling provides a channel through which monopoly slack in one component market can be shifted to another with the effect of mitigating rent dissipation in the systems market bundling can be profitable if this beneficial effect of reduced rent dissipation outweighs the negative effect of intensified price competition after demonstrating the private optimality of bundling its welfare implications are considered finally the results can be reinterpreted to analyze the relationship between compatibility decisions and r d incentives in mix and match models

pricing option contracts on the strategic petroleum reserve in this article we examine the pricing of option contracts on the strategic petroleum reserve spr and consider how these can be used by both the government and refiners we analyze the interaction between the call and put option contracts taking into account the underlying game in the infinite markov decision process with discounting explaining the relationship between the valuation of options on the spr by refiners and the valuation of financial options on a marker crude in financial markets we conclude that the values of both call and put options on the spr increase with oil prices and decrease with total inventory furthermore our analysis shows that a more active management of the spr creates higher social welfare although refiners profit less from inventories and larger volatility in inventory profits decreasing private investment in petroleum stocks

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

tying in two sided markets with multi homing this paper analyzes the effects of tying on market competition and social welfare in two sided markets when economic agents can engage in multi homing by participating in multiple platforms to reap maximal network benefits the model shows that tying induces more consumers to multi home and makes platform specific exclusive content available to more consumers which is beneficial to content providers as a result tying can be welfare enhancing if multi homing is allowed even in cases where its welfare impacts are negative in the absence of multi homing the analysis thus can have important implications for recent antitrust cases in industries where multi homing is prevalent

an analysis of bundle pricing the case of biotech seeds biotechnology has provided opportunities for strategic management and pricing of patented products this article analyzes the economics and strategy of bundling and bundle pricing of biotech traits in seeds when the bundling of genes traits is decided by biotech firms firms may choose among subadditive pricing component pricing or superadditive pricing strategies we argue that complementarity among component genes contributes to subadditive pricing while substitution among components contributes to superadditive pricing the nature of bundle pricing is explored empirically using u s seed corn data from 2000 to 2007 we document that subadditive bundle pricing of traits is commonly found in the seed corn market however we also present evidence of superadditive pricing and component pricing the presence of different pricing and bundling strategies suggests a rapidly advancing and complex market the preponderance of subadditive pricing suggests that trait bundling offers benefits to farmers exhibiting strong demand for multiple complementary genetic traits jel classifications l4 l13 l65

a theory of collective reputations with applications to the persistence of corruption and to firm quality the paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations a member s current incentives are affected by his past behaviour and because his track record is observed only with noise by the group s past behaviour as well the paper thus studies the joint dynamics of individual and collective reputations and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature it shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone and it derives necessary and sufficient conditions under which group reputations can be rebuilt last the paper applies the theory to analyse when a large firm can maintain a reputation for quality 1 collective reputations collective reputations play an important role in economics and the social sciences countries ethnic racial or religious groups are known to be hard working honest corrupt hospitable or belligerent some firms enjoy substantial rents from their reputations for producing high quality products some departments are reported to treat their faculty or students fairly the paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations a member s current incentives are affected by her past behaviour and because her track record is observed only with noise by the group s past behaviour as well the paper studies the joint dynamics of individual and collective reputations in a model in which current generations are progressively replaced by new ones and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature see section 2 for a detailed comparison with the literature it shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone and it derives necessary and sufficient conditions under which group reputations can be rebuilt last the paper applies the theory to analyse when a large firm can maintain a reputation for quality let us spell out the building blocks of our theory in more detail a a group s reputation is only as good as that of its members each member is characterized by individual traits such as talent diligence or honesty past individual behaviour conveys information about these traits and generates individual reputations

an equilibrium selection theory of monopolization we develop a duopoly model in which firms compete for the market e g investing in process innovation or product development as well as in the market e g setting quantities or prices competition for the market generates multiple equilibria that differ in the firms investment levels relative size and profitability we show that monopolization that affects competition in the market can act as an equilibrium selection device in competition for the market in particular it eliminates equilibria that are undesirable for the monopolizing firm while not generating new equilibria this result complicates the task of determining whether a firm s dominance in a given market is the result of fair competition or unlawful monopolization we discuss a number of implications for antitrust policy and litigation and illustrate these by means of two well known antitrust cases

