the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

attitudes to uncertainty in a strategic setting much uncertainty in life relates to the behaviour of others in interactive environments this article tests some implications of subjective expected utility theory savage 1954 in an experimental strategic setting where there is uncertainty about the actions of other players in this environment a large majority of our participants violate subjective expected utility theory however they do not exhibit the sorts of consistent attitude to ambiguity found in individual decision experiments we discuss three possible explanations of their behaviour non linear transformation of probabilities noise in responses and or systematic biases in the way that individuals generate subjective probabilities

price setting supergames with capacity constraints this paper examines the role of industry capacity in enforcing collusion in the context of repeated games for a fixed capacity per firm it is shown that changes in the number of firms have a non monotone effect on the best enforceable cartel price this is due to the fact that while an additional firm lowers the share that each of the other firms enjoys at the collusive price it also increases the losses to each firm should the cartel fail

prudence with respect to ambiguity under expected utility prudence is equivalent to a positive third derivative of utility and plays a crucial role in precautionary saving behaviour eeckhoudt and schlesinger 2006 proposed behavioural definitions of prudence and of higher order risk preferences the present paper proposes a similar definition for prudence with respect to ambiguity i e situations in which objective probabilities are not available implications for several ambiguity models are derived ambiguity prudence is implied by hansen and sargent s 2001 multiplier preferences empirically correlates with financial behaviour and plays a key role in prevention behaviour this article is protected by copyright all rights reserved

haggling over substitutes abstract using a model of substitutable goods i determine generic conditions on tastes which guarantee that fixed prices are not optimal the fully optimal tariff includes lotteries that is a profit maximising seller would employ a haggling strategy we show that the fully optimal selling strategy in a class of cases requires a seller to not allow themselves to focus on one good but to remain haggling over more than one good this throws new light on the selling strategies used in diverse industries these insights are used to provide a counter example to the no lotteries result of mcafee and mcmillan j econ theory 46 1988 335

asymmetric effects of favorable and unfavorable information on decision making under ambiguity most daily decisions involve uncertainty about outcome probabilities arising from incomplete knowledge i e ambiguity we explore how the addition of partial information affects these types of choices using theoretical and empirical methods our experiments in both gain and loss domains demonstrate that when such information supports a favorable outcome it strongly increases valuation of an ambiguous financial prospect however when information supports an unfavorable outcome it has significantly less impact we find that two mechanisms drive this asymmetry first unfavorable information decreases estimates of a good outcome occurring but also reduces aversive uncertainty these factors act in opposition minimizing the effects of unfavorable information second when information can be subjectively interpreted unfavorable information is less likely to be integrated into evaluations our findings reveal mechanisms not captured by traditional models of decision making under uncertainty and highlight

preference reversals under ambiguity preference reversals have been widely studied using risky or riskless gambles however little is known about preference reversals under ambiguity unknown probabilities subjects were asked to make a binary choice between ambiguous p bets big likelihood of giving small prize and ambiguous bets small likelihood of giving large prize and their willingness to accept was elicited subjects then performed the same two tasks with risky bets where the probability of winning for a given risky bet is the center of the probability interval of the corresponding ambiguous bet preference reversals are not only replicated under ambiguity but are even stronger than are those under risk this is due to higher elicited prices for the bet and lower elicited prices for the p bet under ambiguity than under risk this result can be explained by the shape of the weighting function for different levels of uncertainty and for different elicitation modes this paper was accepted by peter wakker decision analysis

challenges of existing in a market as a small low quality producer this paper explores the strategy of a small firm entering a monopolist s market thereby creating a duopoly market the small firm avoids competing with the larger incumbent firm by producing a lower quality product at a lower price the model here establishes an equilibrium under a specific set of assumptions and examines how exogenous factors affect prices qualities and profits although the strategy might allow the firm to enter and earn a profit the market conditions may make this position much less desirable to that of the large firm for several reasons in the case explored here where tastes for the product are uniformly distributed the small firm s profit is about six percent of that of the larger firm the smaller firm is more severely threatened by the entrance of a third firm furthermore even if the smaller firm can cut costs its position is not well suited for exploiting such increases in efficiencies

risk taking for others under accountability we let subjects take risky decisions that affect themselves and a passive recipient adding a requirement to justify their choices significantly reduces loss aversion this indicates that such an accountability mechanism may be effective at debiasing loss aversion in agency relations

