stopping agents from cheating abstract when a principal hires two or more agents to work in a correlated environment each agent s reward will depend on the other s performance unfortunately with just the usual optimal incentive constrained contracts being offered the agents strictly prefer to play equilibrium strategies other than those desired by the principal they cheat however the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost this mechanism uses one agent to police the other and exploits certain properties of the optimal contracts

a model of negotiated transfer pricing abstract a large majority of firms employ negotiated transfer pricing yet this method of decentralization remains largely unexplored this study develops a model of negotiated transfer pricing incorporating private divisional information as this is the setting where decentralization is most compelling the firm designs a compensation system utilizing divisional performance evaluation and negotiated transfer pricing a dynamic bargaining model is employed to capture managerial negotiations the study demonstrates that the firm can design managerial compensation schemes and bargaining infrastructures so that the negotiated transfer pricing structure allows it to reach the upper bound on available profits

desirability of compatibility in the absence of network externalities i compare the incentives firms have to produce individual components compatible with components of other manufacturers instead of systems composed of components that are incompatible with components of competing manufacturers i show that even in the absence of positive consumption externalities network externalities prices and profits will be higher in the regime of compatibility equilibrium total surplus could be higher in either regime both regimes overprovide variety compared to the surplus maximizing solution in today s environment many products are complex specified by a long array of characteristics part of the decision of the firm is to choose if it should break this long array of features into two or more smaller parts and produce the products corresponding to the smaller arrays instead of the product that embodies the full array we will call the products that correspond to these smaller arrays components and the product that corresponds to the full array a system note that components are by their definition complements components produced by different manufacturers are compatible if it is feasible for the consumers to combine them costlessly into a working system in this paper we will assume that there are two components which make up a system we will discuss competition under full compatibility when components produced by all firms are compatible with each other and under incompatibility when no components produced by different firms are compatible and no hybrid systems can exist 2 assuming availability of the same

the choice theory approach to market research this paper surveys economic choice theory stressing developments that permit use of data from psychometric and conjoint experiments to produce market demand forecasts alternatives to the widely used multinomial logit model are summarized and a new method for estimating multinomial probits is described an integration of choice models with attitudinal scaling and perceptual mapping within a latent variable system is described estimation of such systems under either random effects or fixed effects descriptions of heterogeneity across individuals is discussed issues in the use of choice models to describe responses from conjoint experiments are presented new regression diagnostic tests for the consistency of multinomial logit representations are discussed

bundling of substitutes or complements abstract the adams yellen two good bundling framework is generalized to allow the goods to be substitutes or complements general theorems on price change effects are given a monopolist may find it most profitable to offer the goods only as a bundle even if they are imperfect substitutes or to not bundle the goods even if they are complements if one good is competitively sold a monopoly producer of the other good can never increase profits by offering his good only as part of a bundle however such a monopolist might profitably offer his good in both bundled and unbundled form to price discriminate even if the two goods are substitutes

testing the limits of privatization argentine railroads abstract just how far can privatization be pushed and with what consequences based on a study of argentine railroads this paper concludes that even large unprofitable firms in developing countries faced with market failures can be privatized but the gains from doing so depend on how badly the state enterprise was performing to begin with and the potential for introducing competition in the market and for the market the broader lesson is that when both market failures and government failures are present a public private solution is preferable to a purely private or a purely public solution privatization is not a panacea but potentially a palliative when it comes to reducing subsidies or coping with regulatory failures

equilibrium with product differentiation tive consumer formulations is used to examine the properties of single and multiple price equilibria conditions under which decreases in the intensity of consumer preferences reduce price are given it is shown that with certain types of demand curves entry can eliminate price cost markups even given product differentiation if competition is localized it is demonstrated that entry does not affect the markup finally the effect of spurious product differentiation on price is examined

bertrand supertraps we study oligopoly price competition between multiproduct firms firms whose products interact in the profit function specifically we focus on the impact of intrafirm product interactions on the level of equilibrium profits this impact may be decomposed in two different ways a a direct effect keeping the competitors actions fixed plus a strategic effect i e through the competitors actions or alternatively b a competitive advantage effect change in firmi only plus an imitation effect change in all other firms we derive conditions such that a the strategic effect more than outweighs the direct effect and conditions such that b the imitation effect more than outweighs the competitive advantage effect bertrand supertraps for example an increase in the degree of economies of scope would increase profits if prices were fixed or if the change were limited to firmi s cost function however if all firms increase the degree of economies of scope then all firms receive lower profits a variety of other applications is considered including learning curves core competencies demand synergies systems competition compatibility bundling network effects switching costs durable goods long term contracts