a model of biased intermediation this paper studies situations in which some consumers rely on a potentially biased intermediary to choose among downstream firms we introduce the notion that firms and consumers payoffs can be congruent or conflicting and show that this has important implications for the effects of bias under congruence the firm towards which the intermediary is biased invests more than its rival and consumers can be better off than under no bias under conflict bias hurts consumers and the favored firm charges higher prices we study various oft proposed policies for dealing with a biased intermediary and show that the efficacy of each intervention depends strongly on whether the environment exhibits congruence or conflict we discuss how the model relates to recent issues in online markets

product bundling and incentives for mergers and strategic alliances this paper analyzes firms choice between a merger and a strategic alliance in bundling their product with other complementary product we consider a framework in which firms can improve profits only from product bundling while mixed bundling is not profitable pure bundling is because pure bundling reduces consumers choices and thus softens competition among firms firms benefit the most from this reduced competit ion if they form an alliance firms do not gain as much from a merger because internalizing the complementarity between the two products a merged firm is inclined to pursue aggressive pricing to gain market share yet firms may be motivated to choose a merger over an alliance because of foreclosure possibility as foreclosure is not possible under strategic alliance however in response unmerged rivals can use a strategic alliance to avert foreclosure hence the possibility of counter bundling via strategic alliance by rivals reduces the incentives for merger in equilibrium

vertical foreclosure with the choice of input specifications we develop an equilibrium model of vertical foreclosure with the choice of input specifications vertical foreclosure occurs as the upstream division of the integrated firm makes a specialized input for its sister downstream division while it would as an independent firm provide a generalized input the changes in incentives with vertical integration can be explained by the externalities the choice of a specialized input entails vertical integration allows the upstream firm to internalize the benefit of raising the rival firm s costs at the downstream level we derive conditions for equilibrium vertical foreclosure to occur and discuss its welfare consequences

optimal path for china s strategic petroleum reserve a dynamic programming analysis abstract this paper proposes a dynamic programming model to explore the optimal stockpiling path for china s strategic petroleum reserve before 2020 the optimal oil acquisition sizes in 2008 2020 under different scenarios are estimated the effects of oil price risks and elasticity value on inventory size are further investigated it is found that the optimal stockpile acquisition strategies are mainly determined by oil price and total inventory costs while oil supply disruption is not considered china s optimal stockpile acquisition rate increases from 19 2 to 52 million barrels from 2008 to 2020 if an oil supply disruption occurs the oil acquisition rate will be reduced significantly however it may not be a good strategy to interrupt oil reserve activities in order to minimize the total costs for the entire planning period

exclusivity and tying in u s v microsoft what we know and don t know research on capital structure attempts to explain how corporations finance real investment with particular emphasis on the proportions of debt vs equity financing there is no universal theory of the debt equity choice and no reason to expect one but three useful conditional theories are reviewed in this paper the tradeoff theory says that firms seek debt levels that balance the tax advantages of additional debt against the costs of possible financial distress the pecking order theory says that the firm will borrow rather than issuing equity when internal cash flow is not sufficient to fund capital expenditures thus the amount of debt will reflect the firm s cumulative need for external funds the free cash flow theory says that dangerously high debt levels will increase value despite the threat of financial distress each of these theories works for some firms in some circumstances more general theories will require a deeper understanding of the financial objectives of corporate managers

efficient patent pools the paper builds a tractable model of patent pools agreements among patent owners to license sets of their patents it provides a necessary and sufficient condition for patent pools to enhance welfare and shows that requiring pool members to be able to independently license patents matters if and only if the pool is otherwise welfare reducing the paper allows patents to differ in importance asymmetric blocking patterns and licensors to also be licensees we undertake some initial exploration of the impact of pools on innovation the analysis has broader applicability than pools being relevant to a number of co marketing arrangements

beer and the tie did divestiture of brewer owned public houses lead to higher beer prices in 1989 the united kingdom monopolies and mergers commission mmc recommended measures that eventually led brewers to divest themselves of 14 000 public houses the mmc claimed that their recommendations would lower retail prices and increase consumer choice since that time however retail prices have risen this paper contains an econometric analysis of the transition period the analysis is based on a model of the relationship between retail price and retail organisational form that emphasises how exclusive dealing clauses and strategic factors interact in 1989 in an important decision the united kingdom monopolies and mergers commission mmc recommended measures that eventually led brewers to divest themselves of 14 000 public houses the mmc claimed that their recommendations would lower retail prices and increase consumer choice there is considerable doubt however that their objectives were achieved indeed since the time that the recommendations were implemented retail prices have risen it is not clear however if prices would have increased in the absence of divestiture one goal of my research is to provide an answer to this question the mmc s recommendations created an exceptional opportunity to assess the effects that different contractual arrangements have on retail prices indeed one would like to investigate this relationship ceteris paribus unfortunately however the choice of vertical market structure is normally endogenous and it is impossible to condition on all of the factors that affect the contracting decision in the uk beer industry in contrast the government ordered changes in the type and terms of the contracts under which national brewers could operate their licensed premises increased separation between brewer and publican therefore was not due to changes in economic conditions moreover some premises the free houses that were not owned by a brewer were not affected by the beer orders the existence of a control group facilitates the analysis by strengthening the conclusions that one can draw in recent years economists have moved away from simple theories of vertical

an empirical analysis of the dynamic programming model of stockpile acquisition strategies for china s strategic petroleum reserve abstract the world s future oil price is affected by many factors the challenge therefore is how to select optimal stockpile acquisition strategies to minimize the cost of maintaining a reserve this paper provides a new method for analyzing this problem using an uncertain dynamic programming model to analyze stockpile acquisition strategies for strategic petroleum reserve using this model we quantify the impact of uncertain world oil price on optimal stockpile acquisition strategies of china s strategic petroleum reserve for the period 2007 2010 and 2011 2020 our results show that the future stockpile acquisition is related to oil prices and their probability and if not considering the occurrence of oil supply shortage china should at least purchase 25 million barrels when world oil price is at an optimal level the optimal price of stockpile acquisition of every year has a stronger relationship with the probability of high price and the optimal expected price and size of stockpile acquisition is different in each year

cooperation punishment and immigration abstract we study the incentive to cooperate in a society comprised of citizens and immigrants the level of cooperation is governed by a steady state under population dynamics along with the behavior of individual citizens and immigrants we provide an equilibrium characterization exhibiting a uniquely determined positive level of cooperation in society we then use this framework to study the impact of government programs aimed at punishing immigrants who defect when agents produce offspring we show that a consequence of such punishment is that while the incentive for immigrants to defect decreases there is an equilibrium substitution effect whereby citizens realize an increased incentive to defect

oil stockpiles and import reductions a dynamic programming approach this paper analyzes oil stockpiling policies using models in which u s policy choices are restricted to just two instruments stockpiles and disruption tariffs the model considers the influence of u s and in general oecd import demands upon the opec price for oil and the duration and severity of oil disruptions induced by disturbances among the opec nations our development is based upon a probabilistic view of disruptions analyzed by applying dynamic programming

social norms and random matching games abstract nash equilibrium has been tremendously useful in understanding economic problems in which strategic behavior is important the theoretical foundations of the solution concept often include the assumption that the game to be played is common knowledge an unrealistic assumption in games with many players we introduce the concept of norm equilibrium for random matching games a norm equilibrium is a nash equilibrium that relies on substantially less information than common knowledge of the game we use norm equilibria to provide a folk theorem for random matching games and to analyze increasing numbers of players in a random matching game journal of economic literature classification numbers c70 c72

ostracism and forgiveness many communities rely upon ostracism to enforce cooperation if an individual shirks in one relationship her innocent neighbors share information about her guilt in order to shun her while continuing to cooperate among themselves however a strategic victim may herself prefer to shirk rather than report her victimization truthfully if guilty players are to be permanently ostracized then such deviations are so tempting that cooperation in any relationship is bounded by what the partners could obtain through bilateral enforcement ostracism can improve upon bilateral enforcement if tempered by forgiveness through which guilty players are eventually readmitted to cooperative society

the determinants of suboptimal technological development in the system company component producers relationship abstract the paper analyses the behaviour of a high tech system company in a model where her strategic variable is the choice of the contractual relationship with component producers the system company develops an optimal contractual design separating component producers qualities and providing optimal incentives to them the particular features of the system company generate however a static and an intertemporal dilemma in her optimising behaviour the static dilemma is between i releasing property rights to component producers to increase their incentives and ii maintaining more control on strategic components to improve her systemic capacity the intertemporal dilemma is about the optimal share of property rights on component products to maintain in a framework in which the strategic non strategic feature of individual components varies over time both static and intertemporal dilemmas have effects on the divergence between the system company optimum and the socially optimum level of technological development