industrial organization and public policy competition policy has been dominated by politics industrial organization can expect to exert an influence only insofar as it commands superior knowledge that is true with respect to the long run since economies of scale are limited to the short run competition is feasible in the long run therefore a trade off approach seeking to identify optimal market structures is misleading competition policy should instead be directed at prohibiting protective strategies of incumbents to deter entry competition being a process of creative destruction political viability of a competitive order requires competition policy to be supplemented by a social welfare policy

economic theory of choice and the preference reversal phenomenon a reexamination in a recent issue of this review david grether and charles plott 1979 hereinafter referred to as g p presented a series of experiments that show that individual decisions are made in a manner inconsistent with standard preference theory this inconsistency can be illustrated by the following example individuals under suitable laboratory conditions first have a choice between a lottery with a high probability of winning a small sum of money the p bet probability bet and a lottery with a high stake but low probability of winning the m bet money bet after indicating a preference for one of the lotteries in the pair the same subjects are then asked to place a monetary value on each of the individual lotteries grether and plott found that a large number of participants stated a preference for the p bet in the first round but placed a higher value on the other lottery the m bet in the second round this behavior a preference reversal is inconsistent with the traditional statements of preference theory

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

small worlds modeling attitudes toward sources of uncertainty abstract we introduce the concept of a conditional small world event domain an extension of savage s the foundations of statistics wiley new york 1954 notion of a small world as a self contained collection of comparable events under weak behavioral conditions we demonstrate probabilistic sophistication in any small world event domain without relying on monotonicity or continuity probabilistic sophistication within though not necessarily across small worlds provides a foundation for modeling a decision maker that has source dependent risk attitudes this also helps formalize the idea of source preference and suggests an interpretation of ambiguity aversion often associated with ellsberg type behavior in terms of comparative risk aversion across small worlds

decisions error and heterogeneity probabilistic choices or choice errors may play an important supporting role in shaping observed risky choices and a variety of restrictions on such choice probabilities play the role of identifying restrictions in empirical decision research we test six restrictions in the context of common ratio effect data for a general class of theories of risky choice two restrictions one for aggregate and one for individual data are supported but none of the heterogeneity restrictions that make the aggregate data model powerful survive scrutiny nor do estimable parametric versions of the individual data model there is room for new stochastic identifying restrictions in empirical decision research

cartels profits and excess capacity a model of a collusive duopoly in which each firm has limited capacity is studied the negotiated output quotas depend on the bargaining power of the firms which derives from the damage the firms can do by cutting prices for fixed capacities the unit profit of the small firm is at least as large as that of the large firm and the relative position of the small firm is better when demand is low when the capacities can be chosen once and for all there is excess capacity in equilibrium so long as the cost of capacity is not too high copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

attitudes to risk and attitudes to uncertainty experimental evidence in a series of experiments the interactions among individual attitudes towards risk and uncertainty the sign of the outcome domain and the way uncertainty is represented are tested this is done in a unified framework eliciting individual values by means of a second price auction results confirm the presence of the well known fourfold pattern of risk attitude risk aversion for gains and risk seeking for losses at high probability and risk seeking for gains and risk aversion for losses at low probability and show that this pattern can also be extended to uncertainty in the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases while increasing risk and uncertainty aversion is observed for gains moreover it is found that the size of reaction to uncertainty does not depend on the outcome domain and that it persists in the face of an incentive compatible mechanism to elicit preferences

capacity constraints mergers and collusion abstract the objective of this paper is two fold to contribute to the analysis of tacit collusion in bertrand supergames with asymmetric capacity constraints and from a more applied perspective to bring a new light on merger analysis and provide useful guidelines for competition policy taking into account dynamic aspects of competition it is well known that capacity constraints affect tacit collusion as they limit both incentives to deviate e g to undercut rivals and retaliation possibilities however most studies have so far focused on symmetric situations where all firms have the same capacity which leads to ambiguous and unintuitive results and also considerably limits the scope of application studying asymmetric situations makes it possible to analyse the impact of changes in the distribution of these capacities expansions but also mergers split offs transfers etc and to provide guidelines for competition policy and particularly for merger policy these guidelines which differ substantially from those inspired by more static analyses such as the herfindahl or other standard concentration tests are applied to a famous merger that took place in the french bottled water market the nestle perrier merger case

