a contractual remedy to premature innovation the vertical integration of brand name specific research is there any private contractual mechanism which can reduce premature innovation vertical integration of inventors and manufacturers is shown to be an answer so is exclusive dealing between inventors and manufacturers the prospect of getting ahead of other manufacturers and the fear of being left behind would induce a manufacturer to contract for an inventor s output inventors assured of markets for their results can focus more on the quality than on the completion dates of their work the paper examines contractual remedies for premature innovation consistent with the idea of competition the analysis develops from the conventional rushing model first it is shown that self interest of consumers manufacturers and inventors contradicts the intrinsic consequences of the rushing model correction requires exclusive commitments by manufacturers to the innovating results of winning inventors second it is hypothesized that vertical integration of inventors with production facilities of manufacturers is a form of prior commitment discouraging premature innovation viewed this way an entry barrier raised by brand name advertising may not be entirely undesirable

simultaneous clearing of energy and reserves in multi area markets under mixed pricing rules the integration of the spot electricity markets in europe shall lead to multi area power exchanges that will substitute the local markets in such scheme market prices are affected by physical e g network constraints yet they should sometimes follow regulatory policy rules which do not necessarily reflect or depend on physical characteristics in some cases complex pricing rules should be implemented which impose price discrimination for supply and demand entities within the same area the methodology presented in this paper enables the balancing of supply and demand in a multi area market considering energy and reserve bids under complex pricing rules which mix energy and reserve prices a demand bid corresponds to the whole cost a demand entity is willing to pay for its participation in the energy market including the cost for the procurement of the necessary reserves the approach attains price integration of energy and reserves markets simultaneous settlement of energy and reserves and significant decrease of the payments through the uplift accounts the main principle is the formulation of a mixed complementarity problem for the system equilibrium conditions in which supply and demand are associated to explicitly or implicitly defined prices which may be different even in the same zone

the bias in centrally planned prices the historical verdict must be surely in on the great central planning experiment soviet block economies are fleeing central planning philosophy in droves nonetheless the brute fact constraining movement from central planning to market economy is the necessity of vastly increasing prices kurtzman 1988 the point of this note is to look back on the central planning debate of the 1930s and 40s with the perfect wisdom of hindsight and ask why none of the participants predicted this answer by an easy process of elimination we focus on the anti central planning side of the debate after all if disinterested members of the pro central planning side of the debate after all if disinterested members of the pro central planning side had reached the correct answer surely they would have switched sides the brunt of the anti central planning position was carried by two alone von mises and hayek so we reconsider their arguments using a bit of statistical notation to sharpen the points at issue the argument is that von mises and hayek focused on the complex technical issues in involved in central planning and ignored the simple incentives facing planners a concluding speculation is offered as to why neither von mises nor hayek got it right

the transaction costs paradigm 1998 presidential address western economic association 1998 presidential address western economic association though the idea can be traced to david hume and adam smith the path breaking first economic analysis of transaction costs did not occur until 1937 when ronald coase published the nature of the firm 1 stigler and boulding perspicaciously reprinted coase s paper in the famous aea readings in price theory 1952 but for a quarter of a century it had no real impact on the profession in the 1940s two significant works were published which touched on transaction costs but these sparks did not ignite a fire 2 the transaction costs paradigm began to blossom in the early 1960s again it was coase who supplied the primum mobile his great paper on social cost was published in early 1961 though aaron director dated that issue of journal of law and economics as 1960 ronald had company this time george stigler s article on information cost came out later the same year and kenneth arrow s work on the appropriability of returns to inventions appeared in 1962 3 the combined wisdom of three brilliant men would perhaps not have been enough except that by the early 1960s science was on their side jargonistic articles on economic development flooded the journals throughout the 1950s but by 1960 economists were beginning to question the explanatory power of this kind of economics after the clarion call of friedman s work on the consumption function a few years earlier in 1957 the great methodological debate began 4 the demand for testable implications was becoming more vociferous by the day and the tendency for economists to be policy oriented was losing hold as the keynesian revolution waned 5 the tide of economic explanation was beginning to swell and the transaction costs paradigm was the beautiful goddess who emerged from the foam i began graduate work at ucla in 1961 and after my ma a year later i turned to audit the price theory lectures of jack hirshleifer and armen alchian the straight as student who knew by heart everything about market imperfections was told that this kind of knowledge did not count by 1963 graduate students at ucla s department of economics were all talking property rights and transaction costs now i knew coase and stigler by heart and could even handle the questions on pricing behavior and mergers at the end of friedman s price theory 1962 moreover i was the luckiest of the lot because in late 1963 armen gave me a copy of a manuscript by harold demsetz 6 one of the great expositors of our time harold wrote about property rights and transaction costs with such clarity and force that i decided then and there to work on these topics for my doctorate since that time my research has all been on the same track in this address i shall confine discussion of the transaction costs paradigm to my own involvement this limitation is imposed by necessity i like to sail the strange seas of thought alone and have seldom read other people s publications with the seriousness they deserve after i left chicago in 1969 from 1976 to 1982 i spent my time on contracts in the petroleum industry and from 1982 to now my research has concentrated on economic reforms in china although these works are all transaction costs oriented the former is not in print because it is proprietary while the latter has mostly been published in chinese after more than half a lifetime on the seashore however i feel it is time to share my small collection of pebbles with colleagues in the wea still you would not be wrong if you feel that i am addressing the subject as if i were a stranger returning from another planet i the nature of transaction costs transaction costs must be defined to be all the costs which do not exist in a robinson crusoe economy this broad definition is necessary because it is often impossible to separate one type of transaction cost from another the toll collector of a bridge serves not only transacting customers but also police against trespassers

structure and performance the task of economic history jhe cliometric revolution in ecoknomic history wedded neoclassical economics and quantitative methods in order to describe and explain the performance of economies in the past economic history gained in rigor and scientific pretension but at the expense of exploring a much more fundamental set of questions about the evolving structure of economies that underlies performance 2 cliometricians have turned their backs on a long tradition stretching back from joseph schumpeter to karl marx to adam smith these scholars regarded economic history as essential because it added a dimension to economics its purpose was to analyze the parameters held constant by the economist if economics is a theory of choice subject to specified constraints a task of economic history was to theorize about those evolving constraints the failure of economic historians to provide their colleagues with a historical dimension to their perspective has reduced the effectiveness of economists in dealing with contemporary problems failure of economists to appreciate the transitory character of the assumed constraints and to understand the source and direction of these changing constraints is a fundamental handicap to further development of economic theory the challenge to the economic historian which has equally compelling implications for the economic theorist is to explain the transformation of the structure of the american economy in the past century 3 in the rest of this essay i shall explore this issue in order to specify some of the dimensions of the economic historian s task

sequencing strategically wage negotiations under oligopoly abstract should an industry wide union in a unionized oligopoly e g the united auto workers in the us negotiate new contracts by bargaining with firms simultaneously or should it strategically sequence its bargaining partners the models presented isolate two key factors affecting this decision pre existing contracts and the post negotiation product market game the better the preexisting contracts for the union the more attractive is the option of sequencing moreover a high wage negotiated with the first firm reduces product market competition increasing other firms ability to pay higher wages as well this adds to the attractiveness of strategic sequencing for the union

capital budgets borrowing rules and state capital spending abstract this paper compares the level and composition of government spending in u s states that maintain separate budgets for capital and operating expenditures with that in states that employ unified budgets it also investigates the effects of pay as you go financing rules for capital projects the empirical findings suggest that states with separate capital budgets spend more on public capital projects than comparable states with unified budgets there is no evidence that the presence or absence of a capital budget affects the level of non capital spending pay as you go requirements for financing capital projects are associated with lower levels of both capital and non capital spending

some observations on power and property rights in the inland fisheries of bangladesh abstract this paper examines the causes behind the failure of the fishermen to establish property rights over fishing grounds in the inland fisheries of bangladesh property rights are eventually transferred to socially powerful agents called the lessees who are not part of the fishing community differential costs of establishing and maintaining property rights have been observed as the key element behind the transfer of rights this differential cost stems from power asymmetries and consequently more rent is generally realizable by the lessees differential capacity to realize rent creates the potential for an exchange of rights between them 1997 elsevier science ltd all rights reserved

a coasian perspective on informal rights assignment among waste pickers in the philippines this paper examines in light of the coase theorem how delineation of a degree of enforceable rights for a previously open access dumpsite in the philippines would affect market transactions of waste pickers it shows that a simplistic exclusion solution was not enough to constrain rent dissipation of recyclables in the primeval land fill some intervention of non government organisations backed by some initial government assistance were found helpful in reducing transaction costs to sustain operations and promote innovations and initiatives from the scavengers themselves despite obvious external economic difficulties

rent seeking behaviour and its economic costs in urban land transactions in accra ghana the existing body of knowledge attributes to informal land transactions in sub saharan african cities observed problems in city neighbourhoods substantial resources often backed by donor agencies are therefore being spent in revamping bureaux and governmental bodies in a bid to solve the problems this paper examines the economic impacts of this aspect of market intervention employing insights from rent seeking theory it estimates costs brought to bear on agents by government agencies involvement in the urban land market of accra ghana the sum of these wasteful diversions of resources is found to explain a great deal of the haphazard developments that have come to characterise many neighbourhoods in the city market led regulation emerges as the needed focus of future land policy and management strategy towards this the paper calls for the removal of existing unwarranted market interventions and the reorganisation of responsible bureaux in ways that would induce them to operate efficiently

managing channel profits a channel of distribution consists of different channel members each having his own decision variables however each channel member s decisions do affect the other channel members profits and as a consequence actions a lack of coordination of these decisions can lead to undesirable consequences for example in the simple manufacturer retailer consumer channel uncoordinated and independent channel members decisions over margins result in a higher price paid by the consumer than if those decisions were coordinated in addition the ensuing suboptimal volume leads to lower profits for both the manufacturer and the retailer this paper explores the problems inherent in channel coordination we address the following questions what is the effect of channel coordination what causes a lack of coordination in the channel how difficult is it to achieve channel coordination what mechanisms exist which can achieve channel coordination what are the strengths and weaknesses of these mechanism what is the role of nonprice variables e g manufacturer advertising retailer shelf space in coordination does the lack of coordination affect normative implications from in store experimentation can quantity discounts be a coordination mechanism are some marketing practices actually disguised quantity discounts we review the literature and present a simple formulation illustrating the roots of the coordination problem we then derive the form of the quantity discount schedule that results in optimum channel profits this article was originally published in marketing science volume 2 issue 3 pages 239 272 in 1983

coordinating channels under price and nonprice competition this paper analyzes how manufacturers should coordinate distribution channels when retailers compete in price as well as important nonprice factors such as the provision of product information free repair faster check out or after sales service differentiation among retailers in price and nonprice service factors is a central feature of markets ranging from automobiles and appliances to gasoline and is especially observed in the coexistence of high service retailers and lower price discount retailers therefore how a manufacturer should manage retail differentiation is an important channel management question yet the approach in the existing literature has been to examine channel coordination under the standard symmetric contracting assumption that offering a uniform contract to all the retailers in a market will be sufficient for coordination i bring this assumption into question and ask when is it optimal for the manufacturer to use the channel contract to deliberately induce retail differentiation even if the retailers were ex ante identical in their cost and other characteristics the paper identifies the type of channel contracts that can endogenously induce symmetry as opposed to differentiation among retailers next the paper highlights a type of channel conflict that arises from the very nature of retail price service competition a manufacturer might find the retailers to be excessively biased towards price competition at the cost of service provision or vice versa the paper establishes when a manufacturer is likely to stimulate greater price as opposed to greater service competition among the retailers the framework that i develop to address these issues highlights the role of two basic types of consumer heterogeneity consumers are heterogeneous in their locations as in the spatial models of horizontal differentiation and in their willingness to pay for retail services as in the models of vertical differentiation the model also uses a natural relationship in retail markets between the travel time cost incurred by a consumer and her willingness to pay the more affluent consumers who have a higher willingness to pay for retail services also have a higher cost for their personal time given these market features the paper analyzes the problem faced by a manufacturer who sells to competing retailers the paper shows that the standard notion in the literature of offering similar contracts to all the retailers is sufficient only in markets with substantial locational differentiation relative to the differences in the willingness to pay effective channel management in these markets simply requires mechanisms that ensure that retailer interests are aligned so that they compete by offering a mix of price and service that is desirable from the manufacturer s point of view however in markets with small locational differentiation and substantial diversity in consumer willingness to pay the manufacturer s problem is not just to align retailer interests but to also use the channel contract to induce the correct level of retail differentiation this helps the manufacturer to better cater to the diversity in consumer willingness to pay and to prevent the cut throat competition that the retailers would otherwise have indulged in the manufacturer can achieve this through the use of menu based contracts menu based contracts induce differentiated retailer behavior despite the fact that the retailers are not forced into accepting different terms of trade this aspect can be useful in shielding manufacturers from litigation under the robinson patman act the paper also shows that for relatively high ticket items retailers tend to be excessively biased towards competing in the provision of retail services the correlation between consumer willingness to pay for service and travel costs implies that for high ticket products the competing retailers will focus on the more service sensitive customers at the cost of ignoring the price sensitive consumers in the market the manufacturer is therefore likely to encourage greater price competition among the retailers in contrast for low ticket items the manufacturer prefers to reduce price competition and encourage greater provision of services this provides an endogenous rationale for the use of price ceilings versus floors the basic model is also extended to consider the effect of upstream competition between manufacturers under upstream competition coordinating retail price and service decisions is not always optimal for an individual manufacturer this extension to manufacturer competition provides a basis for understanding the role of retail price service differentiation in the context of a channel duopoly it also shows that a mixed distribution channel a channel in which one manufacturer chooses to be coordinated while the other chooses to be noncoordinated can be an equilibrium in markets with weak brand loyalty

households willingness to pay for public housing in the presence of price controls nonmarket housing allocation mechanisms such as queueing prevent households from revealing their marginal willingness to pay for housing through market prices we derive the households marginal willingness to pay using the intuitive idea that the length of the queue for a specific house reflects the households willingness to pay for housing characteristics we apply our methodology to public housing in the amsterdam metropolitan area and show that on average the households marginal willingness to pay for a unit of public housing is close to its marginal costs this suggests that the welfare loss of public housing through distortions in housing supply is rather limited and is mainly through distortions in housing demand we provide indirect evidence of the latter by showing that queueing induces inefficient matching of households and housing

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

a simultaneous model of consumer brand choice and negotiated price in this paper we develop a simultaneous model of consumer brand choice and negotiated price in the highly relevant marketing context of automobile transactions consumer brand choice is modeled as a multinomial probabilistic outcome and the individual consumer level transaction price is modeled to be consistent with the nash bargaining solution our simultaneous model introduces a natural way to account for price endogeneity in a microlevel choice setting when the price paid is individual specific and correlated with the idiosyncratic preference of a buyer it also accounts for the potential selectivity bias in studying the negotiated price by integrating consumer brand choice modeling we apply the proposed model to a data set of 4 795 consumer automobile purchases the empirical results show that the proposed approach not only better fits the data of consumer choice and negotiated price but it also provides additional insights into buyers and sellers behaviors in comparison with models that study only consumer choice or the negotiated price but not both simultaneously

balancing supply and demand under mixed pricing rules in multi area electricity markets market clearing has always been an issue of great interest and research as liberalized electricity markets evolved over time in many countries as trading in electricity evolves rapidly multi area power exchanges appear to substitute the local markets the tie lines constitute a significant parameter in multi area power exchanges since congestion leads to price differentiation prices are affected by physical e g network constraints yet they should sometimes follow regulatory policy rules which do not necessarily reflect or depend on physical characteristics until now all approaches in clearing a multi area power dispatch or a multi area market are based on a zonal or nodal pricing model which is applied uniformly to both production and demand within the same zone or at each node these approaches are not able to deal with complex pricing rules which impose price discrimination for supply or demand entities within the same area this paper presents a mathematical approach for the solution of a multi area dispatch in which production and demand of the same area may be cleared in different prices the main principle is the formulation of a mixed complementarity problem for the system equilibrium conditions in which supply and demand are associated to explicitly or implicitly defined prices illustrative implementations and test results for a simple five zone system and the 73 bus ieee rts 96 are presented

implicit taxes collected by state liquor monopolies state monopolization or taxation aresupposedly justified because of negativeexternalities from alcohol consumption butrecent research questions the efficacy ofsuch policies suggesting that their actualgoals may be revenue generation consideration of this hypothesis isfacilitated by estimates of the implicittaxes charged in monopoly states whichgenerally are substantially higher thantaxes in non monopoly states evidencethat monopolization and high taxes do notaffect the level of externalities is alsoexplained by adjustments that rationalindividuals make to avoid the consequencesof such policies thus providing furthersupport for the revenue maximizationhypothesis

multi issue bargaining with endogenous agenda abstract the first part of this paper shows that in a noncooperative bargaining model with alternating offers and time preferences the timing of issues the agenda matters even if players become arbitrarily patient this result raises the question of which agenda should come up endogenously when agents bargain over a set of unrelated issues it is found that simultaneous bargaining over packages should be a prevailing phenomenon but we also point to the possibility of multiple equilibria involving even considerable delay journal of economic literature classification number c78

the impact of rent control on rents in the free sector in most cases rent control covers only a part of the housing stock this note provides a simple analysis of the impact which rent control and non price rationing exert on the rent in the free sector it is shown that depending on the rationing mechanism rents in the free sector can be higher or lower than in the absence of rent controls

rent shifting and the order of negotiations abstract when two sellers negotiate terms of trade with a common buyer the order in which the negotiations occur can affect the buyer s payoff this suggests that the buyer may have preferences over which seller to negotiate with first we find that when the efficient outcome calls for the buyer to purchase from only one seller the buyer weakly prefers to negotiate first with the inefficient seller and when the efficient outcome calls for the buyer to purchase from both sellers the buyer prefers to negotiate first with the seller that has less bargaining power or offers a smaller stand alone surplus all else being equal these conclusions hold whether or not penalty clauses are feasible

vertical control and price versus nonprice competition this paper considers a manufacturer distributing a product through retailers who compete in price and service which reduces the time it takes to purchase a good the mix of these instruments that maximizes collective profit is determined by the tastes of consumers on the product margin whereas decentralized retailers consider as well the tastes of consumers on the interretailer margins given search or travel costs consumers with low time costs are overrepresented on the interretailer margins in considering customers on the wrong margin retailers are therefore biased toward price competition this distortion that can be corrected with vertical restraints

multi area power generation dispatch in competitive markets in competitive electric energy markets the power generation dispatch optimization is one of the most important missions among generation companies how to respond to the markets dispatch their units and maximize profits this paper proposes an approach to incorporate power contracts which include call and put options forward contracts and reliability must run contracts into multi area unit commitment and economic dispatch solutions the proposed solution algorithm is based on adaptive lagrangian relaxation unit decommitment and lambda iteration methods the problem formulation consists of three stages 1 the incorporation of the power contracts 2 the multi area unit commitment and 3 the multi area economic dispatch the proposed algorithm has been successfully implemented and its testing results on modified ieee test cases are promising

economists and public policy chicago political economy versus conventional views both conventional welfare economics and public choice analysis suggest that economists have an important educational role to play in the public policy process in improving the decision making process in sharp contrast information and incentive problems related to voting rules the bureaucracy and the legislature do not arise in cpe because these processes are all perfect agents of interest groups consequently the political process is efficient and there is no scope for beneficial economic analysis as it relates to the sugar program or other public policies that is the polity is efficient or it would be reordered by competing interest groups to make it so but as mitchell 1989 290 stresses the important unanswered question in cpe remains if there is no scope for improvement how and why does change occur

bertrand competition for inputs and walrasian outcomes market making by merchants who obtain stock from suppliers and resell it to con sumers is modeled as a two stage pricing game with winner take all c ompetition for the inputs in contrast to fixed capacity models the re is a unique subgame perfect nash equilibrium spne which is walr asian for elastic demand and non walrasian for inelastic demand alte rnatively when merchants first sell forward contracts to consumers a nd then compete for supplies the unique spne is always walrasian th us the author has an equilibrium model in which walrasian price aris es not from the benevolent actions of a fictitious auctioneer but fr om optimal price setting behavior of merchants copyright 1988 by american economic association

rationing and rent dissipation in the presence of heterogeneous individuals this paper discusses the implications of rationing by waiting when consumers have different time costs and personal valuations the joint distribution function of time costs and personal valuations is used to characterize market equilibrium it is argued that under certain conditions an increase in the variance of time costs will reduce the dissipation of rent furthermore it is shown that introducing a secondary market for a rationed good does not necessarily improve welfare because total surplus under rationing by waiting depends more on the variance than on the level of time costs and personal valuations the model is also used to discuss other institutions that involve rent seeking activities such as the patent system and import quotas

political preferences for the pork barrel a generalization this paper provides a rational explanation for the observation of oversized coalitions often approaching unanimous size in the realm of distributive policies distributive policies are those which concentrate benefits in specific geographic areas states congressional districts while spreading costs through general taxation the explanation offered here that legislators may rationally prefer universalism to hard ball coalition politics generalizes earlier work of weingast and fiorina in particular it extends their results to pork barrel politics i e projects that are economically inefficient and demonstrates how packages of economically inefficient projects can nevertheless be politically popular the main theoretical feature that induces preferences for universalism is uncertainty over the composition of winning coalitions and consequently the desire for the political insurance that universalism provides

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

a bargaining theory of distribution channels abstract a critical factor in channel relationships between manufacturers and retailers is the relative bargaining power of both parties in this article the authors develop a framework to examine bargaining between channel members and demonstrate that the bargaining process actually affects the degree of coordination and that two part tariffs will not be part of the market contract even in a simple one manufacturer one retailer channel to establish the institutional and theoretical bases for these results the authors relax the conventional assumption that the product being exchanged is completely specifiable in a contract they show that the institution of bargaining has force and it affects channel coordination when the complexity of nonspecifiability of the product exchange is present the authors find that greater retailer power promotes channel coordination thus there are conditions in which the presence of a powerful retailer might actually be beneficial to all channel members the authors rec

multilateral bargaining and downstream competition we examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers in these relationships the negotiations are interdependent and bargaining externality may arise across the retailers in addition the timing by which the manufacturer negotiates with the retailers becomes important in simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation we show that simultaneous bargaining is optimal for the manufacturer when the retail prices and profitability are similar and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large as a result of ex post renegotiations the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability moreover ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition

multi area energy and reserve dispatch under wind uncertainty and equipment failures the cross border trading among electricity markets in an interconnected multi area system e g in central europe and the integration of renewable resources e g wind energy have remarkably increased in recent years to efficiently operate such system a proper coordination among different areas is required within this context a decentralized algorithm for market clearing is proposed in this paper to dispatch simultaneously energy and reserve under wind generation uncertainty and equipment failures the proposed technique does not require a central operator but just a moderate interchange of information among neighboring areas additionally the benefit of cross border trading is studied

the rhetoric and reality of redistribution it is customary when giving a presidential address to begin by remarking on how happy you feel i have an even stronger reason for being happy than most presidents it will at long last permit me to break into the southern economic journal up to this point referees of that august institution have always rejected everything that i sent them finally however i am privileged to put an unrefereed paper in the journal and hence do not have to worry about this one being rejected the audience may feel that although it is nice for me it is hard on the journal but under the sacred traditions of the southern economic association the editors and referees can do nothing about it the blame if there is any has to be laid on me and not on the management of the journal in a way the fact that i will not face referees is important because in this paper i propose to violate a number of implicit taboos in the discussion of income redistribution indeed i propose to argue that most of the current discussion of income redistribution is drastically defective this will not only include rawls it will include what most members of the economic profession normally say on the subject and presumably what the potential referees of this paper would have thought let me very briefly survey the existing economic as opposed to the philosophic literature on the redistribution of income firstly a good many economists have said simply that economics can say nothing about the subject because somebody gains and somebody loses but we can t say whether this is a good or a bad thing with our apparatus hochman and rodgers 9 have started another tradition of dealing with income redistribution in which the government is seen as simply organizing what is essentially a voluntary transfer from the better off american citizens to the less well off american citizens why the government should be used as an instrumentality for this kind of transfer was interestingly enough first explained by milton friedman 6 191 92 such redistribution has the interesting characteristic that it does not actually involve redistribution because the people who make the gift are maximizing their own utility and hence are better off it is a case in which human preferences are so arranged that a given dollar of income benefits two people a full dollar s worth the donor gains a dollar from expending money at its best use to him i e making a gift to the poor and the poor gain the dollar in a somewhat metaphysical sense it can be said here

might makes rights a theory of the formation and initial distribution of property rights this paper is a theoretical and empirical investigation into the formation and initial distribution of property rights violence is singled out as a major constraint on this formation process its role is explicitly modeled in a choice theoretic framework and some of the implications are tested using data collected from contracts written during the california gold rush of 1848

institutions and economic growth an historical introduction abstract in this essay the interdependence of political and economic institutions is examined against premises in neoclassical theories of economies which maintain that population and savings are the principal determinants of economic growth that institutions matter in the development of economies is the difference in assumptions i examine i look at the institutional frameworks that preceded adoption of the united states constitution and the northwest ordinance in early america i then trace the precedents of these american institutions to the evolution of common law in england where interests unconcerned with the crown coalesced to form competing political units i then contrast england s institutional development with the comparatively centralized enforcement mechanisms of spain to examine the hypothesis that institutional differences produce economic consequences

bilateral monopolies and incentives for merger the paper presents a model of duopoly in which firms acquire inputs through bilateral monopoly relations with suppliers it combines a bargaining model with a duopoly model to examine how input pri

break up fees and bargaining power in sequential contracting abstract when a buyer negotiates in sequence with two potential sellers of a good the outcome of each negotiation depends on all three players bargaining powers assuming all parties are symmetrically informed we find that the first seller s payoff is increasing in his own and the second seller s bargaining power on the other hand the second seller s payoff is decreasing in the first seller s bargaining power and in some cases also in his own bargaining power we characterize when contracts will contain break up fees all results extend to the case of a seller negotiating in sequence with two buyers

fragmented property rights and royalty bargaining abstract we consider production by a firm that relies on the patent rights that are held by other actors before production can take place bargains have to be struck with each patent holder over the royalty per unit produced in the negotiations a patent holder must be mindful of the fact that a large royalty will increase the product price and lower demand for the final product hence each patent holder would prefer to gain a large royalty at the expense of rivals when the producer makes the first offer in an alternating offer framework we analyze whether it should conduct negotiations sequentially with some grouping of patent holders or simultaneously we demonstrate that the producer will prefer simultaneous negotiation an individual patent holder would prefer to negotiate early with the producer and then to see remaining rights holders negotiate simultaneously a firm that holds several patents would want to negotiate royalties on each one sequentially and then have simultaneous negotiation of payments to other rights holders

appropriation violent enforcement and transaction costs a critical survey this paper focuses on the extension of transaction costs to appropriative activity and coercive power in the property rights approach it has been argued that including the costs of appropriation and violent enforcement in transaction costs is based on the assumption that coaseian bargaining can be extended to any institutional scenario i e voluntary as well as coercive exchange however voluntary transactions cannot capture the logic of coercive power this means that the assumption of an efficient political market is not valid and that the political coase theorem lacks the logical consistency to provide a cornerstone for political theory

redistribution tax under non benevolent governments i analyze redistribution policies of majority governments in one kind of representative voting system i employ these assumptions members gain special benefits in the majority parties act strategically by using redistribution transfers the member s utility function is given in a quasi linear function the government s objective functions are the weighted summation of utilities and i classify governments according to the weight the four main results are a stable majority dose not support myopic government the stable redistribution policy of benevolent government is expressed by a scope of transfers the stable transfer of non benevolent governments depends on private utilities of the majority and opportunity costs of the minority and the altruistic government is not displayed by any other majority because it offers the total welfare of the majority to the minority as a subsidy

competitive promotional strategies this article analyzes the equilibrium pricing strategies of brands engaged in a pricing game each brand has a monopoly market loyal consumers and competes with others in a common market called brand switchers in the case of a duopoly it is shown that the behavior of the brand switchers characterizes the equilibrium behavior of the duopolists this article focuses on two key comparative statics namely the depth of discounts away from a regular high price and the probability of giving a deal or the frequency of deals how these properties vary with the size of the loyal markets and the behavior of the brand switching population is discussed copyright 1988 by the university of chicago

pass through of commodity price shocks in distribution channels with risk averse agents abstract we apply variance analysis for studying the risk sharing mechanism in distribution channels in which the risk averse buyer and supplier are suffered from commodity price shocks we obtain the closed form optimal pass through rate that minimizes the total channel price cost risk and maximizes the channel throughput for a stackelberg leadership game and a nash bargaining solution using the commodity price data in the steel industry we demonstrate that the pass through rate should be set between 40 and 80 for major metal alloys

vertical integration in the presence of upstream competition we analyse vertical integration when there is upstream competition and compare outcomes to the case where upstream assets are owned by a single agent i e upstream monopoly in so doing we make two contributions to the modelling of strategic vertical integration first we base industry structure namely the ownership of assets firmly within the property rights approach to firm boundaries second we model the potential multilateral negotiations using a fully specified non cooperative bargaining model designed to easily compare outcomes achieved under upstream competition and monopoly given this we demonstrate that vertical integration can alter the joint payoffs of integrating parties in ex post bargaining however this bargaining effect is stronger for firms integrating under upstream competition than upstream monopoly we also consider the potential for integration to internalise competitive externalities in manner that cannot be achieved under non integration we demonstrate that ex post monopolization is more likely to occur when there is an upstream monopoly than when there is upstream competition our general conclusion is that the simple intuition that the presence of upstream competition can mitigate and reduce the incentives for socially undesirable vertical integration is misplaced and depending upon the strength of downstream competition i e product differentiation the opposite could easily be the case journal of economic literature classification number l42

a correction in elementary public choice geometry this paper corrects a long standing errorin elementary geometrical constructionsthat involve collective choices inmultidimensional settings the seeminglyinnocuous assumption of separability amongarguments in individual utility functionsdoes not imply symmetric indifferencecontours in shared goods space sharedgoods necessarily become gross substituteswhen resource or budgetary constraints areintroduced the corrected constructionsuggests that issue by issue voting is lessefficacious than is indicated in theconventional analysis

the misallocation of housing under rent control the standard analysis of price controls assumes that goods are efficiently allocated even when there are shortages but if shortages mean that goods are randomly allocated across the consumers that want them the welfare costs from misallocation may be greater than the undersupply costs we develop a framework to empirically test for misallocation the methodology compares consumption patterns for demographic subgroups in rent controlled and free market places we find that in new york city which is rent controlled an economically and statistically significant fraction of apartments appears to be misallocated across demographic subgroups jel c25 d12 d61 r20

countervailing power and consumer prices this paper considers the importance of countervailing power manifested as the effects of increased retail concentration on consumer prices and welfare within a market setting where imperfectly competitive retailers negotiate intermediate prices with a monopoly supplier only when retailer services are regarded as very close substitutes do final prices fall following a reduction in the number of retailers even in these circumstances the social benefits of countervailing power may not be realised as the supplier may seek to protect its profits by using a refusal to supply restraint to engage in exclusive trading

why so much stability one of duncan black s 1958 more important contributions was a classically simple proof that with complex issues and majority voting a stable outcome is unlikely this very simple proof that there would normally be no motion which can get a majority against all others and hence that any possible outcome is dominated by another has been elaborated and made more precise by later work without most improbable conditions endless cycling would be expected this is particularly true when logrolling is present as it normally is if we look at the real world however we observe not only is there no endless cycling but acts are passed with reasonable dispatch and then remain unchanged for very long periods of time thus theory and reality seem to be not only out of contact but actually in sharp conflict it is the purpose of this article to demonstrate that our existing theory when properly looked at does indeed imply a relatively stable outcome to voting in some cases however this stability will not be a true equilibrium because a random member of a large set will be chosen and then that random outcome will be left unchanged for long periods of time it does not dominate all other outcomes but is retained merely because of its particular history there are already several possible explanations for the observed stability in the literature we will take them up as they become relevant to the general line of reasoning i should however warn the reader that my own previous work including joint work with buchanan will play a major role here this may simply reflect egotism but i think that some of the early work which is now partially forgotten can provide solutions for more modern problems much recent public choice work has involved spatial models and these models frequently ignore logrolling the reason presumably is that it is very hard to put logrolling in a two dimensional diagram we shall begin considering such special models and assume that the issues are the sort that does not lead to logrolling and then turn to more complex logrolling problems with respect to the first situation in which logrolling does not occur there is already one possible explanation for the observed stability in the literature