rebates as incentives to exclusivity we show how rebates or fidelity discounts that take the form of lump sum payments made to retailers can be used by an incumbent manufacturer to achieve exclusivity and to deter the entry of a more efficient rival the results which hold whatever the degree of differentiation between retailers and whatever the cost advantage of the entrant are found despite minimizing asymmetries that may favour the incumbent as such there is no need to introduce buyers disorganization discriminatory offers economies of scale non coincident markets or liquidated damages to find that exclusivity can lead to anti competitive effects

strategic oil stockpiling for energy security the case of china and india abstract compared with the developed countries the developing countries could be more vulnerable to oil supply disruptions due to their lack of strategic petroleum reserves sprs several developing countries including china and india are establishing their sprs to ensure energy security in the common world oil market one country s spr decisions can be affected by the decisions of other countries this paper investigates the spr policies of china and india two of the largest developing countries in a game theoretic framework where the interactions between the two countries are taken into account the results show that players equilibrium stockpiling strategies and total expected costs could vary significantly with the initial oil market state stockpile acquisition capacity and the probabilities for disruptions to persist

mixed bundling in two sided markets in the presence of installed base effects we analyze mixed bundling in two sided markets where installed base effects are present and find that the pricing structure deviates from traditional bundling as well as the standard two sided markets literature we determine prices on both sides fall with bundling mixed bundling acts as a price discrimination tool segmenting the market more efficiently consequently as a by product of this price discrimination the two sides are better coordinated and social welfare is enhanced we show unambiguously that platform participations increase on both sides of the market after theoretically evaluating the impact mixed bundling has on prices and welfare we take the model predictions to data from the portable video game console market we find empirical support for all theoretical predictions this paper was accepted by j miguel villas boas marketing

a dynamic programming model of china s strategic petroleum reserve general strategy and the effect of emergencies abstract to protect the security of energy supply china is building national strategic petroleum reserve spr we present a dynamic programming model to determine the optimal stockpiling and drawdown strategies for china s spr under various scenarios focusing on minimizing the total cost of reserves in contrast to previous research the oil price given in our model is exogenous on a monthly instead of annual basis with a view to more realistic simulation of optimal strategies each year our model results show that in the case where stockpiling affects oil prices a given spr size will be achieved earlier than when stockpiling does not affect oil prices in different emergency conditions the optimal stockpiling and drawdown strategies of china s spr are very different when an emergency occurs the shock of stockpiling on the oil price per barrel could range 0 49 6 35 while the impact of drawdown on the oil price per barrel could range 6 22 to 0 48

developing a market based approach to managing the us strategic petroleum reserve abstract the strategic petroleum reserve has not been used effectively to manage the consequences of oil shocks in the united states the main reason is that political decision makers tend to hoard the reserves during crises and bureaucratic processes delay the sale of the reserves also the enabling legislation focused on ameliorating shortages whereas disruptions result price spikes rather than shortages we develop a markov game of the buildup and drawdown of the reserve in which a public player aims to maximize consumer welfare at the same time private holders of inventory maximize their profit the methodological contribution in this paper is the development of financial options to implement the public player s optimal policy we use the solution of this game to calculate the number and value of options necessary for the private marketplace to trigger the optimal buildup and drawdown of the reserve

a stochastic dynamic nash game analysis of policies for managing the strategic petroleum reserves of consuming nations in this paper we present a nash dynamic game model of interactions among oil inventory and tariff policies for oil importing countries the inventory policies consist of the rates for building up and drawing down strategic oil reserves while the tariff policies consist of setting tariffs as a function of the state of the world oil market the model represents a stochastic game in which countries are grouped into two players where each player in the game chooses its individual policies to maximize expected social welfare we use the model to present empirical results about the sizes of the stockpiles as a function of disruption probabilities tariff policies and cooperation versus noncooperation between nations in addition to results regarding the build up and draw down rates as a function of the amount of disruption or probability of future disruption our central conclusion is that build up and drawdown policies are essentially the same with or without international cooperation due to the current inventory limits on u s and foreign strategic petroleum reserves

cooperation in community interaction without information flows we study cooperative behaviour in communities where the flow of information regarding past conduct is limited or missing players are initially randomly matched with no knowledge of each other s past actions they endogenously decide whether or not to continue the repeated relationship there is incomplete information regarding player types a subset of the population is myopic while the remainder have discount factors that permit cooperation in principle we define social equilibrium in such communities such equilibria are characterized by an initial testing phase followed by cooperation if the test is successful it is precisely the presence of myopic types that permit cooperation by raising barriers to entry into new relationships we examine the implications of increased patience which takes two forms an increase in the number of non myopic types and an increase in the discount factor of non myopic types these two notions turn out to have strikingly different implications for the degree of cooperation that can be sustained