approximation in mechanism design with interdependent values abstract this paper studies the revenue maximization problem in environments wherein buyers have interdependent values and correlated types we show that 1 when the system of feasible sets is a matroid and buyer valuations satisfy a single crossing condition the generalized vickrey clarke groves mechanisms with lazy reserves vcg l are ex post incentive compatible and ex post individually rational 2 if in addition the valuation distribution satisfies a generalized monotone hazard rate condition the vcg l mechanism with conditional monopoly reserves is approximately optimal then we construct an ascending auction that implements the truth telling equilibrium of a vcg l mechanism in ex post equilibrium finally we discuss the connection between the vcg l mechanisms and greedy algorithms studied in lehmann et al 2002 and deferred acceptance auctions studied in milgrom and segal 2014 and the impact of competition by proving a bulow and klemperer 1996 type result

preference paradoxes and lexicographic choice abstract results of various experiments reported in the literature have shown repeated violations of expected utility theory this paper presents a model of lexicographic choice under uncertainty that has the probability of gain or at least no loss and the best possible outcome as well as expected utility as determinants of choice under different conditions the model easily explains the observed violations and other curious preference patterns including the allais and ellsberg paradoxes probalistic insurance preference reversals preference cycles and the reflection isolation and translation effects despite its explanatory power the model is as testable as the expected utility hypothesis

pricing access services many established industries such as the online service industry the telecommunication industry or the fitness club industry are access service industries when using services in these industries consumers pay for the privilege of accessing the firm s facilities but do not acquire any right to the facility itself a firm s pricing decisions in access industries frequently come down to a simple choice among flat fee pricing usage pricing or two part tariff pricing however it is not so simple for firms in those industries to make this choice access service firms typically face a mix of consumers who have intrinsically different usage rates a key characteristic of access service firms however is that the cost of providing an additional minute of usage is typically negligible as long as the firm has the necessary capacity to serve its customers service capacity which corresponds to the total available time on a firm s system is often limited in this paper we show that service capacity and consumer usage heterogeneity are two important factors that determine a firm s optimal choice we develop a model that incorporates these two salient characteristics shared by access industries and study what determines a firm s choice among the three alternative pricing structures flat fee pricing usage pricing or two part tariff pricing our analysis shows that in the presence of consumer usage heterogeneity service capacity mediates a firm s optimal choice in a complex yet predictable way a firm s choice also hinges on whether heavy or light users are more valuable in terms of their willingness to pay on a per unit capacity basis the presence of both consumer usage heterogeneity and capacity constraints prompts a firm to choose its pricing structure to attract a desired customer mix and to price discriminate as a result two part tariff pricing is not always optimal in access industries and a firm s pricing structure can vary in a complex way with the interaction of those two factors specifically we show that when light users are more valuable a firm may use a two part tariff or a flat fee depending on whether the firm is constrained by its service capacity but never charge a usage price alone or offer any signing bonus a negative flat fee or a flat payment to customers when heavy users are more valuable a firm may choose to set a usage price a signing bonus plus a usage price or flat fee interestingly regardless of whether heavy or light users are more valuable in an access service industry only flat rate pricing is a sustainable pricing structure once the industry has developed sufficient excess capacity we also show that the optimal pricing strategy in access industries can have some intriguing nonintuitive implications that have not been explored elsewhere for instance when the industry capacity is unevenly distributed between competing firms the large capacity firm may well be advised to increase rather than to decrease its price to accommodate the small firm it would be too costly and too tactless for the large firm to do otherwise in fact the strategy of accommodation calls on the larger firm to retreat in both light and heavy user markets and leave more of its capacity idle and more of the market demand unmet when the small firm s capacity hence the industry capacity increases this implies that incremental policy measures that encourage the growth of smaller companies in the presence of a large company can be welfare decreasing because the growth of smaller firm can force the retreat of a large company at the expense of market coverage today services account for two thirds to three quarters of the gnp not only in the united states but also in many industrial countries access industries are growing rapidly to exert profound impact on today s economy however service pricing in general and pricing access services in particular have not received adequate attention in the literature in this paper we take the first step in understanding how capacity constraints and consumer usage heterogeneity mediate the choice of pricing structures in both monopolistic and competitive contexts

pricing strategies in supergames with capacity constraints some evidence from the u s portland cement industry abstract theory demonstrates that demand variations can have nonmonotonic effects on pricing in supergames with capacity constraints furthermore this nonmonotonic relationship can be a function of capacity utilization rates time series data from 25 regional cement markets are used to examine this results empirically no statistically significant relationship is found between demand variations pricing and excess capacity