what does privatization do for efficiency evidence from argentina s and brazil s railways abstract railway restructuring and privatization have now become a mainstream policy option in many developing countries this paper provides the first analysis of the efficiency payoffs of railway reform for two developing countries argentina and brazil we track down the evolution of the performance of the private operators in both countries since reform compare with the pre reform performance when possible distinguishing between the output and input sources of efficiency changes this is done by computing the total factor productivity of each business unit since the regulators started collecting enough data

holdups standard breach remedies and optimal investment in bilateral trading problems the parties may be hesitant to make relationship specific investments without adequate contractual protection we postulate that the parties can sign noncontingent contracts prior to investing and can freely renegotiate them after information about the desirability of trade is revealed we find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages moreover specific performance can induce both parties to invest efficiently if a separability condition holds expectation damages on the other hand is poorly suited to solve bilateral investment problems forthcoming the american economic review please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

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

gaussian demand and commodity bundling in an important and widely cited essay adams and yellen 1976 examine the use of package selling as a price discrimination device they consider a monopolist producing two goods with constant unit costs and facing buyers with diverse tastes the marginal utility of a second unit of either good is assumed to be zero for all buyers the two goods are independent in demand for all buyers so that any buyer s reservation price for the first unit of either good is independent of the market price of the other thus the maximum amount any buyer would pay for a bundle consisting of one unit of each good is the sum of the two reservation prices and buyers are completely described by the values of those two prices 2 resale markets are assumed away in order to obtain comparative results for alternative pricing strategies the distribution of reservation prices in the adams yellen framework is assumed to be bivariate normal implications of gaussian demand are explored pure bundling is shown to operate by reducing buyer diversity thus facilitating the capture of consumers surplus it generally makes buyers worse off than unbundled sales it is more profitable if average reservation prices are high enough mixed bundling combines advantages of both pure bundling and unbundled sales and it is generally strictly more profitable than either bundling which treats goods symmetrically seems most attractive under symmetric reservation price distributions i am indebted to severin borenstein for superb research assistance to the ford motor company for research support through a grant to m i t and to the harvard economics department for housing me as a visiting scholar while most of this research was performed of course only i can be held responsible for this essay s shortcomings 1 the first clear recognition of this possibility seems to have been by stigler 1968 but also see burstein 1960 2 paroush and peles 1981 relax the assumption that consumers purchase at most one unit of each good but they consider only two types of buyers both with linear demand functions they retain the assumption that demands are independent for all buyers telser 1979 and phillips 1981 use different frameworks to analyze bundling policies spence 1980 explores the relation between bundling across commodities as here and bundling multiple units of the same

resource allocation auctions within firms there is growing interest in the use of markets within firms proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed in contrast to the use of markets in the broader economy the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating privately informed agents in this paper we study the optimal design of managerial incentives when resources are allocated by an internal auction market as well as the efficiency of the resulting resource allocations we show that the internal auction market can achieve first best resource allocations and decisions but only at an excessive cost in compensation payments we then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second best outcome as determined using a direct revelation mechanism the advantage of the auction is that it is easier to implement than the direct revelation mechanism when the internal auction mechanism is unable to achieve second best we characterize the factors that determine the magnitude of the shortfall overall our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

a strategic motivation for commodity bundling the analytical literature on commodity bundling explains the practice of selling two or more differentiated products in a single package as a surrogate for direct price discrimination in contrast this paper shows that imperfect competition creates a strategic incentive to bundle the profitability of bundling whether it adversely affects rival producers and whether it yields an overall efficiency gain depends inter alia on the nature of product market competition the role of complementarity in explaining why firms bundle is also explored copyright 1990 by blackwell publishing ltd

an approach to transfer pricing under uncertainty from the perspective of agency theory newer insights perhaps can be gained into issues of decentralization and transfer pricing transfer pricing can be viewed as a mechanism which simultaneously establishes proper incentives for the agent such as a divisional manager or a subcontractor and induces an optimal decision on the quantity of production when such a decision is delegated in a decentralized setting in this paper we consider a principal such as top management who delegates a production decision to an agent and wishes to induce proper decisions through proper compensation the word proper refers to whatever is optimal under the circumstances including uncertainty divergence of preferences and information asymmetry one example of such setting see below for a discussion of another scenario is the relation between a contractor principal and a subcontractor agent whereby production is subcontracted because of economies of scale and scope and there is no intermediate market for the transferred product the problem of devising an optimal transfer price mechanism in a world of certainty was addressed by ronen and mckinney henceforth rm 1971 they did not consider whether their transfer price mechanism generalizes to a world of uncertainty moreover their mechanism assumed that the divisional managers agents wish to maximize their respective divisional accounting profits and that there is only information asymmetry no moral hazard 1