innovation rent extraction and integration in systems markets author s farrell joseph katz michael abstract we consider innovation incentives in markets where final goods comprise two strictly complementary components one of which is monopolized we focus on the case in which the complementary component is competitively supplied and in which innovation is important we explore ways in which the monopoly may have incentives to confiscate efficiency rents in the competitive sector thus weakening or destroying incentives for independent innovation we discuss how these problems are affected if the monopolist integrates into the competitive sector

the economic consequences of social network structure we survey the literature on the economic consequences of the structure of social networks we develop a taxonomy of macro and micro characteristics of social interaction networks and discuss both the theoretical and empirical findings concerning the role of those characteristics in determining learning diffusion decisions and resulting behaviors we also discuss the challenges of accounting for the endogeneity of networks in assessing the relationship between the patterns of interactions and behaviors

china s optimal stockpiling policies in the context of new oil price trend abstract optimizing the size of oil stockpiling plays a fundamental role in the process of making national strategic petroleum reserve spr policies there have been extensive studies on the operating strategies of spr however previous literatures have paid more attention to a booming or stable international oil market while few studies analyzed the impact of a long term low oil price on spr policy as a supplement this paper extends a static model to study china s optimal stockpiling policy under different oil price trends and in response to different current oil prices a new variable fc which demonstrates the appreciation and depreciation of the reserved oil economic value has been taken into account to assess the optimal size of spr in this paper a more multi perspective of view is provided to consider the policies of china s spr especially under the different trend of international oil price fluctuations

tying compatibility and planned obsolescence according to the hypothesis of planned obsolescence a durable goods monopolist without commitment power has an excessive incentive to introduce new products that make old units obsolete and this reduces its overall profitability in this paper i reconsider the above hypothesis by examining the role of competition in a monopolist s upgrade decision i find that when a system add on is competitively supplied a monopolist chooses to tie the add on to a new system that is only backward compatible even if a commitment of not introducing the new system is available and socially optimal tying facilitates a price squeeze

airline network rivalry in this paper the effects of the strategic interaction between deregulated airlines on their network choice are analyzed the authors examine whether switching from a linear to a hub spoke network confers a strategic advantage because it saves costs and improves service quality they find that if hubbing lowers total cost which includes both airline and passenger inconvenience costs the pursuit of strategic advantages usually intensifies the extent of hubbing even if hubbing raises total cost it might be pursued by the airline either because hubbing is a dominant strategy in an oligopolistic setting or because hubbing will be useful in deterring entry

a dynamic nash game model of oil market disruptions and strategic stockpiling in this paper we present and analyze a nash dynamic game model for investigating public and private sector oil inventory policies in unstable world oil markets conceptual results about the model include simple verifiable conditions for uniqueness and stability of solutions along with characterizations of optimal policies we also present results and discuss computational issues that arise in determining subgame perfect infinite horizon equilibria using a steady state policy iteration approach

tying foreclosure and exclusion in recent years the leverage theory of tied good sales has faced heavy and influential criticism in an important sense though the models used by its critics are actually incapable of addressing the leverage theory s central concerns here the author reconsiders the leverage hypothesis and argues that tying can indeed serve as a mechanism for leveraging market power the mechanism through which this leverage occurs its profitability and its welfare implications are discussed in detail copyright 1990 by american economic association

endogenous institutional selection building trust and economic growth abstract private order market institutions founded on trust based relational contracts suffer adverse selection and moral hazard problems while public order market institutions have a limited capacity to enforce contracts i model agent selection between contract enforcement institutions and demonstrate that the state s contract enforcement capacity is complementary to private order contract enforcement institutions for low to moderate levels of public order enforcement capacity this suggests that initial improvements to public order institutions cause the accumulation of trust and result in economic growth in both institutions however i show that the private order institution must collapse once the public order contract enforcement capacity is too great

myopic perception in repeated games abstract in obtaining the celebrated folk theorem not only everyone must value his future sufficiently high but also everyone must be perceived so by the others this common perception of players time preferences must be maintained even after someone deviates this paper explores the implications of myopic perception in repeated games with perfect monitoring under myopic perception a deviator will not be perceived as a long run player in the continuation game which in turn affects the equilibria in the repeated game before deviation we develop an algorithm to compute a set that characterizes almost all equilibrium payoffs when the discount factor is sufficiently high when the stage game has a unique nash equilibrium and it strictly dominates all other stage game payoffs then under myopic perception the corresponding repeated game has a unique subgame perfect equilibrium

bundling subscription tv channels abstract i analyze a market such as a subscription tv market where multiple varieties of an excludable public good are traded in bundles here bundling is not due to a producer s desire to extract consumers surplus but due to economies of scope in distribution technology the paper studies the pricing and production decisions of a supplier as well as the impacts of certain regulations such as pure bundling or pure components pricing restrictions findings of interest are as follows a profit constrained welfare maximizer would use a pure bundling price system when costs are low and a mixed bundling price system when costs are high a private monopolist produces too few varieties a pure bundling restriction on a private monopolist may increase welfare and consumer surplus but a pure components restriction never increases them

bundling and competition for slots we consider competition between sellers selling multiple distinct products to a buyer having k slots under independent pricing a pure strategy equilibrium often does not exist and equilibrium in mixed strategy is never efficient when bundling is allowed each seller has an incentive to bundle his products and an efficient technology renting equilibrium always exists furthermore in the case of digital goods or when sales below marginal cost are banned all equilibria are efficient comparing the mixed strategy equilibrium with the technology renting equilibrium reveals that bundling often increases the buyer s surplus finally we derive clear cut policy

endogenous market structures and contract theory delegation principal agent contracts screening franchising and tying abstract i study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry traditional results change substantially when the market structure is endogenous rather than exogenous they concern 1 contracts of managerial delegation to non profit maximizers 2 incentive principal agent contracts in the presence of moral hazard on cost reducing activities 3 screening contracts in case of asymmetric information on the productivity of the managers 4 vertical contracts of franchising in case of hold up problems and 5 tying contracts by monopolists competing also in secondary markets firms use always these contracts to strengthen price competition and manage to obtain positive profits in spite of free entry

social capital and social quilts network patterns of favor exchange we examine the informal exchange of favors in societies such that any two individuals interact too infrequently to sustain exchange but such that the social pressure of the possible loss of multiple relationships can sustain exchange patterns of exchange that are locally enforceable and renegotiation proof necessitate that all links are supported any two individuals exchanging favors have a common friend in symmetric settings such robust networks are social quilts tree like unions of completely connected subnetworks examining favor exchange networks in 75 villages in rural india we find high levels of support and identify characteristics that correlate with support

durable products time inconsistency and lock in many durable products cannot be used without a contingent consumable product e g printers require ink ipods require songs razors require blades etc for such products manufacturers may be able to lock in consumers by making their products incompatible with consumables that are produced by other firms we examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable under a lock in strategy the manufacturer has pricing power over the contingent consumable which she can use to extract additional rents from higher valuation consumers but such pricing power may also reduce consumers willingness to pay for the durable because it subjects them to being held up with higher consumables prices in the future restricting our attention to linear pricing policies we find that if the manufacturer can commit to shutting down production of her durable after an initial one time sale then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers fears of being held up on the other hand when the manufacturer cannot commit to shutting down production of her durable then her own output of additional durables gives her an incentive to keep consumables prices low and competition in the consumables market is less beneficial this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

trade expansion and contract enforcement consider a world of traders separated in geographic economic or social space honest trade offers larger gains for more distant traders but frequencies of meetings and information flows about cheating have local bias honesty is self enforcing only between pairs of sufficiently close neighbors global honesty prevails only in a sufficiently small world the extent of self enforcing honesty is likely to decrease when the world expands beyond this size costly external enforcement is useful only if the world is sufficiently large and its net payoff need not be larger than that of a self governing small community intermediate size worlds fare worst

trust and social collateral this paper builds a theory of trust based on informal contract enforcement in social networks in our model network connections between individuals can be used as social collateral to secure informal borrowing we define network based trust as the largest amount one agent can borrow from another agent and derive a reduced form expression for this quantity which we then use in three applications 1 we predict that dense networks generate bonding social capital that allows transacting valuable assets whereas loose networks create bridging social capital that improves access to cheap favors such as information 2 for job recommendation networks we show that strong ties between employers and trusted recommenders reduce asymmetric information about the quality of job candidates 3 using data from peru we show empirically that network based trust predicts informal borrowing and we structurally estimate and test our model