to commit or not to commit revisiting quantity vs price competition in a differentiated industry previous studies have shown that quantity commitment by all firms in an industry mitigates price competition this paper shows that when firms have a choice asymmetric outcomes can arise with some firms choosing to commit to a quantity and other firms choosing not to to study the commitment decision we analyze a multistage game within a duopoly of differentiated firms a la hotelling in the first stage of the game firms choose whether or not to commit to a quantity in the second stage each firm that chose to commit sets a quantity which represents an upper bound on how much it can sell to consumers in the third stage both firms set prices strategically regardless of whether or not they committed in the final stage demand is allocated as consumers maximize their utilities firm s that chose not to commit to a quantity in the first stage can fulfill any quantity that consumers demand at the equilibrium prices we find that if product differentiation is sufficiently low both firms choose to co

imprecision as an account of the preference reversal phenomenon many individuals choices and valuations involve a degree of uncertainty imprecision this paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms one of which appears not to have been reported previously the model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained the results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people s decisions

auctions with online supply abstract online advertising auctions present settings in which there is uncertainty about the number of items for sale we study mechanisms for selling identical items when the total supply is unknown but is drawn from a known distribution items arrive dynamically and the seller must make immediate allocation and payment decisions with the goal of maximizing social welfare we devise a simple incentive compatible mechanism that guarantees some constant fraction of the first best solution a surprising feature of our mechanism is that it artificially limits supply and we show that limiting the supply is essential for obtaining high social welfare although common when maximizing revenue commitment to limit the supply is less intuitive when maximizing social welfare the performance guarantee of our mechanism is in expectation over the supply distribution we show that obtaining similar performance guarantee for every realization of supply is impossible

recent advances in oligopoly theory from a game theory perspective abstract this paper surveys the contribution that recent developments in game theory have made to the understanding of oligopoly theory it is argued that conventional models suffer from the problem that there are a number of solution concepts offered with little guidance as to which should be selected and this is related to the static nature of the models employed one important development in game theory has been the analysis of repeated games and when applied to oligopoly theory this suggests that outcomes may be more cooperative than conventional theory suggests related to this is the requirement that firms employ credible threats to punish cheating from cooperative outcomes and the paper examines the extent to which imperfect information may restrict the scope of firms to employ such punishments one way in which firms may seek to make threats credible is through strategic investments for example in production capacity and the paper explores how competition over price or output is integrated with competition over instruments for strategic investment

testing different stochastic specificationsof risky choice the harless camerer hc hey orme ho and random preference rp models of stochastic variation in choice under uncertainty are compared implications of these models including some that are independent of the deterministic theory with which they are combined are tested in an experiment in which participants respond to decision problems twice the hc model generally performs poorly the ho model predicts more violations of dominance than are observed while the rp model fails to account for those few violations which do occur additional regularities are observed which are inconsistent with all three models when combined with expected utility theory

on the workings of a cartel evidence from the norwegian cement industry using the institutional set up of the norwegian cement industry in particular its sharing rule we are able to identify the workings of a cartel in some detail given data on prices production and exports we are able to identify marginal costs as well as the effectiveness of the cartel we compare our marginal cost estimates which are derived from an equilibrium condition to detailed cost accounting data and find that our estimate of marginal cost is very much in line with the data we then show that the cement cartel has been ineffective in the sense that the sharing rule induces overproduction and exporting below marginal costs in this sense it is consumers not firms that benefi tf rom the sharing rule we find that the ineffectiveness of the cartel is becoming so large that domestic welfare of a merger to monopoly would in fact be positive at around 1968 which is exactly when the merger actually took place however we also show that competition would have resulted in even higher welfare gains over the entire sample

competition for scarce resources we model a downstream industry where firms compete to buy capacity in an upstream market which allocates capacity efficiently although downstream firms have symmetric production technologies we show that industry structure is symmetric only if capacity is sufficiently scarce otherwise it is asymmetric with one large fat capacity hoarding firm and a fringe of smaller lean capacity constrained firms as demand varies the industry switches between symmetric and asymmetric phases generating predictions for firm size and costs across the business cycle surprisingly increasing available capacity can cause a reduction in output and consumer surplus by resulting in such a switch

experimental economics hard science or wasteful tinkering i take it that in raising the question what have we learned from experimental economics under the broader umbrella of controversy the point is not to solicit a catalogue of experimental findings but rather to signal the more pointed question are we learning anything at all or at least much that is very useful form experimentation in economics as a practising experimentalist i am convinced that experiments do have the potential to make a significant contribution to knowledge in economics this abstract was borrowed from another version of this item

