multiple equilibria and deterrence in airline markets we use data from the us airline industry to estimate a model of entry deterrence we model the interaction among airlines as a repeated static game where we allow for a very general form of heterogeneity we consider a menu of three alternative games that describe the strategic interaction among airlines simultaneous and sequential move games and a sequential move game with deterrence investments following bernheim 1984 deterrence investments include all investment that raises barriers to entry and for which the incumbent must incur some investment costs we show that the profits that incumbents can make in the sequential game both with and without deterrence investments are larger than those that they can make if the game is played simultaneously thus we find that on average it is profitable for all firms to deter new entrants with the exception of united airlines remarkably united airlines was under bankruptcy protection during the period of analysis suggesting that its deterrence investments were not credible overall we find that the data is explained better by a model where firms make deterrence investments thus we cannot reject the hypothesis that incumbents deter entrants in the airline industry

not all rivals look alike estimating an equilibrium model of the release date timing game a very serious game of strategy is at work a cross between chess and chicken which studio distribution chiefs play year round but with increasing intensity during the summer and holiday release period new york times december 6 1999 hubris hubris if you only think about your own business you think i ve got a good story department i ve got a good marketing department we re going to go out and do this and you don t think that everybody else is thinking the same way in a given weekend in a year you ll have five movies open and there s certainly not enough people to go around joe roth chairman of walt disney studios answering a question about the large number of major movies opening within days of each other los angeles times december 31 1996 i introduction the number of americans who go to the movies varies dramatically over the course of the year and sometimes more than doubles within a period of two weeks at the same time the first week accounts for almost 40 of the box office revenues of the average movie the combination of these two facts makes the timing of launching a new movie a major focus of attention for distributors of movies with virtually no subsequent price competition the movie s release date is one of the main short run vehicles by which studios compete with each other in this paper i develop and estimate a model of discrete games which allows me to analyze this release date timing game most empirical industry studies focus on price and quantity competition taking other product characteristics as given in many industries however prices play a very small role and competition is channeled through other product attributes the entertainment industry is a prime example competition among movies television programs or broadway shows is on nonmonetary product attributes such as content advertising and time therefore understanding competition in such industries requires a model that endogenizes some of these product attributes especially those that can be changed in the short run this paper provides a framework in which release decisions can be endogenized and nonprice competition can be analyzed the absence of price competition is useful because it allows the focus of the analysis to be on the timing dimension without relying on assumptions about the nature of the postrelease price competition 1 together with the frequent timing decisions associated with different movies this makes the motion picture industry quite attractive for empirical analysis of the timing game this industry however is not the only example in which timing decisions play a central role similar timing considerations are also important in the release decisions of books compact disks and other new products as well as in the scheduling decisions of major events television programs flight schedules and promotional sales 2 when taking on a new project distributors of movies typically plan for a friday release which falls within a relatively short window of time carefully chosen to match the type of the movie this makes the choice of the release date a very discrete one the exact friday within the season is generally determined by a strategic timing game played among distributors before each release season distributors scramble to release their movies on big holiday weekends when demand is high when doing so each distributor tries to release on the attractive holiday weekend and at the same time to deter competitors from doing the same the extent to which distributors are successful in doing so largely depends on the quality of the movies at their disposal and on the way they can compete with movies released by other studios thus modeling this timing game must account for the asymmetries among movies and for the variation in these asymmetries across release seasons specifically i develop and estimate a sequential move game with private information i assume that the observed release date decisions are the equilibrium outcome of such a game

capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

entry its deterrence and its accommodation a study of the u s photographic film industry this work set in the new empirical industrial organization framework bresnahan 1987 examines firm level demand based and cost based explanations for entry and accommodation strategies in the u s photographic film industry i first estimate preentry and postentry market structures then using the estimated demand cost and market conduct parameters i show how entry by fuji photo or lack thereof by others is a function of two market structures i also show how market structure and conduct and changes in them over the pre and postentry periods are in turn functions of entry its deterrence and it accommodation

credible spatial preemption it is often argued that incumbent firms may deter entry by preemptive investment in new goods we show that these conclusions are reversed when multiproduct incumbentfirms may exit in response to entry once entrants are in an industry an incumbent will often want to withdraw some goods to prevent competition with the entrant from reducing profits on other goods such a reaction makes entry more attractive to a potential entrant the equilibrium industry structure is less likely to be monopolistic as the goods are better substitutes as exit costs are low and as the competition between producers of the same good is more intense

international effects of tax reforms in an open economy with international capital flows there is an equivalence relation between income tax consumption tax international borrowing tax and an external interest earning tax this paper analyzes tax reform involving shifts between income and consumption taxes in this setting it is shown that the real effects of such revenue neutral tax reform depend critically on the country s current account position and the nature of the reform in particular whether the world interest rate rises or falls as a consequence of a budget deficit depends on the tax system in force the analysis provides a clear rationale for the international coordination of tax policies copyright 1989 by royal economic society