multiproduct pricing in oligopoly abstract this paper proposes a two good model of price competition where some consumers visit all shops and others visit only one we find that information frictions lead to price dispersion when the two goods are complements their prices will tend to be negatively correlated so if one is priced high the other will be discounted this finding is supported by some empirical evidence which suggests that simultaneous price discounts of complements are infrequent if the goods are substitutes their prices will be uncorrelated potentially rationalizing the lack of evidence on their co pricing when selling complements retailers earn higher profits than in the one good model through taxing captive consumers with a high overall price tag and attracting shoppers by pricing one of the goods aggressively bundling practices are thus shown to be detrimental to retailers profits

why the west became wild informal governance with incomplete networks settlers flocking to boomtowns on the american western frontier were faced with the same task that communities in weak states across the globe face in contemporary times self governance peer sanctions can enforce cooperation in these environments but their efficacy depends on the social networks that transmit information from peer to peer the author uses a game theoretic model to show that peripheral network positions can generate such strong incentives to misbehave that persistent cheating occurs in equilibrium the model reveals that groups maintaining high levels of cooperation that face shocks to their strategic environment or to their network can ratchet down into less cooperative equilibria in which the most peripheral become ostracized furthermore population change that features rapid growth high turnover and enclave settlements can undermine cooperation the insights from this article help to explain the trajectory of cooperation in the mining towns of the wild west in which high levels of cooperation deteriorated as the population surged and help to make sense of why only certain nonwhite settlers were targets of hostility and racism

selective contracts foreclosure and the chicago school view abstract i examine a mechanism by which exclusive supply contracts may inefficiently deter entry into the market in the model the incumbent supplier selectively offers contracts only to some buyers and convinces them to consent by guaranteeing them low prices the contracts strengthen the monopoly position of the incumbent supplier and allow it to extract rents from the remaining buyers that were not offered contracts aside from the favorable contract terms buyers have another reason to consent to the exclusivity scheme the latter raises the input costs of rival buyers that were not offered contracts the model has potential applications to the recent microsoft antitrust case 1994 i define exclusive supply contract as an agreement under which an upstream firm becomes the exclusive supplier of a downstream firm the downstream firm is prohibited from buying from other suppliers

brand extension as informational leverage the marketing literature refers to the concept of brand capital and provides empirical evidence that firms with a large stock of well established brands have an advantage in introducing new products this paper develops a theory of brand extension as a mechanism for informational leverage in which a firm leverages off a good s reputation in one market to alleviate the problem of informational asymmetry encountered in other markets it is shown that brand extension helps a multi product monopolist introduce a new experience good with less price distortion thus the paper provides a theoretical foundation for the concept of brand capital

using stockpile delegation to improve china s strategic oil policy a multi dimension stochastic dynamic programming approach abstract there has been much attention paid to oil security in china in recent years although china has begun to establish its own strategic petroleum reserve spr to prevent potential losses caused by oil supply interruptions the system aiming to ensure china s oil security is still incomplete this paper describes and provides evidence for the benefits of an auxiliary strategic oil policy choice which aims to strengthen china s oil supply security and offer a solution for strategic oil operations with different holding costs in this paper we develop a multi dimension stochastic dynamic programming model to analyze the oil stockpile delegation policy which is an intermediate policy between public and private oil stockpiles and is appropriate for the chinese immature private oil stockpile sector the model examines the effects of the oil stockpile delegation policy in the context of several distinct situations including normal world oil market conditions slight oil supply interruption and serious oil supply interruption operating strategies that respond to different oil supply situations for both the spr and the delegated oil stockpile were obtained different time horizons interruption times and holding costs of delegated oil stockpiles were examined the construction process of china s spr was also taken into account

exclusive dealing before bork and beyond abstractantitrust scholars have come to accept the basic ideas about exclusive dealing that bork articulated in the antitrust paradox indeed they have even extended his list of reasons why exclusive dealing can promote economic efficiency yet they have also taken up his challenge to explain when exclusive dealing might possibly cause harm and have modeled a variety of special cases where it does some albeit not all of these are sufficiently plausible to be useful to prosecutors and judges

r d inefficiency with bundling in systems markets abstract with diminishing returns to r d bundling makes firms invest more in component products with higher production costs as a result bundling causes an inefficient allocation of r d resources from the social standpoint

a graphical analysis of bundling by comparing the demand for a bundle and the vertical sum of the demands for its components this article analyzes the profitability and welfare consequences of bundling if it does not lower costs bundling tends to be profitable when reservation values are negatively correlated and high relative to costs if bundling lowers costs and costs are high relative to average reservation values positively correlated reservation values increase the incentive to bundle bundling and charging a price equal to the sum of the components prices lowers consumer surplus bundling can however increase consumer surplus when it results in lower prices copyright 1995 by university of chicago press

