econometric estimation of foresight tax policy and investment in the united states we develop a method for measuring the foresight agents have we first dichotomize an agent s information at current date t into knowledge up to date t 1 f and expectations after t 1 f we then form a residual based test statistic that allows us to compare prediction errors for econometric models based on different values of f we illustrate the method examining investment around tax reforms to measure the foresight firms have about tax policy in this illustration current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes

capital utilization and capital accumulation theory and evidence a firm may acquire additional capital input by purchasing new capital or by increasing the utilization of its current capital the margin between capital accumulation and capital utilization is studied in a model of dynamic factor demand where the firm chooses capital labour and their rates of utilization a direct measure of capital utilization the work week of capital is incorporated into the theory and estimates the estimates imply that capital stock is costly to adjust while the work week of capital is essentially costless to adjust the estimated response of the capital stock to changes in its price and in the required rate of return is more rapid than found in other estimates

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

tying as a response to demand uncertainty this article examines requirements tying of a competitively supplied good to a monopolized good it expands the set of market conditions in which this instrument is known to be profitable with heterogeneous privately informed buyers a firm can profit by tying two goods even when demands for the goods are price independent providing the demands are stochastically dependent we investigate the profitability of tying as a response to stochastic demand as well as the effects of tying on prices and the extent of the market served

backward stealing and forward manipulation in the wto abstract motivated by the structure of wto negotiations we analyze a bargaining environment in which negotiations proceed bilaterally and sequentially under the most favored nation mfn principle we identify backward stealing and forward manipulation problems that arise when governments bargain under the mfn principle in a sequential fashion we show that these problems impede governments from achieving the multilateral efficiency frontier unless further rules of negotiation are imposed we identify the wto nullification or impairment and renegotiation provisions and its reciprocity norm as rules that are capable of providing solutions to these problems in this way we suggest that wto rules can facilitate the negotiation of efficient multilateral trade agreements in a world in which the addition of new and economically significant countries to the world trading system is an ongoing process

time to build and aggregate fluctuations some new evidence this paper presents maximum likelihood estimates and tests of a model similar to one kydland and prescott 1982 suggested for this purpose it derives equilibrium laws of motion for a set of aggregate variables as functions of the model s parameters and the innovation to the technology shock the paper shows that a single unobservable index can explain the variability in the observed series but identifying the single index with the innovation to the technology shock implies that per capita hours is not well explained it also shows that time separable preferences with respect to leisure are consistent with the data copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

regional policy and investment behaviour the case of greece 1971 1982 louri h 1989 regional policy and investment behaviour the case of greece 1971 1982 reg studies 23 231 239 the present paper reports an attempt to evaluate the relative effects of regional policy on investment in greek manufacturing industry during 1971 82 a generalized neoclassical model of investment behaviour is used allowing for separate estimates of the effects of different policy instruments both regional investment incentives and infrastructure expenditures were found to exert a significant influence on capital formation simulations with alternative policy combinations showed that if incentives were accompanied by more equally distributed infrastructure expenditures the cost of the policy would be the same but its effects would be enhanced an equal amount of investment would be created with a fairer regional distribution louri h 1989 la politique regionale et le comportement d investissement etude de cas de la grece de 1971 a 1982 reg studies 23 231 239 cet article fait un comp

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

nonlinear pricing and exclusion ii must stock products dominant firms often are unavoidable trading partners buyers may consider switching a fraction of their requirements to rival products but that fraction is highly uncertain in rapidly evolving industries nonlinear pricing serves to adjust the competitive pressure placed on rival firms depending on the joint distribution of the buyer willingness to pay for the rival s good and the share of contestable demand concave price quantity schedules erect barriers to entry convex parts in schedules introduce barriers to expansion dominant firms use all units discounts to create high entry barriers for rival firms with intermediate levels of contestable demand

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

small sample bias and adjustment costs the response of most stock variables e g capital housing consumer durables and prices to exogenous impulses involves a dynamic or short run reaction and a target or long run reaction the difference between these two is typically attributed to some form of adjustment cost in this paper i argue that the small sample problems of cointegrating procedures used to estimate the long run component are particularly severe when adjustment costs are important more precisely elasticity estimates will tend to be biased downward i illustrate the empirical relevance of this by showing that the target elasticity of capital with respect to its cost is severely downward biased when estimated with conventional ols cointegration procedures once this is corrected the elasticity of the u s capital output ratio to the cost of capital is found to be large and close to minus one copyright 1994 by mit press

exclusionary pricing in markets with interdependent demands in this paper i use a simple model to study the competitive effects of exclusionary pricing involving two markets related by a positive demand externality it is shown that below cost pricing on one of these markets can allow an incumbent firm to exclude from both markets a more efficient rival which does not have a customer base yet however when exclusion occurs it is always socially optimal in addition under some circumstances there is inefficient entry the entrant wins both markets while the social optimum would require the incumbent to win them

a dynamic quantity adjustment process in a small open economy and welfare effects of tariff changes abstract considered an n good small open economy where the technology is strictly convex and ad valorem tariffs are imposed in this world it is known that the tariff utility relationship may be perverse the fact is known as the vanek bhagwati paradox the source of the perversity is found in aggregate income effects the present paper shows that d stability of our dynamic system implies non perverse aggregate income effects and hence the non perverse tariff utility relationship

exclusionary vertical contracts and product market competition this article considers whether a monopolist is able to deter more efficient entrants through contracting with buyers in the antitrust literature the chicago school s stand is that such contracts cannot be anticompetitive hence vertical contracts should be accorded per se legal status in a four stage game with the following features 1 the incumbent enjoys a first mover advantage 2 the entrant must incur some sunk cost to enter the market and 3 entry is uncertain the author shows that vertical contracts can be anticompetitive if there exists product market competition thus the author advocates caution in treating all contracts as per se legal a three factor repeated measures experiment tested the effect of leadership style charismatic structuring and considerate on performance improvement on a manufacturing task over four trials findings from a repeated measures multivariate analysis of variance indicated that individual exposed to considerate leadership had superior initial performance but that this difference faded over time further analysis indicated that self efficacy fully mediated the relationship between leadership style and performance copyright 1999 by university of chicago press

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

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

golden cages for showy birds optimal switching costs in labor contracts under what circumstances do workers sign contracts with high quitting penalties our answer points to market transparency when the worker s performance is privately observed by the incumbent 4rm alternative employers face an adverse selection problem as a result e7cient separations can only take place through involuntary layo8s and there is no role for quitting fees in contrast when performance is public quitting fees are useful devices to appropriate the surplus from workers reallocation separations are amicable and take the form of quitting after downwardly renegotiating the fees qualitative features of contracts are independent of the distribution of ex post bargaining power the impact of switching costs on total welfare and its distribution depends on the degree of market transparency and the ex ante distribution of market power c

loyalty discounts and price cost tests abstract we analyze by means of a formal economic model the use of the discount attribution test to assess the competitive effects of loyalty discounts the discount attribution test is a variant of the price cost test where the discount is attributed only to the share of total demand that is regarded as effectively contestable in the model a dominant firm enjoys a competitive advantage over its rivals and uses market share discounts to boost the demand for its own products in this framework we show that the attribution test is misleading or at best completely uninformative our results cast doubts on the applicability of price cost tests to loyalty discount cases

exclusive dealing investment promotion may facilitate inefficient foreclosure this paper studies a model whereby exclusive dealing ed can both promote investment and foreclose a more efficient supplier since ed promotes the incumbent seller s investment the seller and the buyer realize a greater surplus from bilateral trade under exclusivity hence the parties involved may sign an ed contract that excludes a more efficient entrant in circumstances where ed would not arise absent investment the paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ed

on the dampening of competition effect of exclusive dealing the authors compare and contrast the profit and welfare effects of exclusive dealing sales through a common retailer and vertical integration as did y j lin 1990 the authors find that imperfectly competitive manufacturers prefer to impose exclusive dealing on their retailers unlike lin the authors find that welfare is higher under exclusive dealing than when products are sold through a common retailer this finding suggests a new interpretation of the standard stations v united states 1949 antitrust case copyright 1993 by blackwell publishing ltd

price leadership and dynamic aspects of oligopoly in u s manufacturing this study which covers a sample of 314 four digit industries taken from an exhaustive set of 450 four digit industries shows that increases in concentration associated with rising productivity occur mainly in low concentration industries while decreases in concentration associated with rising productivity occur mainly in high concentration industries the empirical results of this study indirectly lend support to a plausible hypothesis that a small group of firms makes a big impact on the productivity of an initially unconcentrated industry and thereby concentrates it later the small firms imitate the now big firms and concentration goes down while productivity keeps rising

presidential address antitrust restrictions on single firm strategies this article offers an overview of selected developments in the law and economics of antitrust regulation of single firm strategies the strategy generating the most cases historically is resale price maintenance here the law has moved sharply in both canada and the u s towards more solid economic foundations yet a gap between the law and economics remains the economics of resale price maintenance is reviewed within a framework that is much simpler and more general than the existing literature the law on a second strategy predatory pricing represents in my view a success story for the influence of economic theory in spite of the absence of a single accepted theory of predatory pricing the remaining single firm strategies are concerned largely with the exclusion by a dominant firm of rivals from a market i review with application to cases the two most basic questions concerning exclusionary strategies are exclusionary anticompetitive contracts ever entered into voluntarily by market participants on the other hand is complete or substantial foreclosure of a market through exclusionary strategies necessarily anticompetitive cette allocution presidentielle a l association canadienne d economique presente une vue d ensemble des developpements dans le droit et l economie de la reglementation antitrust sur les strategies d une firme unique la loi sur la strategie qui genere historiquement le plus de cas le maintien du prix de revente a change dramatiquement au canada et aux etats unis et derive vers une politique qui a des assises economiques solides mais il reste un ecart entre le droit et l economie on reexamine l economie du maintien du prix de revente a l aide d un cadre d analyse qui est a la fois plus simple et plus general que ce qui existe dans la litterature specialisee la loi pour ce qui est d une seconde strategie prix d eviction est a mon avis une grande reussite pour la science economique malgre l absence d une seule theorie du prix d eviction generalement acceptee un troisieme ensemble de strategies concerne l exclusion de ses rivaux d un marche par la firme dominante l auteur reexamine avec un recours extensif aux cas les deux questions de base pour ce qui est des strategies d exclusion est ce que les participants sur un marche entrent jamais volontairement dans un arrangement contractuel qui exclut et est anticoncurrentiel d autre part est ce que la saisie complete ou substantielle d un marche par des man uvres d exclusion est necessairement anticoncurrentielle

on directions of commodity tax reform in the presence of a given non linear income tax schedule this paper analyzes directions of commodity tax reform in the presence of a given possibly nonlinear income tax schedule two prominent policy prescriptions are reexamined first the welfare effect of a proportional reduction of all commodity price distortions turns out to be sensitive to nonlinearity secondly the welfare implications of tax changes based on substitutability or complementarity between labor and commodities remain valid in the presence of nonlinearity within the scope of the model the authors also discuss the question raised in the classic of w j corlett and d c hague 1953 which commodity taxes should supplement the income tax

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

naked exclusion efficient breach and downstream competition previous papers by eric b rasmusen j mark ramseyer and john s wiley jr 1991 and ilya r segal and michael d whinston 2000 argue that exclusive contracts can inefficiently deter entry in the presence of scale economies and multiple buyers we first show that these results no longer hold when buyers are final consumers who can breach these contracts and pay expectation damages we then show however that exclusive contracts can inefficiently deter entry if buyers are downstream competitors even in the absence of scale economies and even if breach is possible

exclusive quality exclusive quality in the case of vertically differentiated products bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high quality rival indeed because of differentiation the incumbent s inferior product is not eliminated upon entry due to the resulting competitive pressure a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent s monopoly rents thus in equilibrium the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion this is true under linear pricing for intermediate levels of entry costs and with two part tariffs even in the absence of entry costs copyright 2010 the author the journal of industrial economics 2010 blackwell publishing ltd and the editorial board of the journal of industrial economics

factores socio politicos y judiciales como determinantes de la inversion privada en latinoamerica this paper studies the relationship between social political and judicial factors and private investment in latin america during 1995 2003 by means of panel data analysis the empirical evidence suggests that investment rate differentials not only among latin american countries but also with developed countries might have been caused by these factors countries with a neutral and strong judicial system might see their investment rates increase by as much as 2 29 percentage points regarding the social political factor it is worth to emphasize that significant improvement in political institutions control on corruption and better access to political and civil rights could cause the investment rate to increase by 1 84 percentage points at last if latin american countries want to attract new investments increase their economic growth possibilities and improve their population standard of living their governments must start working on the strengthening and creation of political institutions that permit to abolish or at least diminish corruption levels civil rights repression the loss of political rights and on enhancing the judicial system

the british electricity experiment the privatization of the electricity supply industry esi in britain which began 1990 is in itself an unremarkable event much of the esi is privately owned in several european countries and in the united states and the u k privatization program has embraced utilities since 1984 when british telecom was privatized the thing that is remarkable about recent policy toward the industry is the radical nature of the regulatory reform accompanying privatization a vertically integrated administered generation and transmission structure was replaced overnight on march 31 1990 by one that is deintegrated and market based generation and transmission have been separated and there has been an attempt to establish competition in generation a number of countries have been moving gradually in the direction of encouraging competition but nowhere else have such dramatic changes been implemented so quickly

welfare effects of changing commodity tax rates toward uniformity abstract this paper presents a theory of tax reform that is applicable to a many good economy where i the initial tax structure is arbitrarily given ii no lump sum tax exists and iii the initial tax revenue must be maintained after the reform sufficient conditions are established under which tax changes definitely result in increases in welfare they indicate that in a wide class of situations the uniform tax structure can be a useful intermediate target on the way to optimum

explaining investment dynamics in u s manufacturing a generalized s s approach we are grateful to olivier blanchard whitney newey james stock an editor three anonymousreferees and seminar participants at brown cepr champoussin chicago columbia econometric society meetings caracas and tokyo efcc harvard impa lse nber princeton rochester site toronto u de chile and yale for their comments financial support to caballero from the national science and sloan foundations and to engel from fondecyt grant 195 510 and the mellon foundation grant 9608 is gratefully acknowledged 2since plants entry is excluded from their sample these statistics are likely to represent lowerbounds on the degree of lumpiness in plants investment patterns 3we use the word project to emphasize the fact that the actual implementation of a projectmay cover more than a year observation realistic time to build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature 4 see chirinko 1994 for a survey of the empirical investment literature

contracts and externalities how things fall apart a single principal interacts with several agents offering them contracts the crucial assumption of this paper is that the outside option payoffs of the agents depend positively on how many uncontracted or free agents there are we study how such a principal unwelcome though he may be approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out two variants are considered when the principal cannot re approach agents there is a unique equilibrium in which contract provision is split up into two phases in phase 1 simultaneousoffers at good though varying terms are made to a number of agents in phase 2 offers must be made sequentially and their values are discontinuously lower they are close to the very lowest of all the outside options when the principal can repeatedly approach the same agent there is a multiplicity of equilibria in some of these the agents have the power to force delay they can hold off the principal s overtures temporarily but they must succumb in finite time in both models despite beingable to coordinate their actions agents cannot resist an invasion by the principal and hold to their best payoff it is in this sense that things eventually fall apart

naked exclusion an experimental study of contracts with externalities this paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts we use the strategic environment described by rasmusen ramseyer and wiley 1991 and segal and whinston 2000 where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent when discrimination is impossible the game resembles a stag hunt coordination game in which the buyers payoffs are endogenously chosen by the incumbent seller exclusion occurs when the buyers fail to coordinate on their preferred equilibrium two way non binding pre play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller when discrimination and communication are possible the exclusion rate rises divide and conquer strategies are observed more frequently when buyers can communicate with each other exclusion rates are significantly higher when the buyers payoffs are endogenously chosen rather than exogenously given finally secret offers are shown to decrease the incumbent s power to profitably exclude

contractual signaling relationship specific investment and exclusive agreements i analyze a model of hold up with asymmetric information at the contracting stage the asymmetry of information concerns the value of trade with external parties i show that contractual signaling and efficiency of investment can conflict if only quantity is contractible this conflict generates inefficient equilibria in terms of investment contracting on exclusivity in addition to quantity resolves the conflict and consequently eliminates the inefficiency of investment

the theory of reform and indian indirect taxes abstract given a set of value judgements an initial state and a model of the economy one can ask whether some feasible tax change would increase welfare we do this by defining the marginal cost in terms of welfare of raising an extra rupee from the i th good the inverse optimum problem is the calculation of non negative welfare weights on households which imply that the initial state is optimum if no such welfare weights exist then a pareto improvement is possible we illustrate the concepts and results using data from the indian economy for 1979 1980 directions of tax reform for a number of specific social welfare functions and for pareto improvements are presented

tariff reform in a small open multi household economy with domestic distortions and nontraded goods we examine tariff reforms in the context of a small open economy and simultaneously deal with three extensions of the current literature nonremovable domestic tax distortions nontraded goods and many households using the new concepts of a constant utility tax adjusted balance of trade function and a constant utility productivity improvement in tariffs necessary and sufficient conditions for the existence of strict pareto improving tariff and transfer reforms are established we also consider directional tariff reforms such as movements towards the world price vector proportional reductions and reductions of extreme tariffs also discussed is the role of normality of household preferences most of the literature on piecemeal tariff reform in small open economies has been concerned with models in which there is a single household and in which domestic commodity taxes are absent an exception to this is lloyd 1974 who allows the existence of domestic commodity taxes but maintains the assumption of a single household nor does he consider nontraded commodities other than nontaxed fixed factors others such as foster and sonnenschein 1970 bertrand and vanek 1964 bruno 1972 hatta 1977b and fukushima 1979 deal with single household economies with no domestic distortions the purpose of this paper is to consider the question of tariff reform in a very general model of a small open economy the generality of the model allows us to simultaneously deal with three extensions of the current literature the first extension is to allow for nonremovable domestic tax distortions the second is to incorporate nontraded commodities into the model and the third is to explicitly consider a multi household economy by dealing simultaneously with these extensions to the model we are able to provide a general treatment of tariff reform in small open economies and to obtain new and more general results since domestic tax distortions are prevalent in the real world it is important that they be taken into account in any analysis of tariff reform specifically it is of considerable theoretical and policy interest to determine whether the piecemeal tariff policy prescriptions that have been derived in the literature for models

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

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

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

econometric estimation of foresight tax policy and investment in the u s we develop a method for measuring the foresight agents have we first dichotomize an agent s information at current date t into knowledge up to date t 1 f and expectations after t 1 f we then form a residual based test statistic that allows us to compare prediction errors for econometric models based on different values of f we illustrate the method examining investment around tax reforms to measure the foresight firms have about tax policy in this illustration current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes

exclusive dealing as a barrier to entry evidence from automobiles exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market we ask whether such contracts may act as an entry barrier and provide an empirical analysis of the european car market we first estimate a demand model with product and spatial differentiation and quantify consumers valuations for dealer proximity and dealer exclusivity we then perform policy counterfactuals to assess the profit incentives and possible entry deterring effects of exclusive dealing we find that there are no unilateral incentives to maintain exclusive dealing but there is a collective incentive for the industry as a whole furthermore a ban on exclusive dealing would raise the smaller entrants market share but more importantly consumers would gain not so much because of increased price competition but rather because of the increased spatial availability which compensates for the demand inefficiency from a loss of dealer exclusivity

a pareto improving commodity tax reform under a smooth nonlinear income tax abstract this paper analyzes the welfare effects of commodity tax reform in an economy with a nonlinear income tax and linear commodity taxes the main result is that we can find a tax reform program that improves every consumer s utility in the pareto sense unless efficiency loss in the economy is minimized under incentive compatibility the tax reform rule proposed here applies to a broad class of economies with arbitrary smooth income taxes the expenditure function approach makes our analyses clear and simple some intuition is presented on the role of commodity taxation in a mixed tax economy the relationship with previous work in optimal tax and tax reform theory is also discussed we extend our result to the case where the government spends tax revenue to provide a public good

the commitment value of contracts under dynamic renegotiation we examine why different renegotiation processes can lead to opposite results regarding the commitment value of third party contracts in the presence of asymmetric information our main result is that a contract loses all strategic value if renegotiation is allowed during the production stage rather than only before production begins this result casts serious doubt on the relevance of previous findings which emphasize how contracts can have commitment value even in the presence of renegotiation our analysis can also be used to understand the differences between many of the results in the renegotiation literature

extracting interaction created surplus abstract this paper demonstrates that the economic surplus which agents produce in bilateral interactions is extractable by an outside party having sufficient initial resources the third party achieves this outcome using a class of exclusive interaction contracts a basic extractability result is shown to be robust to several extensions competition among outside parties multiplicity of interacting agents and a dynamic extension with repeated opportunities to interact finally some connections with the economic intermediation literature are drawn journal of economic literature classification number c79

inventorship and authorship as attribution rights an enquiry into the economics of scientific credit abstract authorship and inventorship are attribution rights upon which individual scientists build their reputation and career social and legal norms concerning their distribution within research teams are currently criticized for failing to inform third parties on individual contributions we examine the case of teams engaged in the double disclosure of their research results through both publications and patents and model the negotiation process taking place between junior or female team members and the senior male ones we suggest that the former may give up inventorship in order to secure authorship even when entitled to the both based on a sample of 680 patent publication pairs related sets of patents and publications we show that very frequently one or more authors of a publication do not appear as inventors of a related patent this is less likely to happen for first and last authors which is in accordance both with our model and the prevailing legal norms on inventorship however the probability of exclusion from inventorship also declines with seniority and increases for women which is compatible with our model only

customer coalitions monopoly price discrimination and generic entry deterrence abstract this paper analyzes the interplay between a profit maximizing monopolist and a set of consumers who are able to form coalitions that bargain with the monopolist and or integrate into production we show that the monopolist will deter the formation of these countervailing coalitions through strategic selection of generic limit price offers to each consumer these limit prices are derived as subgame perfect equilibria in two alternative models of customer monopoly interplay in both models price discrimination emerges in environments wherein it has previously been considered unprofitable welfare analysis of the equilibria demonstrates the procompetitive effects of potential customer coalitions and generally provides an efficiency based motivation for a government ban on price discrimination

naked exclusion comment the ability of an incumbent firm to deter entry by writing exclusionary contracts with customers has been a subject of contention in the antitrust literature the courts concern with such exclusionary contracts has been challenged by those who argue that an incumbent faced with buyers whose interest is to promote entry and competition would have to pay buyers more for the inclusion of exclusionary provisions than it could possibly gain from exclusion in a provocative article eric b rasmusen et al 1991 henceforth rrw have argued that an incumbent may in fact be able to exclude rivals profitably using such contractual provisions because it can exploit buyers lack of coordination in essence if buyers expect other buyers to sign such provisions then they may see little reason not to do so themselves the rrw argument is potentially an important one because most alleged instances of entry deterrence through exclusionary contracts with customers occur in situations with multiple buyers unfortunately however rrw s two main results contain errors in this note we reconsider the rrw model providing correct characterizations of the likelihood and cost of exclusion for an incumbent firm our results indicate that while the intuition suggested by rrw is valid the equilibrium likelihood and cost of exclusion differ from what rrw derive moreover our analysis illuminates some further aspects of exclusionary contracting with multiple buyers among these issues we focus on how an incumbent can use discriminatory offers to exploit the externalities that exist among buyers in the provision of competition in section i we review the basic assumptions of the rrw model in sections ii and iii we then consider in turn the cases of simultaneous and sequential offers studied by rrw for the simultaneous model we distinguish between settings in which the incumbent can and cannot discriminate in its offers to different buyers this distinction is the source of the problem in rrw s analysis their simultaneous offer model assumes no discrimination but the proof of their proposition 2 assumes at times that discrimination is feasible we show that absent the ability to discriminate the incumbent can exclude profitably only when buyers fail to coordinate on their most preferred continuation equilibrium in contrast we show that when discrimination is possible the incumbent need not rely on a lack of buyer coordination to segal department of economics landau building stanford university stanford ca 94305 e mail ilya segal stanford edu whinston department of economics northwestern university 2003 sheridan road evanston il 60208 e mail mwhinston nwu edu we thank eric rasmusen john wiley and participants in the berkeley stanford iofest the university of copenhagen vertical restraints conference and a seminar at the antitrust division of the u s department of justice for helpful comments we thank federico echenique for excellent research assistance 1 for example a recent department of justice investigation concerned the use of exclusive contracts by the leading provider of computerized ticketing services ticketmaster most major cities have several large concert sports venues in many cities ticketmaster has exclusive contracts with a very large share of these venues 2 the other leading response to the argument that contracts with buyers cannot be a profitable method of exclusion is given in philippe aghion and patrick bolton 1987 section i one factor limiting the applicability of the aghion and bolton theory however is that it involves partial exclusion the contracts signed are not fully exclusionary they involve finite stipulated damages and the profitability of the strategy arises from extracting rents from an entrant when entry occurs indeed in the aghion and bolton model contracts that fully exclude offer no benefits over writing no contract at all in section iii of their paper aghion and bolton also discuss a two buyer version of their model in which externalities arise across buyers in contrast to the analysis here and in rrw they allow the incumbent to make an offer to a buyer i that is conditional on the acceptance decision of the other buyer 3 r innes and r j sexton 1994 also discuss the use of discriminatory offers in the context of a model in which buyers can form coalitions with the entrant

the strategic nature of advertising in segmented markets we develop a simple model in which firm specific advertising has cooperative and predatory effects our model is set in a static market where firms are naturally segmented into two distinct submarkets several large firms located in the core with small firms operating as a fringe we test the net effect of opposing market size cooperative and market share predatory effects of both fringe and core firm advertising on the advertising decisions of large firms in several us consumer industries empirically fringe firm advertising leads to an increase in advertising efforts by large firms implying strategic complementarity on the other hand increased advertising by core firms in an industry decreases advertising expenditures of other core firms indicating they are strategic substitutes our findings imply that equilibrium levels of advertising can be greater with asymmetric rather than symmetric strategic interactions

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

on the economic efficiency of liquidated damages abstract recently aghion and bolton american economic review 1987 77 388 401 have shown that liquidated damages can serve as a barrier to entry and may therefore be socially harmful in this paper i show that liquidated damages remain excessive and continue to serve as a barrier to entry even in the presence of relationship specific investment but may nevertheless have an overall positive effect on welfare

interest rates and investment spending some empirical evidence for postwar u s producer equipment 1947 1980 the empirical evidence on the effect of interest rates on aggregate investment behavior is ambiguous the early neoclassical models of investment e g hall and jorgenson 1967 jorgenson and stephenson 1967 and the putty clay extensions e g bischoff 1969 1971 imposed various nonlinear restrictions on demand shifters and the user cost of capital some studies use the nominal interest rate in constructing user cost whereas others use a proxy for the real rate given these restrictions and different definitions of user cost of capital it is difficult to distinguish the interest rate effect nominal or real from other effects on investment behavior moreover some writers e g eisner and nadiri 1968 eisner 1978 clark 1979 concluded that interest rates are not empirically relevant the latter authors empirical findings point to the accelerator effect to be the most critical determinant of investment spending this paper explores the dynamic effect of interest rates on investment spending utilizing vector autoregressions nominal interest rate innovations have a strong and persistent effect on investment overshadowing animal spirit or own investment innovations and gnp innovations this result is robust to different ordering of the contemporary innovations by imposing cross equation restrictions we test the fama litterman weiss hypothesis that nominal yields affect investment since they provide information on future gnp this hypothesis cannot be rejected at high significant levels the strong and persistent nominal interest rate effect on investment is eliminated when we include a rational expectations predictor of future gnp in the var system the results therefore support the accelerator model of investment we acknowledge financial assistance from nsf grant no ses 84 11396 and columbia business school we are indebted to joe altonji robert b litterman laurence weiss james poturba and an anonymous referee for their valuable comments we would also like to thank participants at workshops at columbia minnesota princeton cuny nyu queens carleton and montreal for helpful suggestions

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

the rise of economics in competition policy a canadian perspective competition policy in canada and elsewhere has changed remarkably over the last 50 yearsin large measure due to advances in economics in this article we trace the impact of developments in industrial organization on the three central areas of competition policy cartels single firm conduct and mergers we focus on canadian competition policy but draw comparisons with developments in the united states and europe

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

the timing of mergers along the production chain capital structure and risk dynamics abstract i demonstrate that the timing of vertical mergers is generally dependent on industry characteristics my predictions are consistent with empirically observed patterns of vertical mergers i show that merger activity during economic upturns tends to be motivated by operating efficiencies while merger activity during economic downturns tends to occur as a means of keeping production chain operational mergers allow firms to capture synergies and improve efficiencies in order to survive economic contractions the pricing framework implies that a vertical merger decision usually reduces risk during two different economic states

eliminating the market for secondhand goods an alternative explanation for leasing there are a number of prominent specific instances in which a durable goods manufacturer with significant market power employed a lease only policy i united shoe in the market for shoe machinery ii ibm in the market for computers and iii xerox in the market for copiers the obvious question that arises is why would such a firm prefer leasing over selling in this article i argue that one role of the lease only policy was to eliminate the market for secondhand goods the article formally demonstrates the argument discusses the relationship between this article and earlier literature on secondhand markets and discusses the implications for antitrust policy

buyer power and intrabrand coordination we analyze the competitive effects of vertical contracts in a contracting situation where rival retailers offer contracts to a manufacturer in contrast to bernheim and whinston 1998 who study the situation in which competing manufacturers offer contracts to a common retailer we find that two part tariffs even if contingent on exclusivity or not do not suffice to implement the monopolyoutcome richer arrangements including e g conditional fixed fees and upfront payments are thus required to internalize all contracting externalities the welfare implications are ambiguous on the one hand richer contracts ensure that no efficient retailer is excluded on the other hand they allow firms to maintain monopoly prices despite intrabrand competition simulations suggest that the latter effect may be more significant

strategic ex ante contracts rent extraction and opportunity costs this article cosiders the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers the seller s optimal strategic ex ante contract more accurately reflects joint opportunity costs of the seller and the contracted buyer and therefore extracts more rent from the entrant moreover this ex ante contract mitigates the seller s ex post rent seeking vis a vis the contracted buyer accordingly it may create more social welfare than the absence of ex ante contracts depending upon the contracted buyer s financial constraint and the distributions of trade surplus implementation of the optimal strategic ex ante contract and policy implications are discussed

the dampening of competition effect of exclusive dealing using the dampening of competition approach to understanding vertical relationships this paper shows that in the absence of intrabrand retailer competition firms earn greater profits using exclusive dealing the paper explains the frequent simultaneous appearance of exclusive dealing and exclusive territoriality the results are used to analyze the famous 1949 standard stations case the author concludes that the 1949 court did the right thing for a wrong reason copyright 1990 by blackwell publishing ltd

on the hatta normality condition and tax reforms abstract the role of the hatta normality condition in the tax reform literature is discussed it is shown that in a one consumer economy the hatta normality condition only pertains to the directions of welfare improving tax reforms but has no role in determining the existence of such reforms in a many consumer economy the hatta normality condition is shown to affect both the existence and directions of strict pareto improving tax reforms it is also shown that the hatta normality condition can be used to indicate optimality or suboptimality of the economy s initial choice of lump sum transfers

exclusive contracts and market dominance we propose a new theory of exclusive dealing the theory is based on the assumption that a dominant firm has a competitive advantage over its rivals and that the buyers willingness to pay for the product is private information in this setting the dominant firm can impose contractual restrictions on buyers without necessarily compensating them implying that exclusive dealing contracts can be both profitable and anticompetitive we discuss the general implications of the theory for competition policy and illustrate by examples its applicability to antitrust cases jel d21 d43 d82 d86 k21 l13 l40