optimal control of a dual service rate m m 1 production inventory model we analyse a dual source production inventory model in which the processing times at a primary manufacturing resource and a second contingent resource are exponentially distributed we interpret the contingent source to be a subcontractor although it could also be overtime production we treat the inventory and contingent sourcing policies as decision variables in an analytical study and additionally allow the primary manufacturing capacity to be a decision variable in a subsequent numerical study our goal is to gain insight into the use of subcontracting as a contingent source of goods and whether it can fulfill real world managers expectations for improved performance we prove that a stationary non randomised inventory and subcontracting policy is optimal for our m m 1 dual source model and moreover that a dual base stock policy is optimal we then derive an exact closed form expression for one of the optimal base stocks which to our knowledge is the first closed form solution for a dual source model we use that closed form result to advantage in a numerical study from which we gain insight into how optimal capacity subcontracting and inventory policies are set and how effectively a contingent source can reduce total cost capacity cost and inventory cost we find that i the contingent source can reduce total cost effectively even when contingent sourcing is expensive and ii contingent sourcing reduces capacity cost more effectively than it does inventory cost

time preference and international lending and borrowing in an overlapping generations model two economies represented by diamond type overlapping generations models and differing only in their pure rates of time preference are joined together capital formation balance of payments behavior and welfare are compared under autarky and openness with a positive natural rate of growth the low time preference country runs a current account surplus in the steady state but not necessarily outside it if preexisting capital is not shiftable between countries integration in the world economy makes the high time preference country worse off in the short run the ranking of stationary utility levels under autarky and openness is ambiguous

excess capacity as a policing device abstract a great deal of recent work has been devoted to the question of whether an incumbent firm can successfully deter entry by investing in excess capacity this paper demonstrates that a dominant firm may invest in excess capacity even when it is certain that this will not deter entry rather the excess capacity is held by the dominant firm in order to ensure that its competitors will exercise appropriate restraint in their own output decisions an example is provided that illustrates that the rate of return on the capital invested in excess capacity may be very high

economies of scale and barriers to entry dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry entry deterrence in a slight modification of this model involves the classical limit price output under linear or concave demand however the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry it is argued that this suggests the general unimportance of entry barriers erected by scale economies

a dynamic model of advertising and market shares this paper presents a model of strategic advertising and the battle for market shares between incumbents and entrants the lagged impact of advertising allows incumbents strategically to use preentry advertising to effect the postentry equilibrium solution however because the advantages to advertising are erodable by counter persuasive advertising strategies of entrants the threat of entry may cause incumbents to take retreative or aggressive strategies the incumbants retreative or aggressive posture depends crucially on the erosion impact on their advertising

fiscal policy in a simple two country dynamic model abstract this paper analyzes the national and international effects of labor and capital income taxes in a two country infinite horizon perfect foresight neoclassical model with endogenous labor supply and capital accumulation two polar regimes of capital income taxation are considered the source based and the residence based the qualitative effects of labor income taxes are shown to be independent of the taxation regime whereas the effects of capital income taxes are not

sunk costs and strategic commitment a proposed three stage equilibrium dixit s i980 paper in this journal the role of investment in entry deterrence has attracted considerable interest from economists concerned with constructing a modern theory of strategic behaviour towards entry in fact the paper has spawned quite an industry of commitment models in which the equilibrium payoffs in some final period game can be influenced by strategic commitments made by the players in an earlier period for similar models with important insights into strategic entry deterrence see eaton and lipsey i980 i98i schmalensee i98i the purpose of this note is to argue that when the instrument of stragetic commitment takes the form of sunk costs which both entrant and incumbent have to bear as it does in dixit s paper and in many other examples a three stage model rather than the two stage model presented by dixit is required although the proposed equilibrium differs from dixit s its qualitative features are the same it may or may not be profitable to deter entry and if it is the first mover may still prefer to play an accommodation strategy and allow entry to take place following dixit we restrict our attention to the asymmetric case in which one firm the incumbent makes the first move the two stage game involves the first mover sinking part of its costs in advance so that in the second stage equilibrium it will have a current cost advantage over the entrant which must incur the full cost of producing any desired output level the second period cost asymmetry ensures the incumbent a lar ger share of the post entry market which may be sufficient to deter entry altogether the problem with the two stage game lies in the nature of sunk costs sunk costs by definition are committed before the production period takes place if they were expended as a flow simultaneously with production they would not be sunk the installation of capacity is the natural example employed by dixit and well illustrates the point if installed capacity is a sunk cost which it must be for the incumbent to acquire any strategic advantage at all then the entrant s installed capacity is equally sunk and must also be committed before the production period takes place given this observation the post entry final period equilibrium should not be modelled as if the entrant were simultaneously incurring both variable and sunk costs but the incumbent only incurs variable costs this implies too great an asymmetry in favour of the incumbent the final period equilibrium should involve both firms incurring only variable

the transition from payroll to consumption receipts with endogenous human capital abstract the transition from payroll to consumption receipts is simulated in a life cycle growth model featuring adult human capital as in other studies savings are higher under the consumption base however unlike those studies much of the additional savings here take human form human capital production increases for all cohorts in or yet to join the labor market as of the tax change the additional human capital production tends to dampen physical capital accumulation when compared with otherwise identical simulations which hold human capital constant the implications for intergenerational incidence are similar to that found in other examinations of the transition to a consumption base

testing models with multiple equilibria by quantile methods this paper proposes a method for testing complementarities between explanatory and dependent variables in a large class of economic models the proposed test is based on the monotone comparative statics mcs property of equilibria our main result is that mcs produces testable implications on the small and large quantiles of the dependent variable despite the presence of multiple equilibria the key features of our approach are that i we work with a nonparametric structural model of a continuous dependent variable in which the unobservable is allowed to be correlated with the explanatory variable in a reasonably general way ii we do not require the structural function to be known or estimable iii we remain fairly agnostic on how an equilibrium is selected we illustrate the usefulness of our result for policy evaluation within berry levinsohn and pakes s 1999 model

entry deterrence with uncertain entry and uncertain observability of commitment the standard approach to the issue of strategic entry deterrence is based on the assumption that if the incumbent does not precommit entry will take place with certainty while if he does precommit entry will be deterred with certainty in this note we allow for the possibility that the opportunity cost of entry is random so that entry is not a priori certain we also allow for the possibility that the incumbent s commitment is not observed by the potential entrant we show in numerical examples that even very little uncertainty may be sufficient to induce the incumbent not to attempt to deter entry

defensive marketing strategies this paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product our focus is to provide usable managerial recommendations on the strategy of response in particular we show that if products can be represented by their position in a multiattribute space consumers are heterogeneous and maximize utility and awareness advertising and distribution can be summarized by response functions then for the profit maximizing firm it is optimal to decrease awareness advertising it is optimal to decrease the distribution budget unless the new product can be kept out of the market a price increase may be optimal and even under the optimal strategy profits decrease as a result of the competitive new product furthermore if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits it is optimal at the margin to improve product quality in the direction of the defending product s strength and it is optimal at the margin to reposition by advertising in the same direction in addition we provide practical procedures to estimate 1 the distribution of consumer tastes and 2 the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available competitive diagnostics such as the angle of attack are introduced to help the defending manager this article was originally published in marketing science volume 2 issue 4 pages 319 360 in 1983

investment in lumpy capacity abstract investment in lumpy capacity is usually fraught with uncertainty divergent opinions about the future can then lead to adverse selection optimistic competitions tend to be the ones that expand few firms correct this bias formally they rely instead on payback criteria portfolio planning risk sharing and self restraint

do nonprofit and government nursing homes enter unprofitable markets i introduction nursing home care is provided in the united states by for profit private nonprofit and government organizations 1 these three organizational forms may compete directly in the same markets with either differentiated or nondifferentiated output or serve entirely separate markets an understanding of which organizational forms will provide the most effective care in a given set of circumstances requires knowledge of in what ways and to what extent the nature of health care provision varies across organizational forms in the context of a market economy in which profit maximizing firms are the default producers the natural question from a welfare perspective is whether consumer surplus would decline if government and nonprofit providers were replaced with for profit providers this study examines whether nonprofit and government nursing facilities expand access to nursing home care through an examination of patterns of nursing home entry in the rural united states i employ methods due to bresnahan and reiss 1990 to identify markets that are unlikely to be profitable for for profits to enter and then ask whether nonprofits and government nursing homes as a consequence of policies that lower their costs relative to for profits locate in these unprofitable markets equivalently if government and nonprofit nursing homes were to exit isolated markets could one reasonably expect that for profits would enter to replace them any evidence suggesting that they would not supports the argument that government and nonprofit nursing home care providers contribute positively to social welfare by expanding access to care in assessing potential differences in care provided by the different organizational forms the literature has focused largely on access and quality differentials two questions of interest naturally arise when studying access to care first is any care available in the market that is is there a nursing home second if care is available to some in the market is it available to all that is are nursing homes full or do they discriminate at the point of admission on the basis of wealth health status or other observable measures the second question has received more attention in the literature most studies of access to nursing home care for example reschovsky 1996 ettner 1993 and gertler 1992 presume the presence of a facility and ask to what extent prospective residents have access to the facility often focusing on individuals covered by medicaid relatively fewer focus on issues of access in isolated markets yu and bradford 1995 is an exception while this study limits its focus to the first question by analyzing isolated rural markets in the united states the methods used here in principle can be extended to focus on the second question as well in focusing on the question of access this analysis abstracts from potential differences in quality across organizational forms deferring to existing studies on the subject including grabowski and hirth 2003 hirth 1999 chou 2002 holtmann and ullmann 1991 and weisbrod 1988 the question of whether nonprofits enter unprofitable geographic markets has not been previously addressed in the nursing home industry or elsewhere the study closest in spirit to the present one is the analysis of nonprofit and for profit hospital location by norton and staiger 1994 in which the authors conclude that for profits tend to locate in better insured areas that is areas that are more likely to be more profitable than nonprofits do this study differs from norton and staiger in that it explicitly calculates market profitability for markets that for profits have entered and projects it for markets that for profits have not entered this analysis also complements the work of kapur and weisbrod 2000 by assessing whether government nursing homes serve unprofitable markets while their paper addressed the question of whether government nursing homes serve unprofitable patients

entry in monopoly market this paper develops new empirical models of market concentration from game theoretic models of entry we construct our models from inequality conditions that describe entrants equilibrium strategies in simultaneous move and sequential move games and use them to study the effects of entry in isolated monopoly markets for new automobiles from estimates of the market size necessary to support one and two dealers we conclude that monopoly dealers do not block the entry of a second dealer we also find that entry does not cause price cost margins to fall by much

entry into regulated monopoly markets the development of a competitive fringe in the local telephone industry abstract incumbent firms operating in today s local telephone industry are beginning to face competition from new entrants using the dominant firm competitive fringe framework and a recently constructed panel data set of local telephone markets this paper provides an empirical analysis of the competitive transition underway in the u s local telephone industry of particular interest is the differential impact of economic regulation on the development of fringe competition in flocal telephone markets empirical results reveal that local telephone markets with price cap regulation have witnessed less net fringe entry and subsequently contain smaller competitive fringes during the time period studied these findings imply that the widespread adoption of price cap regulation by state public utility commissions has contributed to the slow development of local telephone competition to reconcile this surprising conclusion a political economy explanation that details how state regulators have benefited from

entrepreneurial strategy and the presence of small firms a model is presented hypothesizing that the level of small firm presence in any given industry emanates from the exogenous stock of entrepreneurial talent a stochastic element of managerial and entrepreneurial talent entry deterrence and the entrepreneurial strategy deployed by small firms using data newly released by the u s small business administration the hypothesis is tested for a sample of 247 four digit standard industrial classification industries spanning the entire spectrum of firm sizes we find that consistently for all the measures of small firm size and for all of the time periods used the existence of entry deterrence and reliance upon innovative strategy explains a significant proportion of the variation in the presence of small firms

set identification in models with multiple equilibria we propose a computationally feasible way of deriving the identified features of models with multiple equilibria in pure or mixed strategies it is shown that in the case of shapley regular normal form games the identified set is characterized by the inclusion of the true data distribution within the core of a choquet capacity which is interpreted as the generalized likelihood of the model in turn this inclusion is characterized by a finite set of inequalities and efficient and easily implementable combinatorial methods are described to check them in all normal form games the identified set is characterized in terms of the value of a submodular or convex optimization program efficient algorithms are then given and compared to check inclusion of a parameter in this identified set the latter are illustrated with family bargaining games and oligopoly entry games copyright 2011 oxford university press

spatial competition and price leadership in the stackelberg price leader price follower model each firm is typically better off as a follower than as a leader in this paper we show that introducing the spatial dimension provides a means of endogenising the role of price leadership furthermore the leader follower framework yields existence of a price and location equilibrium in the hotelling spatial model of competition where none exists under the original specification we first analyse the original hotelling model by determining reaction functions for firms this approach allows the model to be fully characterised and affords an intuitive explanation of the non existence of a price equilibrium for certain locations the reaction functions are then used to determine the solution when one firm adopts the stackelberg leadership role contrary to the existing predictions of the simple spatial duopoly model it is found that the outcome is asymmetric in terms of stackelberg equilibrium locations prices and profits with the first firm in the market enjoying higher profits than the subsequent entrant the equilibrium involves one firm locating at the mid point of the market this outcome is also appealing as it corresponds to the entry deterring and monopoly solutions

tax reform and intergeneration incidence abstract this paper presents a simple analytical framework for understanding intergeneration incidence from tax reform along the transitional growth path of life cycle economies by analyzing the incentive effects of taxes previous studies may give the impression that the impact on intergeneration incidence of converting an income tax to either a consumption or wage tax depends solely on the difference in such incentive effects within the framework of lump sum taxation this paper theoretically investigates under what circumstances the tax postponement effect would be relevant and how the timing of tax payments would affect intergeneration incidence

excess capacity and entry some empirical evidence recent articles by spence i977 dixit i979 and schmalensee i98i have elaborated on wenders i97i1 proposition that excess capacity can act as a barrier to entry the intent of all of these treatments is to suggest that firms may rationally invest in excess capacity with the expectation that excess capacity will be seen by potential entrants either as a signal of aggressive intent or as a credible threat 2 when excess capacity does not lead to creation of a credible threat it may still act as a barrier to entry by shifting the risk return perceptions of potential entrants enough to divert the potential entrants investments into other industries 3 alternatively investment in excess capacity by incumbent firms may reduce the prospects of an active market for the used equipment of a defunct entrant and thereby help to convert fixed costs into sunk costs consequently raising entry barriers 4 this paper represents an exploratory effort to investigate empirically the prevalence and efficiency of excess capacity in deterring entry first a simple and traditional model of entry is presented this is followed by the description of the data used to explore the excess capacity investment concept a combined results and comments section follows the description of the data

regulation and the law of torts tort law is private law regulation by statute is public law how should the two relate to each other in a regulatory state where statutory intervention in private markets is widespread both tort and statutory law have regulatory effects thus economic policymakers should examine the links between these legal regimes in substantive areas where both systems operate i argue in this paper that statutes should generally dominate so long as agencies can use rulemaking to shape policy common law torts should be limited to areas of activity not covered by statutes and to situations in which courts can complement the statutory scheme with a supplementary enforcement and compensation mechanism however if the implementation of a statutory scheme