slacks determinants in brazilian railways a distance friction minimization approach with fixed factors this study investigates the drivers for output increasing input saving potentials in the brazilian railway industry which has undergone significant transformations since its privatization in the mid 1990s the main research objective is to determine whether or not different types of cargoes and geographic regions serviced present a significant impact on railway slacks by applying a distance friction minimization dfm approach with fixed factors based on a balanced panel model secondary data from the period 2004 to 2012 were collected and analysed results support anecdotal evidence regarding a heterogeneous impact of types of cargo and geographic location on input reducing and output increasing potentials besides network length and average speed policy implications for railway authorities are also addressed by focusing on the specifics of each railway operator

why firms may prefer not to price discriminate via mixed bundling abstract we analyze a simple model of joint purchase discounts using a discrete choice framework to characterize consumer choices the model suggests that mixed bundling is more likely to be associated with monopoly this is due to the benefits reaped via price discrimination in a duopoly environment however only pure components pricing may be offered in equilibrium since firms fear the extra degree of competition inherent in mixed bundling

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

multiproduct monopoly commodity bundling and correlation of values through what selling strategy can a multiproduct monopolist maximize his profits when his knowledge about individual consumers preferences is limited one possibility extensively studied in the context of a single good monopoly is to use quantity dependent pricing as a means of discriminating among customers with differing tastes see for example oi 1971 and maskin and riley 1984 an alternative technique for price discrimination first suggested by stigler 1968 and analyzed further by adams and yellen 1976 is for the monopolist to package two or more products in bundles rather than selling them separately through a series of examples adams and yellen illustrate that bundling can serve as a useful price discrimination device even when all consumers willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product a typical example is illustrated in figure i adapted from figure iv in adams and yellen where there are two goods three consumers ab c who consume at most one unit of each good with reservation values for each good that are independent of whether the other good is consumed and zero costs of production there a bundle offered at a price of 100 fully extracts all potential surplus which would be impossible pricing the goods independently unfortunately though these authors do not provide any general characterization of the circumstances in which bundling is actually a multiproduct monopolist s optimal strategy their examples however such as figure i create the impression that the profitable use of bundling

the demand for local telephone service a fully discrete model of residential calling patterns and service choices we present an empirical model of households choices among local telephone service options for example between flat rate and measured service and the interrelation of these choices with the number and average duration of local calls households make at each time of day to each geographical zone using a nested logit model with estimation performed on a randomly selected subset of the households calling patterns we calculate elasticities of demand for each local service option number of calls average duration and revenues with respect to the fixed monthly charges and the usage charges for calling under each option we find moderate price elasticities of number of calls with respect to usage charges for households subscribing to measured service nevertheless raising usage charges has a negligible effect on revenues since a sufficient number of households either originally subscribe to flat rate service or convert to flat rate service in response to higher usage charges we find a high elasticity of demandfor each service option with respect to itsfixed monthlyfee this indicates high substitutability among service options the shift among service options induces new calling patterns which wefind to be a small but not negligible indirect effect e most telephone operating companies offer residential customers several options for local service there are two general categories of service flat rate service under which a household can for a fixed monthly charge make an unlimited number of calls within a specified geographical area and measured service for which the household pays a lower fixed monthly fee but can make only a specified number or dollar value of calls at no extra charge after which charges are incurred for additional calls various flat rate services differ in the size of the geographical area in which calling is at no extra charge with higher monthly fees for larger areas measured services differ with respect to the threshold number or dollar value of calls beyond which the customer is charged

on the strategic choice of spatial price policy the strategic incentives with respect to the choice of price policy in spatial competition are analyzed in a duopoly model price discrimination emerges as the unique equilibriu m outcome in games with either simultaneous choice of policy and pric e or sequential choice where firms may commit first to uniform mill p ricing before the actual market stage nevertheless profits may be h igher with uniform pricing the authors models are applied to analyz e some common business practices that arise in geographical pricing like the basing point system and in the pricing of varieties or opti ons from a base product in a product differentiation context copyright 1988 by american economic association

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies