the allocation of inventory risk in a supply chain push pull and advance purchase discount contracts while every firm in a supply chain bears supply risk the cost of insufficient supply some firms may even with wholesale price contracts completely avoid inventory risk the cost of unsold inventory with a push contract there is a single wholesale price and the retailer by ordering his entire supply before the selling season bears all of the supply chain s inventory risk a pull contract also has a single wholesale price but the supplier bears the supply chain s inventory risk because only the supplier holds inventory while the retailer replenishes as needed during the season examples include vendor managed inventory with consignment and drop shipping an advance purchase discount has two wholesale prices a discounted price for inventory purchased before the season and a regular price for replenishments during the selling season advance purchase discounts allow for intermediate allocations of inventory risk the retailer bears the risk on inventory ordered before the season while the supplier bears the risk on any production in excess of that amount this research studies how the allocation of inventory risk via these three types of wholesale price contracts impacts supply chain efficiency the ratio of the supply chain s profit to its maximum profit it is found that the efficiency of a single wholesale price contract is considerably higher than previously thought as long as firms consider both push and pull contracts in other words the literature has exaggerated the value of implementing coordinating contracts i e contracts that achieve 100 efficiency such as buy backs or revenue sharing because coordinating contracts are compared against an inappropriate benchmark often just a push contract furthermore if firms also consider advance purchase discounts which are also simple to administer then the coordination of the supply chain and the arbitrary allocation of its profit is possible several limitations of advance purchase discounts are discussed

guarding the guardians good government requires some restraints on the powerful but how can those be impose if there is no one above them this paper studies the equilibrium allocation of power and resources established by self interested incumbents under the threat of rebellions from inside and outside the group in power commitment to uphold individuals rights can only be achieved if power is not as concentrated as incumbents would like it to be ex post power sharing endogenously enables incumbents to commit to otherwise time inconsistent laws by ensuring more people receive rents under the status quo and thus want to defend it

competition and cooperation in decentralized push and pull assembly systems in this paper we study a decentralized assembly system consisting of a single assembler who buys complementary components from independent suppliers under two contracting schemes push and pull in both schemes the component suppliers are allowed to freely form coalitions or alliances among themselves to better coordinate their pricing or production decisions we show that the sole driver of the inefficiency in a push system which is due to horizontal decentralization of suppliers is the number of alliances that were formed specifically it is shown that in a push system the assembler s profit the total profit of all suppliers and the consumers surplus are all decreasing in the number of coalitions and are thus maximized when the grand coalition is formed we further carry out a stability analysis of coalition structures to verify to what extent suppliers can reduce or eliminate the inefficiency due to their decentralization by forming alliances we show that in a push system with more than two

innovation and imitation in a duopoly in a duopoly where one firm has the idea for a non patentable innovation the expected profits from the innovation will not be a monotonic function of the cost of innovating furthermore a costly innovation may be undertaken where an inexpensive one would not have been all other things being equal

pillage and property this paper introduces a class of coalitional games called pillage games as a model of hobbesian anarchy any coalition can pillage costlessly and with certainty any less powerful coalition power is endogenous so a pillage game does not have a characteristic function but pillage provides a domination concept that defines a stable set which represents an endogenous balance of power every stable set contains only finitely many allocations and can be represented as a farsighted core additional results are obtained for particular games including the game in which the power of each coalition is determined by its total wealth

stability and endogenous formation of inventory transshipment networks this paper studies a cooperative game of inventory transshipment among multiple firms in this game firms first make their inventory decisions independently and then decide collectively how to transship excess inventories to satisfy unmet demands in modeling transshipment we use networks of firms as the primitive which offer a richer representation of relationships among firms by taking the coalitions used in all previous studies as special cases for any given cooperative network we construct a dual price allocation under which the network is stable for any residual demands and supplies in the sense that no firms find it more profitable to form subnetworks under the allocation based on the marginal contribution of each firm to its network called the mjw value we show that various network structures such as complete hub spoke and chain networks are stable only under certain conditions on residual amounts moreover these conditions differ across network structures implying that a network structure plays an important role in establishing the stability of a decentralized transshipment system finally we consider the case when firms establish networks endogenously and show that pairwise nash stable networks underperform the corresponding networks in centralized systems

pricing variation within dual distribution chains the different implications of externalities and signaling for high and low quality brands within many of the multioutlet branded chains that dominate the retail and services landscape the organizational form e g company management franchising used to manage an outlet varies from site to site as do the prices charged at those sites i propose that organizational form and prices may be systematically related as a result of brand externalities in particular i develop logic that the relevant form of externality should differ for upper quality tier brands and lower tier brands using panel data on price and organizational form from more than 6 700 branded u s hotels affiliated with 40 dual distribution brands those brands that simultaneously company manage and franchise individual outlets i find that consistent with the brand externality arguments company managed locations have higher prices within high quality chains whereas franchisees price higher in the lower tiers this paper was accepted by bruno cassiman business strategy

limited liability moral hazard and share tenancy abstract this paper contributes to the literature on share tenancy by reexamining a framework developed in basu 1992 it is shown that limited liability and moral hazard in effort provides a richer theory of share contracts when the tenant also has discretion in the choice of projects

delegation and commitment in durable goods monopolies this paper studies a simultaneous move infinite horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys consuming her monetary rewards but dislikes production effort the delegation contract allows for continual interference with managerial incentives in each period the principal rewards the manager according to her performance we show that when the cost of delegation is low relative to profits the principal can attain the precommitment price plan in a perfect rational expectations equilibrium the paper analyzes the robustness of this result under alternative specifications of timing and objectives we also provide a numerical characterization of the equilibrium strategies for the case of linear quadratic payoffs

hitting the jackpot product proliferation by multiproduct firms under uncertainty this paper presents a model of product proliferation by multiproduct firms under uncertainty firms introduce new differentiated products because they want to hit as many jackpots as possible products with high profits and long lives there is uncertainty about the success of new products as the probability of hitting a jackpot increases product proliferation increases more products are introduced and expected in equilibrium the expected number of products in equilibrium is always less than at the optimum but in industries with multiple firms as the probability of hitting a jackpot increases rivalry intensifies and that gap shrinks

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

the economics of franchise contracts as an organizational arrangement the franchise contract lies between anonymous price mediated exchange and centralized intrafirm employment in contrast to conventional market exchange franchise contracts typically impose on franchisees retail quality standards common hours of business price controls and nonlinear payment schedules for example fixed initial royalty fees plus a percentage of gross retail revenues while franchisors typically provide national advertising and training programs monitor and inspect the franchisees performance with varying intensity across industries and hold the residual power to terminate the franchise agreement observations of actual terminations indicate that franchisors sometimes exclude this power franchisors sometimes face persistent queues of potential franchisees in contrast to simple employment contracts franchise agreements provide for sharing of profits through royalties on revenue or output and considerable freedom for independent decisions by local franchisees 1 why do these franchise contracts exist

ambiguity aversion in buyer seller relationships a contingent claims and social network explanation negotiations between buyers and sellers or suppliers of goods and services have become increasingly important due to the growing trend towards international purchasing outsourcing and global supply networks together with the high uncertainty associated with them this paper examines the effect of ambiguity aversion on price negotiations using multiple priors based real options with non extreme outcomes we study price negotiation between a buyer and seller in a dual contingent claims setting call option holding buyer vs put option holding seller to derive optimal agreement conditions under ambiguity with and without social network effects we find that while higher ambiguity aversion raises the threshold for commitment for the seller it has equivocal effects on the buyer s negotiation prospects in the absence of network control conversely when network position and relative bargaining power are accounted for we find the buyer s implicit price or negotiation threshold decreases or increases unequivocally with increasing aversion to ambiguity extending extant real options research on price negotiation to the case of ambiguity this set of results provides new insights into the role of ambiguity aversion and network structures in buyer seller relationships including how they influence the range of negotiation agreement between buyers and sellers the results also help assist managers in formulating robust buying selling strategies for bargaining under uncertainty by knowing their network positions and gathering background information or inferring the other party s ambiguity tolerance beforehand buyers and sellers can anticipate where the negotiation is heading in terms of price negotiation range and mutual agreement possibilities

component procurement strategies in decentralized assemble to order systems with time dependent pricing we consider a contract manufacturer who procures multiple components from independent suppliers to produce an assemble to order customized product for a client the unit price of the product depends on the manufacturer s delivery lead time we explore how the manufacturer can use a vendor managed consignment inventory vmci scheme to manage the underlying risk and coordinate independent suppliers decisions on the production quantities of their components under demand uncertainty we formulate the problem as a stackelberg game played by the manufacturer against her component suppliers to determine her pricing policy for suppliers consignment inventories we further develop an efficient algorithm for finding the manufacturer s optimal pricing scheme our results provide useful insights for managing components in these types of assemble to order environments and for understanding how component production cost and procurement lead times affect individual firms performance in decentralized assembly channels

on the existence of cournot equilibrium this paper examines the existence of n firm cournot equilibrium in a market for a single homogeneous commodity it proves that if each firm s marginal revenue declines as the aggregate output of other firms increases which is implied by concave inverse demand then a cournot equilibrium exists without assuming that firms have nondecreasing marginal cost or identical technologies also if the marginal revenue condition fails at a potential optimal point there is a set of firms such that no cournot equilibrium exists the paper also contains an example of nonexistence with two nonidentical firms each with constant returns to scale production

brand capital and incumbent firms positions in evolving markets in many advertising intensive industries one observes market share persistence i e firms maintaining lead market shares over long periods of time the author hypothesizes that firms that have the largest stock of well established brands a stock that he terms brand capital are most likely to introduce new products in response to new market information about consumer preferences firms with less brand capital delay their introductions until the uncertainty concerning the market size is reduced the author presents empirical support in a study of new product introductions in the u s beverage industry copyright 1995 by mit press

choosing a licensee from heterogeneous rivals we examine a rm that can license its production technology to a rival when rms are heterogeneous in production costs we show that a complete technology transfer from one rm to another always increases joint pro t under weakly concave demand when at least three rms remain in the industry a jointly pro table transfer may reduce social welfare although a jointly pro table transfer from the most e cient rm always increases welfare we also consider two auction games under complete information a standard rst price auction and a menu auction by bernheim and whinston 1986 with natural re nement of equilibria we show that the resulting licensees are ordered by degree of e ciency menu auction simple auction and joint pro t maximizing licensees in weakly descending order

divisionalization and franchising incentives with integral competing units abstract existing game theoretic models of divisionalization and franchising treat each firm s number of competing units as a continuous variable we account for the integer constraint on divisions and show that the continuous case reasonably approximates the equilibria of the discrete game

a model of endogenous government formation political parties bargain over the allocation of cabinet portfolios when forming coalition governments noncooperative theories of legislative bargaining typically predict that the formateur enjoys a disproportionate share of government ministry positions however empirical evidence indicates that parties receive shares of portfolios proportional to their share of legislative seats that a government party contributes to the government coalition in support of gamson s law of portfolio allocation this article examines government formation as a process in which both the government coalition and the formateur are determined endogenously in equilibrium if parties have similar preferences over cabinet portfolios the share of seats they are allocated is proportional to the parties sizes

farsighted coalitional stability abstract i define the largest consistent set a solution concept which applies to situations in which coalitions freely form but cannot make binding contracts act publicly and are fully farsighted in that a coalition considers the possibility that once it acts another coalition might react a third coalition might in turn react and so on without limit i establish weak nonemptiness conditions and apply it to strategic and coalitional form games and majority rule voting i argue that it improves on the von neumann morgenstern stable set as it is usually defined but is consistent with a generalization of the stable set as in the theory of social situations journal of economic literature classification numbers c70 c71

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

allocating value among farsighted players in network formation we study the stability of networks when players are farsighted and allocations are determined endogenously the set of strongly efficient networks is the unique von neumann morgenstern farsightedly stable set with bargaining if the value function is anonymous component additive and top convex and the allocation rule is anonymous and component efficient moreover the componentwise egalitarian allocation rule emerges endogenously

voting for voters a model of electoral evolution we model the decision problems faced by the members of societies whose new members are determined by vote we adopt a number of simplifying assumptions the founders and the candidates are fixed the society operates for k periods and holds elections at the beginning of each period one vote is sufficient for admission and voters can support as many candidates as they wish voters assess the value of the streams of agents with whom they share the society while they belong to it in spite of these simplifications we show that interesting strategic behavior is implied by the dynamic structure of the problem the vote for friends may be postponed and it may be advantageous to vote for enemies we discuss the existence of different types of equilibria in pure strategies and point out interesting equilibria in mixed strategies

international aspects of merger policy a survey this paper surveys the literature on merger policy in open economies we first adopt a reduced form approach to derive general insights on the scope for conflict between national antitrust authorities and on the gains from international merger policy coordination taking trade costs as given we use standard oligopoly models to derive conditions on market structure under which underenforcement or overenforcement of national merger policies can arise we then study the interactions between merger policy and trade policy and find that trade liberalization often leads to stricter national merger policies we conclude by discussing empirical evidence on conflict between antitrust authorities

equilibrium binding agreements abstract we study equilibrium binding agreements the coalition structures that form under such agreements and the efficiency of the outcomes that result we analyze such agreements in a context where the payoff to each player depends on the actions of all other players thus a game in strategic form is a natural starting point unlike the device of a characteristic function explicit attention is paid to the behavior of the complementary set of players when a coalition blocks a proposed agreement a solution concept and its applications are discussed journal of economic literature classification numbers c70 c71

multidivisional firms internal competition and the merger paradox traditional modelling of mergers has the merged firms insiders cooperate and maximize joint profits this approach has several unappealing results in quantity setting games for example mergers typically are not profitable for insiders but are profitable for non merging firms outsiders we take a different approach and allow for a parent company that can play each insider off one another in quantity setting games with our approach mergers are profitable for insiders unprofitable for outsiders socially beneficial and involve in a non monopolizing merger a small number of firms finally we find that the optimal strategy depends on whether firms compete in quantity or prices jel classification l000 entreprises multi divisionnelles concurrence interne et le paradoxe des fusions les modelisations conventionnelles des fusions suggerent que les entreprises fusionnees parties prenantes cooperent et maximisent leurs profits conjoints cette approche engendre plusieurs resultats contre intuitifs dans des jeux de concurrence par les quantites i e les fusions en general ne sont pas profitables pour les parties prenantes mais sont profitables pour des entreprises qui ne sont pas fusionnees les autres les auteurs adoptent une approche differente qui permet a l entreprise mere de jouer les parties prenantes l une contre l autre dans ce genre de jeu avec l approche adoptee les fusions sont profitables pour les parties prenantes non profitables pour les autres socialement benefiques et impliquent un petit nombre d entreprises dans une fusion qui ne cree pas un monopole finalement on trouve que la strategie optimale depend fondamentalement du fait que les entreprises se concurrencent par les prix ou par les quantites

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

divisionalization with spatial differentiation abstract this paper assumes that firms can create independent divisions which compete in a market where the product is spatially differentiated our first result is that if the number of firms is exogenous and higher than some critical level then the symmetric subgame perfect equilibrium converges to perfect competition when the cost of divisionalization converges to zero comparisons between the equilibrium level of divisionalization and the socially efficient are also obtained in this context on the other hand if we assume free entry and a fixed cost per firm then the subgame perfect equilibrium implies in some cases a natural oligopoly or monopoly

market structure and organizational form this paper studies the determinants of a firm s organizational form in the context of an imperfectly competitive industry there are two kinds of organizational forms the multi divisional form m form and the unitary form u form an m form firm suffers from ignorance of demand externalities among different products and double marginalization is eliminated in contrast in a u form firm demand externalities are taken into consideration and double marginalization exists a firm s optimal choice of organizational form depends on the market structure

adoption and diffusion of an innovation of uncertain profitability the argument has frequently been made that the pattern of diffusion associated with most new innovations will typically have certain characteristics a diffusion curve for an innovation is usually defined as the proportion of its potential users who have already adopted as a function of time measured from the first adoption many empirical studies by both economists and other social scientists have shown that diffusion curves nearly always have two distinct characteristics i they are s shaped the proportion adopted is an increasing function of time which is initially convex but eventually becomes concave and ii they tend to be right hand skewed the inflection point occurs at a time corresponding to a proportion adopted which is less than one half so that the function is concave over the greatest amount of time in fact this skewing is occasionally severe enough to make the diffusion curve appear concave everywhere the focus of most empirical studies of innovation diffusion has centered on identification of either the major determinants of the speed of diffusion or the characteristics of firms which determine how long they delay adoption the seminal contributions are griliches 6 study of hybrid corn and mansfield s 121 study of 12 industrial innovations these studies and most of the similar ones following conclude that diffusion is faster for innovations with higher profitability and that large firms tend to be the earliest adopters some studies e g mansfield 121 herregat 71 have attempted to ascertain