sanctions in networks abstract in this paper we contribute to the sender target models of sanctions by explicitly incorporating the linkages social political or economic that bind the sender and target to other agents given any network model and architecture we draw attention to two factors that play a key role in determining the efficacy of sanctions in reducing the frequency of violations these are respectively strategic complementaritiesbetween the sanctioning action deleting link with target and number of direct links of the sender and the externalities imposed on the sender by third parties we examine the role played by these factors both in the short run when links can only be deleted and the long run when links can also be added as well as when sanctions are unilateral the sender can only delete own links or multilateral the sender can impose on common allies to sever links to the target our analysis allows an active role to the target to build an opposing coalition to deflect sanctions and to third parties to engage in sanction busting it also extends to multiple senders and targets existence of interest groups within sender and target with dissimilar objectives and signed networks allowing both antagonistic and cordial bilateral relationships

social division with endogenous hierarchy many societies are divided into multiple smaller groups certain kinds of interaction are more likely to take place within a group than across groups i model a reputation effect that enforces these divisions people who are observed to interact with members of different groups are believed to be less trustworthy by members of their own group a hierarchical relationship between groups appears endogenously in equilibrium the information requirements for my equilibrium to exist are much less demanding than the information requirements in related models these different information requirements correspond to concrete differences between the institutions of different indian castes

upgrades switching costs and the leverage theory of tying this article investigates the role of product upgrades and consumer switching costs in the tying of complementary products previous analyses have found that a monopolist of one product will not increase its profits and reduce social welfare by tying and leveraging its monopoly position into a complementary market if the initial monopolised product is essential where essential means that all uses of the complementary good require the initial monopolised product we show that this is not true in settings characterised by product upgrades and consumer switching costs we also discuss various extensions including the role of the reversibility of tying

add on pricing by asymmetric firms this paper uses an analytical model to examine the consequences of add on pricing when firms are both horizontally and vertically differentiated and there is a segment of boundedly rational consumers who are unaware of the add on fees at the time of initial purchase we find that consumers who know the add on fees can be penalized and increasingly so by the existence of boundedly rational consumers our consideration of quality asymmetries on base goods and add ons plus the inclusion of boundedly rational consumers leads to several novel findings regarding firm profits when quality asymmetry is on base goods only and with boundedly rational consumers add on pricing can diminish profit for a qualitatively superior firm and increase profit for an inferior firm i e a lose win result compared to when add on pricing is prohibited or infeasible when quality asymmetries exist on both base goods and add ons and without boundedly rational consumers the opposite win lose result prevails when quality asymmetries exist on both base goods and add ons and with boundedly rational consumers the result can be win win win lose or lose win depending on the magnitude of quality differentiation on add ons this paper was accepted by j miguel villas boas marketing

bundling new products with old to signal quality with application to the sequencing of new products abstract this paper provides a new rationale for bundling based on informational leverage bundling a product of established quality to one of unknown quality can mitigate the problem of asymmetric information encountered in the latter market leveraging reputation in one market into another has implications for the timing of new product introductions bundling motivated by informational leverage enhances efficiency by increasing consumer s access to costly information when the possibility of endogenous timing of product introduction is considered however the welfare consequences of bundling are ambiguous the positive effect of market creation must be weighed against the negative effect of market delay

reputation effects and the limits of contracting a study of the indian software industry this paper examines evidence of the role that reputation plays in determining contractual outcomes we conduct an empirical analysis of the indian customized software industry using a data set we collected containing detailed information on 230 projects carried out by 125 software firms we propose a model ofthe industry where reputation determines contractual outcomes the evidence supports the view that reputation matters ex ante contracts as well as the outcome after ex post renegotiation vary with firms characteristics plausibly associated with reputation this holds after controlling for project client and firm characteristics

capturing strategic rent full line forcing brand discounts aggregate rebates and maximum resale price maintenance this paper examines the implications of a retailer s shelf space stocking decisions on the optimal marketing strategy of an upstream multiproduct monopolist when the retailer s opportunity cost of shelf space is known full line forcing brand discounts and maximum resale price maintenance are sufficient to achieve the monopolist manufacturer s first best profit when these strategies are adopted the retailer s profit is reduced to the scarcity rents obtainable on her shelf space when the retailer s opportunity cost of shelf space is unknown the use of aggregate rebates can act as a screening device to maximize channel profit copyright 1991 by blackwell publishing ltd