capital as a commitment strategic investment to deter mobility abstract this paper analyzes how an early entrant in a market can exploit its head start by strategic investment the analysis is based on spence s paper investment strategy and growth in a new market bell j econ 10 1979 1 19 we frist study the investment game in the no discounting case which embodies the key features of mobility deterrence we establish the existence of a set of perfect equilibria and suggest that one particular equilibrium is most reasonable this equilibrium also valid with discounting involves the follower firm being forever deterred from investing to its steady state reaction curve in contrast to spence s proposed solution

preference reversals without the independence axiom the preference reversal phenomenon was believed to be inconsistent with the transitivity axiom of decision theory however recent theoretical papers have demonstrated that the preference reversals that were observed in earlier experiments could be explained by subject violations of the independence axiom or the compound lottery axiom therefore those preference reversals are not known to be inconsistent with generalization of expected utility theory that replace the independence axiom the present paper reports the results of experiments in which a substantial proportion of subject responses violate the asymmetry axiom these results are inconsistent with expected utility theory and its generalizations copyright 1989 by american economic association

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

collusive pricing with capacity constraints in the presence of demand uncertainty we explore the response of collusive prices to changing demand conditions when firms operate under capacity constraints in the presence of demand uncertainty we find support for the conventional view that periods of low demand lead through the emergence of excess capacity to a breakdown of collusive pricing we also find that the nature of price wars depends on the degree of excess capacity in the industry while small amounts of excess capacity can lead firms to engage in mild price wars characterized by uniform price reductions and market share stability more severe price wars characterized by price undercutting and market share instability can emerge if excess capacity is sufficiently great finally our results lend support to the view that market share instability is a symptom of ineffective collusion

strategic incentives in dynamic duopoly abstract we compare steady states of open loop and locally stable markov perfect equilibria mpe in a general symmetric differential game duopoly model with costs of adjustment strategic incentives at the mpe depend on whether an increase in the state variable of a firm hurts or helps the rival and on whether at the mpe there is intertemporal strategic substitutability or complementarity a full characterization is provided in the linear quadratic case then with price competition and costly production adjustment static strategic complementarity turns into intertemporal strategic substitutability and the mpe steady state outcome is more competitive than static bertrand competition

optimal pricing mechanisms with unknown demand the standard profit maximizing multi unit auction intersects the submitted demand curve with a preset reservation supply curve which is determined using the distribution from which the buyers valuations are drawn however when this distribution is unknown a preset supply curve cannot maximize monopoly profits the optimal pricing mechanism in this situation sets a price to each buyer on the basis of the demand distribution inferred statistically from other buyers bids the resulting profit converges to the optimal monopoly profit with known demand as the number of buyers goes to infinity and convergence can be substantially faster than with sequential price experimentation

collusion and heterogeneity of firms we examine the impact of heterogeneous discounting on collusion in dynamic bertrand competition we show exactly when collusion can be sustained and how collusion would be organized efficiently with heterogeneous discounting first we show that collusion is possible if and only if the average discount factor exceeds a certain threshold with or without capacity constraints next we identify a dynamic pattern of market share that characterizes efficient collusion and obtain the unique long run prediction despite the presence of multiple equilibria in the long run the most patient firm and the most impatient firm tend to dominate the market

equilibrium vertical differentiation in a bertrand model with capacity precommitment both quality differentiation and capacity commitment have been shown to relax price competition however their joint influence on the outcome of price competition has not yet been assessed in this article we consider a three stage game in which firms choose quality then commit to capacity and finally compete in price when the cost of quality is negligible we show that firms do not differentiate their products in a subgame perfect equilibrium in other words capacity precommitment completely eliminates the incentive to differentiate by quality

observing violations of transitivity by experimental methods the preference reversal phenomenon is usually interpreted as evidence of nontransitivity of preference but has also been explained as the result of the difference between individuals responses to choice and valuation problems the devices used by experimenters to elicit valuations and the random lottery selection incentive system this paper reports an experiment designed so that none of these factors could generate systematic nontransitivities yet systematic violations of transitivity were still found the pattern of violation was analogous with that found in previous preference reversal experiments and is consistent with regret theory copyright 1991 by the econometric society

judo economics reconsidered capacity limitation entry and collusion abstract the capacity investment by a new firm into an established market is explored in a repeated price game if the entrant expects collusion to prevail upon entry it may not practice judo economics but instead choose to install enough capacity to serve the entire market this occurs when collusion involves optimal punishment paths if instead collusion is based upon the static nash equilibrium punishment and the incumbent has excess capacity and the entrant is at a cost disadvantage the entrant will strategically limit its capacity so as to restrain the incumbent s price response to entry

preference reversal real world lotteries and lottery interested subjects prefer lce reversal or choice reservation price inconsistency has been documented experimentally for zrtain types of lotteries we argue that the relevance of these findings for realworld markets is uncertain because the type of objects used cannot exist on a market and because the extent to which the subjects had any real interest in the objects is unknown using reai world lotteries we have tested choice price consistency on subjects who prefer lotteries ta cash preference reversal was observed but the frequency was much lower than in earlier experiments there were no differences between subjects who qualified as lottery interested and those who did not 1 intmduction