competition and outsourcing with scale economies scale economies are commonplace in operations yet because of analytical challenges relatively little is known about how firms should compete in their presence this paper presents a model of competition between two firms that face scale economies i e each firm s cost per unit of demand is decreasing in demand a general framework is used which incorporates competition between two service providers with price and time sensitive demand a queuing game and competition between two retailers with fixed ordering costs and pricesensitive consumers an economic order quantity game reasonably general conditions are provided under which there exists at most one equilibrium with both firms participating in the market we demonstrate in the context of the queuing game that the lower cost firm in equilibrium may have a higher market share and a higher price an enviable situation we also allow each firm to outsource their production process to a supplier even if the supplier s technology is no better than the firms technology and the supplier is required to establish dedicated capacity so the supplier s scale can be no greater than either firm s scale we show that the firms strictly prefer to outsource we conclude that scale economies provide a strong motivation for outsourcing that has not previously been identified in the literature

cost manipulation games in oligopoly with costs of manipulating we analyze a class of two stage games where rival firms incur real resource costs in manipulating their marginal costs so as to influence the outcome of the game they want to play in stage two marginal costs may be manipulated by various means such as redistribution of productive assets choice of location or creation of an internal input market a general formulation of the game is provided and several applications are analyzed we show that the optimal allocation of resources within an oligopoly can be asymmetric even for ex ante symmetric firms this is an additional explanation of heterogeneity in oligopoly

joint pricing production decisions in supply chains of complementary products with uncertain demand consider n manufacturers each producing a different product and selling it to a market either directly or through a common retailer the n products are perfectly complementary in the sense that they are always sold and consumed jointly or in sets of one unit of each demand for the products during a selling season is both price sensitive and uncertain each of the n manufacturers faces the problem of choosing a production quantity and a selling price for his product two settings are considered regarding the decision sequence of the n manufacturers they are either simultaneous or sequential the retailer when present employs a consignment sales contract with revenue sharing to bind her relationship with the manufacturers and to extract profit for herself using a multiplicative demand model in this paper we fully characterize individual firms decisions in equilibria under each of the two game settings and derive closed form performance measures both for the channel and for individual channel members these closed form solutions allow us to explore the effects of channel structure and parameters on firms decisions and performance that lead to conclusions of managerial interest

the limits of monopolization through acquisition we address the question of whether competitive acquisition of firms by their rivals can result in complete or partial monopolization of a homogeneous product industry this question is modeled in terms of two distinct three stage noncoopera tive games analysis of subgame perfect pure strategy nash equilibria of these games discloses that under simplifying assumptions monopolization of an industry through acquisition is limited to industries with relatively few firms partial monopolization is either limited in scope or can be completely eliminated by prohibiting any owner from acquiring over 50 percent of the firms in the industry

on the existence of share contracts under limited liability abstract in a principal agent relationship under limited liability the agent in general receives the full share of revenue we show that when the agent exerts effort in multiple tasks the effort substitution effect helps explain the existence of share contracts even under limited liability

competition and integration among complements and network market structure this article analyzes the competition and integration among complementary products that can be combined to create composite goods or systems the model generalizes the cournot duopoly complements model to the case in which there are multiple brands of compatible components it analyzes equilibrium prices for a variety of organizational and market structures that differ in their degree of competition and integration the model applies to a variety of product networks including automatic teller machines real estate multiple listing services and airlines crs as well as to nonnetwork markets of compatible components such as computer cpus and peripherals hardware and software and long distance and local telephone services copyright 1992 by blackwell publishing ltd

a model of agreements in strategic form games abstract because in a strategic form game all the possibilities of communication available to the players must be explicitly listed in the strategy spaces coalitions and coalitional behaviour are not very often taken into account in noncooperative games however it may be desirable especially in applications to separate the basic strategic features of a situation from those strategic features added as a consequence of the possibility of coalitional behaviour we define an equilibrium for the bargaining procedure called by greenberg the theory of solid situations an alternative game theoretic approach cambridge university press cambridge uk 1990 coalitional contingent threat situation we argue that the crucial problem of expectations on the counterdeviations following a deviation can be addressed by defining coalitional strategies and studying the equilibrium of the extended game journal of economic literatureclassification numbers c70 c71

improving channel coordination through franchising in this paper we explore the role of franchising arrangements in improving coordination between channel members in particular we focus on two elements of the franchising contract namely the royalty structure and the monitoring technology we begin with a simple analysis where a manufacturer distributes its product through a retailer and the retail demand is affected by the retail price and the service provided by the retailer in this context we show that neither royalty payments nor monitoring are needed for full coordination we then extend the model to allow for free riding by franchisees and show that although monitoring helps affect the behavior of the franchisees royalty payments are still unnecessary to coordinate the activities of the franchisor and the franchisees finally we show that in environments where factors affecting retail sales are controlled by both the franchisor and the franchisee royalty payments provide the necessary incentives for the franchisor while monitoring systems are used to ensure that franchisees also behave in the best interest of the channel our general results are found to be consistent with those in brickley and dark 1987 and norton 1988 who conclude that franchising is affected by principal agent problems our theory finds special support in the work of lafontaine 1988 where it is concluded that the incidence of franchising is related to cost of monitoring and the importance of franchisor investments

a model of product proliferation with multiproduct firms this paper presents a model of product proliferation by multiproduct firms firm behavior is based on a two stage process in which there is centralized decision making in new product introductions and decentralized management of existing products in equilibrium the number of products each firm has as well as its total profits are inversely related to the cost of introducing a new product and to the number of firms in the market but as the number of rivals increases the total number of products in the market increases although total industry profits decrease copyright 1987 by blackwell publishing ltd

game theoretic analyses of decentralized assembly supply chains non cooperative equilibria vs coordination with cost sharing contracts abstract this paper considers a multiple supplier single manufacturer assembly supply chain where the suppliers produce components of a short life cycle product which is assembled by the manufacturer in this single period problem the suppliers determine their production quantities and the manufacturer chooses the retail price we assume that the manufacturer faces a random price dependent demand in either additive or multiplicative form for each case we analyze both simultaneous move and leader follower games to respectively determine the nash and stackelberg equilibria and find the globally optimal solution that maximizes the system wide expected profit then we introduce appropriate buy back and lost sales cost sharing contracts to coordinate this assembly supply chain so that when all the suppliers and the manufacturer adopt their equilibrium solutions the system wide expected profit is maximized