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

the industrial organization of health care markets the u s health care sector is large and growing health care spending in 2011 amounted to 2 7 trillion and 18 percent of gdp approximately half of health care output is allocated via markets in this paper we analyze the industrial organization literature on health care markets focusing on the impact of competition on price quality and treatment decisions for health care providers and health insurers we conclude with a discussion of research opportunities for industrial organization economists including opportunities created by the u s patient protection and affordable care act

capital mobility in the world economy an alternative test abstract this paper proposes a new measure and test of international capital mobility in order to investigate capital flows we utilize a small open economy version of campbell and mankiw s nber macroeconomic annual 1989 185 216 permanent income model our capital mobility measure focuses on the correlation between the country s consumption and net output instead of the correlation between domestic saving and domestic investment proposed by feldstein and horioka economic journal 90 1980 314 329 the model is estimated for 11 oecd countries the results suggest that the null hypothesis of perfect capital mobility cannot be rejected for more than a half of these countries on the other hand some kind of capital mobility constraints are detected for several countries including the united states and japan

taxation of asset income in the presence of a world securities market abstract this paper examines a capm model of world security prices in which governments recognize their ability to influence international security prices via their tax treatment of foreign and domestic investors in this model governments have the incentive to set tax rates such that investors tend to specialize in domestic securities and to restrict net capital flows between countries each country does this to increase the utility of domestic residents taking as given the tax policies of other governments but the net outcome is a reduction in world efficiency and likely a reduction in the utility of all investors

participation games market entry coordination and the beautiful blonde abstract we find the nash equilibria for monotone n player symmetric games where each player chooses whether to participate examples include market entry games coordination games and the bar room game depicted in the movie a beautiful mind the symmetric nash equilibrium involves excessive participation a common property resource problem if participants payoffs are decreasing in the number of participants and insufficient participation if payoffs are increasing with decreasing payoffs there can be many equilibria but with increasing payoffs there are only 3 some comparative static properties of changing one player s participation payoffs are counterintuitive especially with more than two players

labor income taxation and human capital accumulation abstract this paper provides alternative analytical results concerning the effect of labor income taxation on human capital accumulation with the tax revenues being consumed by the government and savings being negatively related to the labor tax rate an increase in the labor income tax rate reduces the incentive for human capital accumulation and thus decreases human capital with tax revenues being consumed by government and savings being positively related to the labor tax rate an increase in the tax rate increases the incentive for human capital accumulation and increases human capital with the tax revenues being used to compensate the individuals who pay the taxes an increase in the tax rate has no effect on human capital

a model of dynamic limit pricing with an application to the airline industry we develop a dynamic limit pricing model where an incumbent repeatedly signals information relevant to a potential entrant s expected profitability the model is tractable with a unique equilibriu

the role of obsolescence and inventory costs in providing commitment this paper modifies the cournot and stackelberg models to allow the firms to sell less than they have produced and to store the unsold portion of their output as inventory even if one of the firms can choose its output before the other if it is costless to carry unsold goods forward then the cournot outcome emerges we show however that costs of carrying the inventory forward endow the firms with a limited degree of commitment to sell what they have produced this partially restores the first mover advantage if the firms choose their outputs simultaneously the cournot outcome emerges and has locally consistent conjectures

output and welfare effects of optimal price discrimination in markets segmented at the initiative of the seller abstract this paper investigates the output and welfare effects of optimal price discrimination in markets segmented at the initiative of the seller a market with n segments and prices is compared to a noncooperative cournot nash oligopoly with n competitors output and welfare are greater than less than equal to cournot nash levels when the demand function is concave convex linear from below

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

contestable markets an uprising in the theory of industry structure presents a transcript of the presidential address delivered at the 94th meeting of the american economic association on december 29 1981 discussion of developments in the theory of industry structure welfare attributes of contestable markets behavior characteristics of oligopoly equilibrium intertemporal vulnerability to inefficient entry ebsco

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

how do incumbents respond to the threat of entry evidence from the major airlines this paper examines how incumbents respond to the threat of entry of competitors as distinguished from their response to competitors actual entry it uses a case study from the passenger airline industry specifically the evolution of southwest airlines route network to identify particular routes where the probability of future entry rises abruptly when southwest begins operating in airports on both sides of a route but not the route itself this dramatically raises the chance they will start flying that route in the near future we examine the pricing of the incumbents on threatened routes in the period surrounding such events we find that incumbents cut fares significantly when threatened by southwest s entry into their routes this is true even after controlling in several ways for airport specific operating costs the response of incumbents seems to be limited only to the threatened route itself and not to routes out of nearby competitor airports where southwest does not operate e g fares drop on routes from chicago midway but not chicago o hare the largest responses appear to be restricted to routes that were concentrated beforehand incumbents do experience short run increases in their passenger loads concurrent with these fare cuts this is consistent with theories implying incumbents will try to generate some longer term loyalty among current customers before the entry of a new competitor we examine evidence relating this demand building motive to frequent flyer programs and find suggestive evidence in favor of this notion there is only weak evidence that incumbents increase capacity on the routes

spillover effects and the terms of trade within a two country model this paper analyzes the long run interdependence of national fiscal policies through changes in the terms of trade and the real rates of interest between two countries the two commodity structure permits the analysis of fiscal interdependence even in the case of no capital mobility and hence more insight into welfare implications of the relationship between the degree of capital mobility and spillover effects will be obtained we shall also investigate welfare implications of import restriction or export promotion policies so as to produce favorable temporal and intertemporal terms of trade effects

new venture strategy and profitability a venture capitalist s assessment abstract this study uses theoretically justified criteria from the industrial organization io strategy literature and applies it to a new domain namely venture capitalists decision making specifically the study investigates the types of information venture capitalists utilize when evaluating new ventures and how venture capitalists use this information to assess likely new venture profitability in the interest of advancing our understanding of the decision making policies of venture capitalists this study addresses many of the limitations of previous research a review of io research suggests important relationships between a number of strategy variables and new venture profitability some of the relationships proposed by io strategy research are contingent in nature the strategy variables and their relationships with profitability are investigated in the domain of venture capitalists decision making individual and aggregate decision making analyses identified those strategy variables criteria venture capitalists utilize in assessing likely new venture profitability namely timing key success factor stability lead time competitive rivalry educational capability industry related competence timing key success factor stability interaction timing lead time interaction and timing educational capability interaction on average the most important criterion for venture capitalists in their assessment of profitability is industry related competence the second tier of importance is competitive rivalry timing and educational capability the third tier of importance is lead time key success factor stability and timing lead time interaction other interactions are less important therefore while venture capitalists use contingent decision policies main effects dominate if venture capitalists use a reported 8 to 12 minutes on average to evaluate a business plan sandberg 1986 then this study s findings may help the inexperienced venture capitalist allocate time towards assessing those attributes of primary importance although more complex relationships exist between the attributes the inexperienced venture capitalist can take comfort from this study s findings that main effects dominant amongst senior venture capitalists senior venture capitalists may take less comfort from their importance placed on main effects in light of research from io which suggests the importance of contingent relationships the results may also have practical application towards training how should venture capital firms train their new employees should venture capital firms rely solely on experienced venture capitalists lecturing the inexperienced on the criteria they use in assessing a new venture proposal like most decision makers venture capitalists have limited insight into their assessments and venture capital firms need to be aware of the gap between espoused policies and policies in use the information being taught needs to be supplemented with venture capitalists decision making research that investigates decision policies in use such as this study venture capitalist training could also involve experiential learning in conjunction with cognitive feedback about the decision policies used to accelerate the learning process experiential learning using cognitive feedback maximizes industry related learning while minimizing the cost of inexperienced decisions for the entrepreneur seeking capital this increased understanding of venture capitalists decision making may help them better target their business plans and presentations at those criteria venture capitalists find most critical to the profitability of a new venture

strategic deterrence of sequential entry into an industry industrial entry deterrence is typically studied in a setting where an established firm or firms confront and attempt to deter a single potential competitor during the evolution of most industries however a sequence of firms enters or attempts to enter at distinct points in time consideration of issues arising from sequential entry fundamentally alters the qualitative nature of the deterrence decision undertaken by incumbent firms within a sequential setting counterintuitive behavior may be observed specifically numerous government policies designed to decrease industrial concentration penalties for anticompetitive practices subsidization of entry consent decrees restructuring industries may have the opposite effect

strategic entry deterrence recent developments in the economics of industry this paper reviews the recent developments in the economics of industry with respect to strategic entry deterrence starting from bain s 1956 classical analysis a simple two stage game between an incumbent firm and a potential entrant is used to present the general structure of the entry deterrence problem commitments credible threat and sub game perfection are illustrated in this context the various strategic variables that an incumbent firm can use to bar entry are discussed the issue of whether a group of incumbents can noncooperatively deter entry is taken up and some empirical evidence is reviewed copyright 1989 by blackwell publishers ltd

entry industry growth and the microdynamics of industry supply entry is widely discussed but rarely subjected to empirical study this study develops a competitive theory of entry with primary focus on the relationship between entry and industry growth the main ingredients are adjustment costs to firms already in the industry and the distribution of fixed entry cost to potential entrants the theory suggests sufficient conditions under which the entry rate is an increasing convex function of the industry growth rate a regression model correcting for severe heteroscedasticity is applied to data from swedish manufacturing industries the results are consistent with the theoretical prediction for growth and other key variables expected to influence entry significantly

excess capacity and limit pricing an empirical test entry may be inhibited by expectations that incumbents have lower marginal costs incumbents may be able to use limit pricing or excess capacity to further this expectation we construct an empirical model of oligopoly capacity and pricing decisions and of entrant responses the results support the hypothesis that both lower prices and greater excess capacity inhibit entry they further support limit pricing but provide no evidence that oligopolies deliberately install excess capacity to deter entry the results suggest however that limit pricing firms may exploit the entry inhibiting effects of unintended excess capacity by raising their limit prices

prices prices and prices a study in the airline sector abstract this article creates and empirically analyzes a dynamic pricing framework the model includes the main theories on prices in the literature and dynamically analyzes how companies change their pricing policies according to different circumstances through the use of regressions the article shows the relative long and short term impact on pricing equations strategic versus operational matters and on production conditions versus demand perspectives in the setting of operational prices in addition it highlights how the proportions of these pricing perspectives change in the airline sector according to the effect of the environment on the configuration of the strategy determined by monthly and hourly seasonality and also according to the nature of this competitive strategy determined by the characteristics of the company and the destination airport the results confirm our framework and show how firms combine the different perspectives in their pricing strategies

the number of firms and production capacity in relation to market size many oligopoly theories predict a positive correlation between market size and the equilibrium number of firms and some also imply that competition is more intense in larger markets we test these predictions on a sample of driving schools in 250 swedish regional markets by estimating the relation between the number of firms production capacity and market size the number of firms increases less than proportionally with market size market size per capacity unit is smaller in large markets since firms produce a fairly homogenous good we argue that this is evidence that profits per capita is decreasing in market size

what is a barrier to entry the present article is an attempt to resolve the controversies concerning the concept of barriers to entry we begin by contrasting the definitions of an entry barrier proposed in the economics literature we then introduce a classification system to clear up the existing confusion and we employ it to assess the nature of the barriers posed by scale economies and sunk costs

industry differences in the persistence of firm specific returns some firms such as kellogg nestle hewlett packard and boeing have consistently earned significantly higher returns than their immediate competitors why do intraindustry rents persist for these firms competition typically erodes these rents as evidenced by the strong convergence of firm profitability to the industry mean illustrated in figure 1 i claim that the persistence of these firmspecific rents depends at least partly on industry economic structure similar to richard e caves and michael e porter s 1977 mobility barriers so the rents are more persistent in some industries than others in this paper i test which of the theoretical industry factors are significant to support my claim i also show that the persistence of abnormal returns differs widely and systematically across industries for example an industry with highly persistent profitability differences is the american automobile industry in the 1970 s as illustrated by figure 2 which graphs differences in returns on assets roa s over time throughout the 1970 s general motors maintained a persistent significant profitability advantage over ford while ford held a persistent advantage over chrysler this situation did change later but it is still true that during the 1970 s there was no apparent convergence of profitability differences among the big three auto makers a comparison of figures 1 and 2 suggests that the economy wide result of figure 1 is merely an average over very different industries with convergence rates ranging from almost zero as in automobiles in the 1970 s to very rapid my methods for estimating persistence of above average returns improve on previous studies in several ways first i only consider the persistence of returns around the industry mean the persistence of this intra industry or firm specific rent rather than total rent has not been previously investigated yet the factors affecting firm specific rents need not be the same as those affecting industry rents second i estimate persistence in several ways finally i use a wider range of explanatory variables than earlier studies this study is structured as follows section i explains the concept of persistent firmspecific rents later sections specify the empirical model and estimate persistence by industry section ii theoretically relate industry factors to these varying persistence estimates section iii discuss cross sectional regression estimates section iv and provide conclusions section v

defensive marketing strategies an equilibrium analysis based on decoupled response function models the entry of a new product attacker into a competitive market is likely to provoke responses from some or all of the existing products defenders this paper investigates the development of optimal defensive strategies based on an understanding of the possible reactions of all the defenders to an optimal attack following lane lane w j 1980 product differentiation in a market with endogenous sequential entry bell j econom 11 1 spring 237 260 we assume that n products each enter sequentially with perfect foresight on subsequent entry then based on new technology an unanticipated attacker enters the n defenders respond in price but not position according to lane s model once this equilibrium is obtained advertising and distribution response functions scale sales we show that under these decoupled response function models of advertising and distribution uniformly distributed tastes and nonincreasing market size the optimal defense for all existing brands is to decrease their respecti

market structure and multiple equilibria in airline markets we provide a practical method to estimate the payoff functions of players in complete information static discrete games with respect to the empirical literature on entry games originated by bresnahan and reiss 1990 and berry 1992 the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions we allow the effects that the entry of each individual airline has on the profits of its competitors its competitive effects to differ across airlines the identified features of the model are sets of parameters partial identification such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data we apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the u s airline industry we find evidence of heterogeneity across airlines in their profit functions the competitive effects of large airlines american delta united are different from those of low cost carriers and southwest also the competitive effect of an airline is increasing in its airport presence which is an important measure of observable heterogeneity in the airline industry then we develop a policy experiment to estimate the effect of repealing the wright amendment on competition in markets out of the dallas airports we find that repealing thewright amendment would increase the number of markets served out of dallas love

hubs and high fares dominance and market power in the u s airline industry this article estimates the importance of route and airport dominance in determining the degree of market power exercised by an airline the results indicate that an airline s share of passengers on a route and at the endpoint airports significantly influences its ability to mark up price above cost the high markups of a dominant airline however do not create much of an umbrella effect from which carriers with smaller operations in the same markets can benefit the article suggests a number of possible explanations for this asymmetry

preemption and rent equalization in the adoption of new technology we study the adoption of a new technology to illustrate the effects of preemption in games of timing we show that the threat of preemption equalizes rents in a duopoly but that this result does not extend to the general oligopoly game if the gain to preemption is sufficiently small then the optimal symmetric outcome which involves late adoption is an equilibrium this contrasts with reinganum s result that in precommitment equilibria there must be diffusion we develop a new and richer formalism for modeling games of timing which permits a continuoustime representation of the limit of discrete time mixed strategy equilibria

capital income taxation in a world economy a territorial system versus a residence system this paper investigates the effects of a tax reform of conversion from capital income to consumption taxes on capital accumulation in a two country model in the territorial system the tax reform will normally lead to a negative comovement between capital accumulation in two countries while in the residence system it will lead to a positive comovement copyright 1991 by royal economic society

food safety regulation an overview of contemporary issues abstract this article discusses a number of issues that are influencing the evolution of food safety regulation in developed and to a lesser extent developing countries whilst not definitive it aims to highlight those factors which are considered crucial to an understanding of contemporary food safety controls in both the public and private spheres these issues include criteria applied to assess the need justification for food safety regulation relationships between public and private food safety control systems alternative forms that public food safety regulation can take strategic responses to food safety regulation and the trade implications of national food safety controls the article serves as an introduction to these issues which are discussed at greater length in the other papers that make up this special issue of food policy

taxation of investment and savings in a world economy the equilibrium of capital and equilibrium market prices are derived for a world economy with a unified securities market mobile capital no uncertainty and varying tax rates on different sources of income in each country the paper then characterizes optimal tax rates for a small country in this setting focusing on the peculiar incentives created when the before tax rate of return differs among securities due to differences in their typical tax treatment copyright 1986 by american economic association

a dynamic model of entry and exit in a growing industry the potential demand in a new industry evolves over time demand is initially low but advertising by the industry s early entrants can speed up demand growth however there is intrinsic uncertainty of the demand level in each period and uncertainty of the demand evolution path which can be affected by the underlying economic environment we construct a dynamic model that features the stochastically and endogenously expanding demand of a new industry and we investigate the optimal entry and exit behavior of firms as the industry evolves we find that firms incentive to enter early depends critically on the cost that early entrants have to pay in developing the market when the cost is high and the benefit spills over to potential entrants firms have an incentive to wait and the probability of entry can increase with the number of incumbents under certain circumstances firms entry strategy is also influenced by the transition of economic states firms are more likely to enter under a state that shows the prospect of demand taking off soon we also find that in the early stage of an industry higher demand uncertainty can induce faster entry

entrepreneurship and growth creative and equilibrating events this paper investigates the constraints on the growth of creative and equilibrating entrepreneurial events the empirical material is drawn from the greek economy it was observed that the two different levels of entrepreneurial events involve constraints of different kinds this paper analyses those constraints and their significance for entrepreneurial growth

prices capacity and the entry decision a conditional logit analysis an understanding of what potential entrants consider in reaching an entry decision is important in assessing the validity of some rather fundamental hypotheses concerning the behavior of firms faced with an entry threat the reason is that such hypotheses are based on implicit assumptions concerning what influences the decisions of potential entrants if for example established firms deter entry by adjusting their prices as suggested by the limit pricing hypothesis then it must be true that prices in fact influence potential entrants 1 similarly if firms build capacity to deter entry as suggested recently by spence 8 then it must be true that observed capacity in fact influences the entry decision hence an examination of whether these considerations are important to potential entrants can be interpreted as a test of a necessary though not sufficient condition for the existence of these types of behavior on the part of established firms despite the significance of this question as a foundation upon which a number of important hypotheses concerning firm behavior rest few studies have attempted to estimate the relationship between the relevant market characteristics and the behavior of identifiable potential entrants the reasons for this are not hard to isolate price data of the type required is not generally available for most industries leaving untested the frequently debated relationship between pre entry market price and the entry decision also in the interindustry context in which empirical resesarch is usually conducted it is virtually impossible to account systematically for the differing levels of knowledge and experience among potential entrants and such differences may significantly influence the relative attractiveness of markets for entry thus any attempt to estimate the relationship between market characteristics and the entry decisions of individual potential entrants in the interindustry context will founder on the inability to account for the influence of knowledge and experience on the attractiveness of the potential entrant s choices this paper circumvents these problems by examining the relationship between market

tax reform and external balance abstract this paper examines the effect of a transformation from capital taxation to consumption in an open economy with the residential capital tax rate being endogenous an increase in the domestic consumption tax rate decreases the interest rate increases capital accumulation and increases the domestic country s net foreign asset holdings and trade surplus with the territorial capital tax rate being endogenous an increase in the domestic consumption tax rate may either increase or decrease the domestic country s interest rate net foreign asset holdings and trade surplus depending on the interest elasticity of capital demand