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

the effects of payoff magnitude and heterogeneity on behavior in 2 2 games with unique mixed strategy equilibria the logit version of quantal response equilibrium predicts that equilibrium behavior in games will vary systematically with payoff magnitudes if all other factors are held constant including the nash equilibria of the game we explore this in the context of a set of asymmetric 2x2 games with unique totally mixed strategy equilibria the data provide little support for the payoff magnitude predictions of the logit equilibrium model we extend the theoretical quantal response equilibrium model to allow for heterogeneity and find that the data fit the heterogeneous version of the theory significantly better

cartel pricing dynamics in the presence of an antitrust authority cartel pricing is characterized when firms are concerned about creating suspicions that a cartel has formed balancing concerns about maintaining the stability of the cartel with those of avoiding detection the cartel may either i gradually raise price to its steady state level or ii gradually raise price and then have it decline to its steady state level antitrust laws may have a perverse effect as they make cartel stability easier and thus allow for higher cartel prices

price setting merchants in a simple trade model abstract in lieu of a fictitious walrasian auctioneer price determination in a simple two country two good trade model is explicitly modelled as the strategic price setting behavior of merchants the results depend on the order in which countries are visited and whether or not the supply is backward bending theorem 1 establishes sufficient conditions for the walrasian outcome to be the unique subgame perfect nash equilibrium spne theorem 2 shows when the unique spne is non walrasian

collusion in a price quantity oligopoly abstract in the context of an infinitely repeated oligopoly game we study collusion among firms that simultaneously choose prices and quantities we compare a price cartel with a price quota cartel and analyze when and why firms prefer the latter to the former output quota may be required to solve coordination and incentive problems when market demand is sufficiently elastic if market demand is sufficiently inelastic then the cartel faces a trade off between increasing prices and the amount of costly overproduction we find that a price cartel prices consistently below the monopoly price to mitigate excessive production in this case a quota arrangement allows firms to avoid overproduction and to sustain the monopoly price from a policy perspective our findings suggest that an overall price increase in conjunction with more stable prices and market shares is indicative of collusion in industries where production precedes sales and outputs are imperfectly observable

approximation in mechanism design this paper considers three challenge areas for mechanism design and describes the role approximation plays in resolving them challenge 1 optimal mechanisms are finely tuned to precise details of the distribution on agent preferences challenge 2 in environments with multi dimensional agent preferences economic analysis has failed to provide general characterizations optimal mechanisms challenge 3 optimal mechanisms are parameterized by unrealistic knowledge of the distribution of agents private preferences this paper surveys positive resolutions to these challenges with emphasis on basic techniques and their relevance to theory and practice

experimental evidence on varying uncertainty and skewness in laboratory double auction markets abstract we investigate the influence of skewness in asset fundamentals on asset prices under different states of uncertainty in double auction markets three different types of assets are considered risky assets ambiguous assets and assets where the fundamental value distribution can be learned by repeated sampling of realizations we show that market prices for skewed assets initially differ from those of non skewed assets for risky as well as for ambiguous assets because of learning the difference in market prices mostly disappears towards the end of trading when fundamentals are learned by experience sampling prices of all assets irrespective of skewness are very efficient from the beginning thus when probabilities are not described but experienced subjects are better able to estimate the fundamental value of an asset

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

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

fixed fee liscensing of innovations and collusion unlike other types of licensing agreements such as those with output restrictions market division clauses or output royalties licensing contracts with only a fixed fee have been perceived as having no anticompetitive consequences this paper illustrates that fixed fee licensing may facilitate collusion by enhancing the licensee s ability to credibly punish deviations from the collusive outcome on the part of the licenser antitrust implications of the result and potential ways of detecting collusion motivated licenses are discussed copyright 1996 by blackwell publishing ltd

envy freedom and prior free mechanism design abstract we consider the provision of an abstract service to single dimensional agents our model includes position auctions single minded combinatorial auctions and constrained matching markets when the agents values are drawn independently from a distribution the bayesian optimal mechanism is given by myerson 1 as a virtual surplus optimizer we develop a framework for prior free mechanism design and analysis a good mechanism in our framework approximates the optimal mechanism for the distribution if there is a distribution moreover when there is no distribution this mechanism still provably performs well we define and characterize optimal envy free outcomes in symmetric single dimensional environments our characterization mirrors myerson s theory furthermore unlike in mechanism design where there is no point wise optimal mechanism there is always a point wise optimal envy free outcome envy free outcomes and incentive compatible mechanisms are similar in structure and performance we therefore use the optimal envy free revenue as a benchmark for measuring the performance of a prior free mechanism a good mechanism is one that approximates the envy free benchmark on any profile of agent values we show that good mechanisms exist and in particular a natural generalization of the random sampling auction of goldberg et al 2 is a constant approximation

dynamic duopoly prices and quantities we study a dynamic model of duopoly in which firms choose both prices and quantities if quantity capacity choices are relatively inflexible firms generally carry excess idle capacity in equilibrium because of this enforcement cost firms are unable to achieve monopoly levels this contrasts with models in which which firms compete in either prices or quantities alone on the other hand if capacities are flexible firms may be able to sustain monopoly behaviour

an anatomy of cartel contracts we study cartel contracts using data on 18 contract clauses of 109 legal finnish manufacturing cartels one third of the clauses relate to raising profits the others deal with instability through incentive compatibility cartel organization or external threats cartels use three main approaches to raise profits price market allocation and specialization these appear to be substitutes choosing one has implications on how cartels deal with instability simplifying we find that large cartels agree on prices cartels in homogenous goods industries allocate markets and small cartels avoid competition through specialization

ambiguity attitudes in a large representative sample using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample in addition to ambiguity aversion we confirm an ambiguity component recently found in laboratory studies a insensitivity the tendency to treat subjective likelihoods as 50 50 thus overweighting extreme events our ambiguity measurements are associated with real economic decisions specifically a insensitivity is negatively related to stock market participation ambiguity aversion is also negatively related to stock market participation but only for subjects who perceive stock returns as highly ambiguous this paper was accepted by james smith decision analysis

managerial incentives and collusive behavior abstract i characterize the effects of empirically observed managerial incentives on long run oligopolistic competition when managers have a preference for smooth time paths of profits as revealed by the empirical literature on income smoothing manager led firms can sustain collusive agreements at lower discount factors capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor independent of contracts duration when managers have these preferences incentives and demand fluctuates price wars during booms need not occur the most collusive price may then be pro cyclical

a nearly optimal auction for an uninformed seller abstract this paper describes a nearly optimal auction mechanism that does not require previous knowledge of the distribution of values of potential buyers the mechanism we propose builds on the new literature on the elicitation of information from experts we extend the latter to the case where the secret information shared by the experts potential buyers in our model can be used against them if it becomes public knowledge

preference reversals the impact of truth revealing monetary incentives researchers vigorously debate the impact of incentives in preference reversal experiments do incentives alter behavior and generate economically consistent choices lichtenstein and slovic 1971 document inconsistencies reversals in revealed preference in gamble pairs across paired choice and individual pricing tasks the observed pattern is inconsistent with stable underlying preferences expressed with simple errors lichtenstein and slovic 1973 and grether and plott 1979 introduce incentives but aggregate reversal rates change little these results fostered numerous replications and assertions that models of non stable preferences are required to explain reversals contrary to this research we find that incentives can generate more economically consistent behavior our reevaluation of existing experimental data shows that incentives have a clear impact by better aligning aggregate choices and prices the effect is sufficiently large that with truth revealing incentives a stable preferences with error model not only explains behavior but fits the data as well as any model possibly could

competition and collusion with fixed output in many industries output is fixed by exogenous constraints so firms compete by allocating a given stock of supplies between different markets this paper shows that collusion in such industries leads firms to shift output from high margin markets to low margin markets as a result welfare is generally reduced although prices decrease in some markets and increase in others

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

examining models of collusion the market for lysine abstract we compare the experience with collusion in the market for lysine with the predictions of theory the lysine market provides an ideal setting following the confessions of cartel participants in antitrust investigations data availability allows demand and cost functions to be estimated and observed mark ups compared with predictions we find that several integral aspects of collusion in the lysine market are not adequately addressed in the literature the dynamics associated with entry and investment persistent asymmetries between firms the cartel s bargaining problem and the existence of cheating in equilibrium these issues are likely to have much wider applicability beyond the lysine market

venture theory a model of decision weights several theories suggest that people replace probabilities by decision weights when evaluating risky outcomes this paper proposes a model called venture theory of how people assess decision weights it is assumed that people first anchor on a stated probability and then adjust this by mentally simulating other possible values the amount of mental simulation is affected by the absolute size of payoffs the extent to which the anchor deviates from the extremes of 0 and 1 and the level of perceived ambiguity concerning the relevant probability the net effect of the adjustment i e up or down vis i vis the anchor reflects the relative weight given in imagination to values above as opposed to below the anchor this in turn is taken to be a function of both individual and situational variables and in particular the sign and size of payoffs cognitive and motivational factors therefore both play important roles in determining decision weights assuming that people evaluate outcomes by a prospect theory value function kahneman and tversky 1979 and are cautious in the face of risk fourteen predictions are derived concerning attitudes toward risk and ambiguity as functions of different levels of payoffs and probabilities the results of three experiments are reported whereas only a subset of the model s predictions can be tested in experiment 1 all fourteen are tested in experiments 2 and 3 using hypothetical and real payoffs respectively several of the model s predictions are not supported in experiment 2 but almost all are validated in experiments 1 and 3 the failures relate to the exact nature of probability payoff interactions in attitudes toward risk and ambiguity for losses the theory and results are discussed in relation to other experimental evidence future tests of the theory alternative models of risky choice and implications of venture theory for explaining further phenomena

auctions versus negotiations which is the more profitable way to sell a company an auction with no reserve price or an optimally structured negotiation with one less bidder we show under reasonable assumptions that the auction is always preferable when bidders signals are independent for affiliated signals the result holds under certain restrictions on the seller s choice of negotiating mechanism the result suggests that the value of negotiating skill is small relative to the value of additional competition the paper also shows how the analogies between monopoly theory and auction theory can help derive new results in auction theory jel d44 g34 there are close analogies between standard price theory and the theory of auctions in an absolute english auction in which the price rises continuously until only one bidder remains and the seller is required to accept the final bid the sale price equals the lowest competitive price at which supply equals demand in the theory of optimal auctions the seller is treated as a monopolist who can choose any

the determination of price and output quotas in a heterogeneous cartel applying a selection criterion that uses both subgame perfection and the nash bargaining solution this paper investigates the relationship between firms cost functions and collusive behavior it is found that the optimal collusive price exceeds the price that the low cost firm would set if it was a monopolist comparative statics reveal that the optimal collusive price is increasing in the low cost firm s unit cost but is decreasing in the high cost firm s unit cost when the cost differential between firms is sufficiently large copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

dynamic price competition with discrete customer choices abstract for many years dynamic pricing has proven to be an effective tool to increase revenue in the airline and other service industries most studies however focused on monopolistic models and ignored the fact that nowadays consumers can easily compare prices on the internet in this paper we develop a game theoretic model to describe real time dynamic price competition between firms that sell substitutable products by assuming the real time inventory levels of all firms are public information we show the existence of nash equilibrium we then discuss how a firm can adapt if it knows only the initial but not the real time inventory levels of its competitors we compare a firm s expected revenue under different information structures through numerical experiments

tacit collusion in the presence of cyclical demand and endogenous capacity levels abstract we analyze tacit collusion in an industry characterized by cyclical demand and long run scale decisions firms face deterministic demand cycles and choose capacity levels prior to competing in prices our focus is on the nature of prices we find that two types of price wars may exist in one collusion can involve periods of mixed strategy price wars in the other consistent with the rotemberg and saloner 1986 definition of price wars we show that collusive prices can also become counter cyclical we also establish pricing patterns with respect to the relative prices in booms and recessions if the marginal cost of capacity is high enough holding current demand constant prices in the boom are generally lower than the prices in the recession this reverses the results of haltiwanger and harrington 1991 in contrast if the marginal cost of capacity is low enough then prices in the boom are generally higher than the prices in the recession for costs in an intermediate range numerical examples are calculated to show specific pricing patterns

consumer choice and cournot behavior in capacity constrained duopoly competition in a two stage model of duopolistic capacity choice and subsequent price competition consumer switching costs can deter some consumers from seeking service at a low price firm that lacks sufficient capacity to serve the entire market in this setting firms residual demand functions are aggregatedfrom thefirm selection decisions of individual consumers based on firms prices and their induced degrees of service reliability if consumers are approximately risk neutral with respect to service reliability then capacity constrained duopoly competition has a unique subgame perfect equilibrium in which firms choose cournot capacities and prices the equilibrium robustness of cournot behavior extends to duopoly markets in which consumer switching costs are induced by subscription pricing