united we stand or divided we stand strategic supplier alliances under order default risk we study the alliance formation strategy among suppliers in a framework with one downstream firm and n upstream suppliers each supplier faces an exogenous random shock that may result in an order default each of them also has access to a recourse fund that can mitigate this risk the suppliers can share the fund resources within an alliance but they need to equitably allocate the profits of the alliance among the partners in this context suppliers need to decide whether to join larger alliances that have better chances of order fulfillment or smaller ones that may grant them higher profit allocations we first analytically characterize the exact coalition proof nash stable coalition structures that would arise for symmetric complementary or substitutable suppliers our analysis reveals that it is the appeal of default risk mitigation rather than competition reduction that motivates cooperation in general a riskier and or less fragmented supply base favors larger alliances whereas substitutable s

divide and conquer multiple leasing in common pool oil fields a theoretic model is developed to analyse strategic leasing behaviours of u s landowners in a non exclusively owned common oil pool oil field development is modelled as a simultaneous move two stage non cooperative game the landowners choose leasing strategies in the first stage independent lease operators choose extraction strategies in the second ownership structure is distinguished from operation structure and their relationship analyzed it is shown that in a non exclusively owned oil field it is individually rational for a landowner to subdivide his landholding and delegate production rights to multiple inde pendent firms although more dispersed production control leads to heavier common pool

when is a break up of gazprom good for russia in the late 1990s several proposals for a structural reform that would bring competition and market prices to the russian gas industry were intensely debated splitting up russian gas monopolist gazprom into several producing companies was a considered option in this paper i examine theoretically and numerically how a split up of gazprom would affect russian national welfare results show that under the current gas market structures in europe and russia the split up of gazprom s monopoly might not be beneficial for russia however analysis in the paper indicates that the market shares that gazprom has in both russian domestic and european gas markets are important in determining whether gazprom s dominance is supported under the national welfare criteria when gazprom has small market share in europe and large market share in russia a break up of gazprom might plausibly result in increase of russian national welfare

coalition formation as a dynamic process abstract we study coalition formation as an ongoing dynamic process with payoffs generated as coalitions form disintegrate or regroup a process of coalition formation pcf is an equilibrium if a coalitional move to some other state can be justified by the expectation of higher future value compared to inaction this future value in turn is endogenous it depends on coalitional movements at each node we study existence of equilibrium pcfs we connect deterministic equilibrium pcfs with unique absorbing state to the core and equilibrium pcfs with multiple absorbing states to the largest consistent set in addition we study cyclical as well as stochastic equilibrium pcfs

double sided moral hazard and the nature of share contracts contractual arrangements involving revenue profit sharing are often based on fairly simple often linear rules in addition in many contexts these contracts are not finely adjusted to the particular circumstances of individual agents or markets nor do they vary over time to the extent current theories based on optimal contracting suggest they should we develop a simple model of such revenue or profit sharing arrangements based on double sided moral hazard and show that this model can account for many of these stylized facts more specifically the model shows that linear contracts can be optimal and that benefits from customizing terms can in some cases be quite limited if not zero

strategic incentives when supplying to rivals with an application to vertical firm structure abstract we consider a vertically integrated input monopolist supplying to a differentiated downstream rival with linear input pricing at the margin the firm unambiguously wants the rival to expand unlike standard oligopoly with no supply relationship for either cournot or bertrand competition with a two part tariff for the input the same result holds if downstream choices are strategic complements but is reversed for cournot with strategic substitutes we analyze vertical delegation as one mechanism for inducing expansion or contraction by the rival customer

divisionalization franchising and divestiture incentives in oligopoly a two stage game is used to model firms strategic incentives to divide production among autonomous competing units through divisionalization franchising or divestiture firms simultaneously choose their number of competing units which then engage in cournot competition while it is costly to form autonomous units each firm does so in equilibrium thus reducing firm profits and increasing social welfare relative to the case where firms cannot form competing units with linear demand and costs duopolists choose the socially optimal number of competing units oligopolies with larger numbers of firms choose too many the case of nonlinear demand is also examined copyright 1996 by american economic association

retail contracting theory and practice we summarize a number of regularities that arise in the empirical literature on contractual relationships between manufacturers and their exclusive resellers we do this using studies of traditional and business format franchise relationships as well as studies of salesforce integration decisions some of the patterns that we uncover are consistent with a standard incentive cum insurance theory of organization while others are not we brie y review some theoretical extensions that seem promising in terms of reconciling seeming con icts between theory and practice i introduction manufacturers of retail products must decide whether to sell their products to consumers themselves vertical integration or to sell via independent retailers vertical separation when manufacturers do not perform the sales function internally but want exclusive retailers they usually choose some form of franchising 1 many theories attempt to explain the choice of retail organizational form moreover a considerable body of empirical evidence concerning this choice is accumulating we attempt to evaluate this econometric evidence and relate it to the theories to accomplish this task we assess studies of franchising arrangements as well as studies of sales force organization in industrial settings the paper is organized as follows in the next section we highlight a number of regularities that arise in the empirical literature on retail contracting in particular we nd that i risk is positively related to the use of high powered incentives vertical separation ii the importance of the agent s eiort in production is positively related to the use of high powered incentives

how many franchises in a market abstract this paper studies how firms use their number of franchises as a strategic tool firms can commit to high output by creating many franchises however signing a single franchise contract with a low wholesale price is an equally effective way to generate output the value of granting many franchises is undercut when firms can sign contracts afterwards so firms place only a single franchise in a market this finding reverses previous results which did not model contracts the same issues arise in international competition policy where countries use anti trust policy to affect their number of exporters and use subsidies to affect the choices of exporters

contract choice in agriculture with joint moral hazard in effort and risk we analyze optimal contract choice in agriculture when there is joint moral hazard on the part of the farmer in the supply of effort and the riskiness of the technique of cultivation in the presence of limited liability high powered incentive contracts such as fixed rental contracts will induce the farmer to adopt techniques of cultivation that are too risky from the point of view of the landlord on the other hand low powered incentive contracts such as fixed wage contracts will induce the farmer to supply too little effort we show that sharecropping contracts emerge as a natural solution to balance these two conflicting considerations

the price effects of international airline alliances abstract this paper provides evidence on the effect of international airline alliances on fares the main finding is that alliance partners charge interline fares that are approximately 25 percent below those charged by nonallied carriers according to our theoretical model the main source of this fare reduction is the internalization of a negative externality that arises from the uncoordinated choice of interline sub fares in the absence of an alliance the paper also looks for evidence of an anti competitive alliance effect in the gateway to gateway markets while the point estimates show that an alliance between two previously competitive carriers would raise fares by about 5 percent this effect is not statistically significant

pricing games and impact of private demand information in decentralized assembly systems this paper analyzes decentralized assembly systems under asymmetric demand information and sequential contracting we reveal new insights on the value of contract type price only versus complex demand information complete versus asymmetric and contract sequence first mover versus second mover to different players our results for the basic model show the following 1 complex contracts increase the suppliers aggregate profit however individual suppliers do not necessarily benefit from a complex contracting equilibrium we identify the conditions under which each supplier benefits from such an equilibrium 2 eliminating information asymmetry is not always beneficial for the suppliers because obtaining information might bring only marginal value and hence might not be realistically justified furthermore a downstream supplier might prefer information asymmetry to complete information especially when demand variability is moderate 3 unless there is a high demand risk the first mover advantage is prevalent when the assembler is a price taker we extend our basic model to analyze two additional scenarios first we study cases where the suppliers may offer contracts of different complexity beyond enriching our understanding of contract choice in decentralized assembly systems such variations enhance the analysis beyond the standard methodology of principal agent models and utilize solution techniques from optimal control second we analyze the situation where the suppliers may possess different levels of information on demand under complex contracts we show that an upstream supplier always benefits from a downstream supplier s superior information however the additional information might decrease the downstream supplier s profit especially when the forecast variability is low compared to the total demand variability in the system our results for the basic model and its extensions confirm that studying interactions between suppliers specifically under different contract types and information structures in assembly systems presents rich opportunities for future research

internal decision making rules and collusion we study the impact of internal decision making structures on the stability of collusive agreements to this end we use a three firm spatial competition model where two firms belong to the same holding company the holding company can decide to set prices itself or to delegate this decision to its local units it is shown that when transportation costs are high collusion is more stable under delegation furthermore collusion with maximum prices is more profitable if price setting is delegated to the local units profitability is reversed for low discount factors

stable farsighted coalitions in competitive markets in this paper we study dynamic alliance formation among agents in competitive markets we look at n agents selling substitutable products competing in a market in this setting we examine models with deterministic and stochastic demand and we use a two stage approach in stage 1 agents form alliances coalitions and in stage 2 coalitions make decisions price and inventory and compete against one another to analyze the stability of coalition structures in stage 1 we use two notions from cooperative games the largest consistent set lcs and the equilibrium process of coalition formation epcf which allow players to be farsighted thus in forming alliances players consider two key phenomena first players trade off the size of the total profit of the system versus their allocation of this total pie and second they weigh the possibility that an immediate beneficial defection can trigger further counter defections that in the end may prove to be worse than the status quo in particular one such example is that of the grand coalition which we show to be stable in the farsighted sense even though players benefit myopically by defecting from it we also provide conditions under which a situation of a few lone players competing against a large coalition is stable we examine the impact of the size of the market n the degree of competition the effect of cost parameters and the variability of the demand process on the prices inventory levels and structure of the market we discuss the possible strategic implications of our results to firms in a competitive market and for new entrants

corruption and socially optimal entry abstract the paper investigates the effects of corruption in the entry certifying process on market structure and social welfare for a cournot industry with linear demand and costs to gain entry a firm must pay a bribe maximizing official a fixed percentage of anticipated profit in addition to the usual set up cost this would lead to a monopoly but only in markets without pre existing or shadow economy firms a benevolent social planner may preempt the harmful effects of corruption by either manipulating the number of pre existing firms in the market or by setting up two independent corrupt licensing authorities a socially optimal number of firms in the market may be reached by choosing the right number of pre existing firms or by having exactly two licensing authorities these mechanisms may be seen as restoring second best efficiency in settings characterized by two major sources of distortion imperfect competition and corruption we also show in an extension that the basic insights carry over in a qualitative sense to a model with quadratic costs and first best entry regulation

formation of alliances in internet based supply exchanges in different industries such as automobiles chemicals or retailing competitors are joining forces in establishing electronic marketplaces to reduce inefficiencies in the purchasing process and cut costs by combining their buying power joining such an alliance leads to reduced costs including those of possible rivals because members share the development and operating costs a company that joins an alliance agrees to share its suppliers with others which may lead to more intense competition among the increased number of suppliers and it may further benefit an alliance member at the expense of companies left outside the alliance natural questions that could arise then are when would a firm prefer to take part in an electronic marketplace joint venture when would it prefer that other firms possibly rivals join the venture and what are the financial consequences of either joining an alliance or remaining independent in an attempt to gain a better understanding of the issues we have developed a model of three retailers whose products may have a certain degree of substitutability we provide some conditions in terms of product substitutability and compatibility of retailers that would lead to the formation of a three member alliance or a two member alliance or no alliance at all we also study the effect of alliance structure and compatibility of retailers on the profit of a company

vertical integration with endogenous contract leadership stability and fair profit allocation abstract this paper studies vertical integration in serial supply chains with a wholesale price contract we consider a business environment where the contracting leader may be endogenously changed before and after forming the integration a cooperative game is formulated to normatively analyze the stable and fair profit allocations under the grand coalition in such an environment our main result demonstrates that vertical integration is stable when all members are pessimistic in the sense that they are sure that they will not become the contracting leader if they deviate from the grand coalition we find that in this case the grand coalition s profit must be allocated more to the retailer and the members with higher costs nevertheless we also show the conditions under which the upstream manufacturer can have strong power as in traditional supply chains

licensing the market for technology abstract in technology based industries incumbent firms often license their technology to potential competitors such a strategy is difficult to explain within traditional models of licensing this paper extends the literature on licensing by relaxing the assumption of a monopolist technology holder competition in the market for technology induces licensing of innovations and incumbent firms may find it privately profitable to license although their joint profits may well be higher in the absence of any licensing a strong testable implication of our model is that the number of licenses per patent holder decreases with the degree of product differentiation

international fish wars the strategic roles for fleet licensing and effort subsidies abstract this article examines the problem of noncooperative international fishing by analyzing the strategic rent shifting roles for such well known national management policies as fleet licensing and effort subsidies it is shown that the noncooperative equilibrium in each policy takes the form of a prisoner s dilemma with dissipated rents in the fishery it is also shown that strategic effort subsidies can only lead to incomplete rent dissipation but strategic fleet licensing can lead to complete rent dissipation the models developed in this article may help to provide an explanation for the persistence of large and excessively subsidized national fleets that exploit depleted international fish stocks

market foreclosure and vertical merger a case study of the vertical merger between turner broadcasting and time warner abstract we employ an event study methodology the event being the vertical merger between time warner and turner broadcasting distribution and programming respectively in the cable television industry we assess the effects of the merger on final prices subscriptions and carriage and marketing decisions of time warner the analysis finds several interesting facts first foreclosure in time warner markets following the merger is observed for the rival channels that are not integrated with any cable distributors second the turner broadcasting channels that increased market shares because of this merger appeared to be foreclosed by time warner prior to the merger the preference for own channels by time warner persisted despite a lower quality of channel bundles in its markets efficiency gains from the merger were not passed on to consumers

multidivisional firms internal competition and comparative advantage baye et al meet neary abstract we present a tractable general equilibrium model to capture the effects of divisionalization on trade in oligopolistic industries divisionalization reduces the incentives for diversification in production the extensive margins of trade expand as a result of divisionalization facilitating specialization toward the direction of comparative advantage with exports rising in the case of domestic divisionalization and imports rising in the case of foreign divisionalization this effect of internal competition on specialization is magnified when competition between divisions is staggered the factor market effects of divisionalization domestic and or foreign strengthen the expansionary effects on the extensive margins of trade

de targeting advertising an assortment of products to loss averse consumers we consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes using sophisticated tracking technologies an intermediary can make inferences about a consumer s preferred product category and offer advertising firms the possibility to target their ads to match the consumer s taste such targeting reduces overall advertising costs and as a direct effect increases industry profits however as we show in this paper when consumers form reference prices and are loss averse more precise targeting may intensify competition between firms as a result firms may earn higher profits from de targeted advertising i e when the intermediary deliberately informs about some products and their price quotes from outside a consumer s preferred product category

on intrabrand and interbrand competition the strategic role of fees and royalties abstract we examine oligopolistic markets with both intrabrand and interbrand competition we characterize equilibrium contracts involving a royalty or wholesale price and a fee when each upstream firm contracts with multiple downstream firms royalties control competition between own downstream firms at the expense of making them passive against rivals when the number of downstream firms is endogenous each upstream firm chooses to have only one downstream firm this result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments we discuss why allowing upstream firms to charge per unit payments in addition to fixed fees dramatically alters their strategic incentives

practical implications of game theoretic models of r and d the purpose of this paper is to survey recent game theoretic models of research and development and to ask whether they yield practical implications or testable hypotheses the papers i will be discussing have been written or published within the past five years they have a good deal in common relying upon similar assumptions and building upon each other because of this the literature surveyed here may seem narrow and some relevant work has probably been inadvertently omitted i apologize for these omissions for want of space i will not discuss the normative conclusions of this literature

dynamics and stability of constitutions coalitions and clubs a central feature of dynamic collective decision making is that the rules that govern the procedures for future decision making and the distribution of political power across players are determined by current decisions for example current constitutional change must take into account how the new constitution may pave the way for further changes in laws and regulations we develop a general framework for the analysis of this class of dynamic problems under relatively natural acyclicity assumptions we provide a complete characterization of dynamically stable states as functions of the initial state and determine conditions for their uniqueness we show how this framework can be applied in political economy coalition formation and the analysis of the dynamics of clubs the explicit characterization we provide highlights two intuitive features of dynamic collective decision making 1 a social arrangement is made stable by the instability of alternative arrangements that are preferred by sufficiently many members of the society 2 efficiency enhancing changes are often resisted because of further social changes that they will engender

increasing the profits of a subset of firms in oligopoly models with strategic substitutes consider an industry composed of n firms in a symmetric equilibrium designate a subset of s n firms and marginally reduce the strategic variables of the firms in the subset if the remaining firms simultaneously make the best reply to this exogenous displacement under what circumstances will profits of the firms in the designated subset increase we show that in the case of cournot competition among producers of perfect substitutes a marginal contraction is strictly beneficial strictly harmful if and only if the number of firms in the designated subset exceeds the adjusted number of firms outside it by strictly more strictly less than one the adjustment factor is unity when cost and demand functions are linear but more generally depends on the convexity of the cost and demand curves thus a marginal contraction of two firms in a triopoly has no effect on the profits of firms in the subset if cost and demand functions are linear if instead cost is linear but the inverse demand function is strictly concave strictly convex a marginal contraction will strictly decrease strictly increase profits the analysis is extended to the effects of nonmarginal exogenous changes in the outputs of the constrained firms this extension has implications for the relationship of stackelberg sequential move and nash simultaneous move equilibria our analysis has broad application to illustrate we show that it unifies results in the literature on export subsidies horizontal mergers and strikes the paper is organized as follows in section i our comparative static result is derived in section ii we present a wide range of applications in the conclusion and the appendix we generalize our analysis to other situations involving strategic substitutes

divisionalization and strategic managerial incentives in oligopoly under uncertainty abstract this paper argues that divisionalization and incentive contracting are complementary rent shifting tools in the presence of demand uncertainty the role for divisionalization arises if managers know the state of demand prior to making output decisions and if incentive contracts are linear and non state contingent in this context incentive contracts achieve expected stackelberg outcomes but have no impact on the firm s responsiveness to demand shocks divisionalization on the other hand has the strategically beneficial effect of making the firm more responsive to demand shocks

incentives and commonality in a decentralized multiproduct assembly system in this paper we explore the impact of decentralized decision making on the behavior of multiproduct assembly systems specifically we consider a system where three components two product specific and one common are used to produce two end products to satisfy stochastic customer demands we study the system under both centralized and decentralized decision making in the decentralized system we prove that for any set of wholesale prices there exists a unique pareto optimal equilibrium in the suppliers capacity game we show that the assembler s optimal wholesale prices lie in one of two regions one leads to capacity imbalance and one does not we use these results to derive insights regarding the inefficiencies that decentralization can cause in such systems in particular several of our findings indicate that outsourcing the management of component supplies may inhibit the use of operational hedging approaches for managing uncertainty

behavioral equilibrium in economies with adverse selection i propose a new solution concept behavioral equilibrium to study environments with players who are naive in the sense that they fail to account for the informational content of other players actions a behavioral equilibrium requires that i players have no incentives to deviate given their beliefs about the consequences of deviating ii these beliefs are consistent with the information obtained from the actual equilibrium play of all players and iii when processing this information naive players fail to account for the correlation between other players actions and their own payouncertainty i apply the framework to certain adverse selection settings and show that contrary to the received literature the adverse selection problem is exacerbated when naive players fail to account for selection more generally the main distinguishing feature of the framework is that in equilibrium beliefs about both fundamentals and strategies are jointly restricted consequently whether a bias may arise or not is determined endogenously in equilibrium jel c72 d82 a large literature presents evidence that psychological and cognitive biases aect people s be havior this evidence raises some questions what are the eects of these biases and can they persist at all in economic settings where people strategically interact with each other and have the opportunity to learn from their experience 1 in this paper i introduce a game theoretic equilibrium framework to study these questions in the context of a particular bias people s failure to take into account the informational content of other people s actions i apply the framework to a class of games that arises naturally in adverse selection settings and then show that the adverse selection

divisionalization and entry deterrence this paper assumes that incumbent firms can create new independent divisions more cheaply than potential entrants who must incur the additional overhead costs of new entry the main theoretical result is that such divisionalization ability leads perfectly informed incumbents to preempt all rational entry into their industries in contrast existing models of entry deterrence imply that informed incumbents even those with steadily decreasing average costs will often allow rational entry our result may explain why successful large scale entry by firms with no informational advantage is extremely rare the use of divisions to preempt entry may also explain why large firms in high profit oligopolies often divisionalize allowing their divisions to compete freely despite the negative pecuniary externality that each division imposes on others

transshipment of inventories among retailers myopic vs farsighted stability the author considers a model of a decentralized distribution system consisting of n retailers selling an identical product retailers face a stochastic demand and must order their initial inventory before this demand is realized after demand realization retailers decide how much of their unsold inventory or unsatisfied demand they want to share with other retailers this is followed by a transshipment of leftover inventories and distribution of the additional profit generated through inventory sharing the author addresses the following issue suppose that the retailers distribute the profit from inventory sharing according to an allocation rule that induces retailers to share their residuals in a way that maximizes the additional profit such as the shapley value but may not belong to the core is it likely that in this framework all retailers will jointly share their residuals and not form subcoalitions previous research has looked at this problem from a myopic viewpoint and concluded that the grand coalition is not stable unlike the prior work the author looks at stability in a farsighted sense that is retailers do not consider only their immediate payoffs but are also concerned with reactions of other retailers to their actions in a symmetric setting with identical additional unit revenues from transshipments generated by all retailers farsighted retailers always maximize their allocations by not defecting from the grand coalition the author also provides conditions when the same is true for nonidentical additional unit revenues

an empirical analysis of territorial encroachment within franchised and company owned branded chains franchisees within large branded chains loudly complain of a form of channel conflict known as encroachment or impact encroachment occurs when franchisors add new units of their brand proximately to their franchisees existing units franchisees claim that their revenues have substantially decreased as a result of encroaching same brand entry the topic of encroachment has not only dominated franchisee association agendas and trade journal headlines but has also become a hot topic for politicians and policymakers yet until now evidence of encroachment has been strictly anecdotal this paper provides the first systematic evidence of encroachment using revenue data from the texas lodging industry in the 1990s i find that when franchisors approve new same brand units in the vicinity of incumbent units these new units cannibalize the incumbents revenues in contrast to the result for franchisors the addition of a new unit by company owned brands in the vicinity of same brand units is associated with an increase in the incumbents revenues this contrast suggests that encroaching behavior is caused by incentives that result from the governance form of franchising and is not simply an outcome that accompanies all expansion this finding informs theory on governance forms and exclusive territories implications for practitioners and policy are also discussed