opportunism in multilateral vertical contracting nondiscrimination exclusivity and uniformity comment an input supplier selling to competing downstream firms would benefit from publicly committing at the outset to all contracts efficient commitment however would require complete contracts the authors study instead bilateral contracting without commitment regarding others terms each firm then fears that the supplier might opportunistically renegotiate another s contract to increase bilateral profit at the firm s expense the authors show that nondiscrimination clauses generally cannot curb such third party opportunism even with symmetric firms to reassure firms crude forms of commitment may be adopted this could explain the pervasiveness of exclusivity arrangements and the striking uniformity and intertemporal rigidity of franchise contracts copyright 1994 by american economic association

bureaucratic agenda control imposition or bargaining niskanen s economic model of bureaucratic behavior assumes that bureaucratic agenda control allows the bureau to impose upon a passive legislature its most preferred alternative from among the set of alternatives that dominate the status quo but does a monopoly on the agenda give bureaus this degree of influence over a voting body this article reports on experiments that demonstrate that a monopoly on the agenda puts the agenda monopolist in a position to bargain with a voting body without being able to impose his or her most preferred alternative on that body this evidence supports theories of bureaucratic legislative bargaining at the expense of theories of bureaucratic imposition

comment managing channel profits comment in a recent paper in this journal jeuland and shugan jeuland a s shugan 1983 managing channel profits marketing sci 2 summer 239 272 proposed a quantity discount schedule as a way of coordinating a channel as they put it on p 253 of their paper a quantity discount schedule which would fix the retailer s and hence the manufacturer s profits to some fixed linear function of total channel profits would lead the channel to maximize profits the purpose of this note is to show that a quantity discount schedule is not necessary for channel coordination

why economic reforms fail in the soviet system a property rights based approach jan winiecki why do economic reforms fail in soviet type systems despite the obvious interest of ruling groups in improving the performance of their ailing economies the author applies a property rights based analysis stressing modes of rent maximization by ruling groups as a crucial explanatory variable party apparatchiks and economic bureaucrats particularly benefit from persistent interference in the economic sphere and consequently are most interested in maintaining the status quo the author surveys the impact of these motivations on the content of economic reforms outlines the strategies of counterreformers and predicts the future of reforms in soviet type economies 1 introduction in analyzing the disequilibrium characteristics of contemporary western economies mancur olson 1982 1984a 1984b agrees with the neoclassical macroeconomists in finding that given the tendencies of markets to clear and given the rational expectations of economic agents any disequilibrium indicates that all mutually advantageous transactions have not been consummated having made this point however he asks what can make agents ignore the potential gains from unconsummated transactions and turns his attention toward the structure of incentives and thus of institutions and policies olson insists and rightly so that a satisfactory static and dynamic macroeconomic theory has to explain who among key actors has the incentive to generate economic growth and equilibrate the economy and who does not furthermore no government even an authoritarian one has an incentive to generate serious recessions or disequilibria olson 1984a 637 writes that even in dictatorial systems the dictator has an incentive to make the economy of the country he controls work better since this will generate more tax receipts he can use as he pleases and usually also reduce dissent olson s arguments about incentives institutions and disequilibria offer an ideal basis for an inquiry into why reforms fail in soviet type economies stes in olson s theories of incentives the old roman principle of criminal law cui prodest who gained is applied to modem economies and the results suggest that contrary to widespread opinion it is not necessarily the small but powerful group of high and highest leaders that stands to gain most in terms of power and privilege from the preservation of the existing order a powerful political elite could satisfy its desires for both power and privilege through an alternative undemocratic system one which involves authoritarian don ts rather than totalitarian do s in that perspective the inefficient system of economic control typical in stes involving centrally planned production goals and input rationing would not be a condition sine qua non of an authoritarian solution since totalitarian command and control systems persist however one must seek groups other than the powerful and privileged few which have incentives to resist reforms and keep the economy inefficient the following sections identify the membership and motives of groups having strong incentives to keep the stes inefficient and prevent successful i e market oriented reforms we show how those groups operate and analyze their effects on the economic performance of their countries first the incentives for these groups to prevent decentralized management in the state sector are spelled out then their incentives to prevent the expansion of the more efficient private sector are outlined third having identified who benefits from the status quo and why the paper discusses when and how market oriented reforms are aborted limited or reversed by those who stand to gain from the reforms failure the last two sections consider the prospects of current attempts at economic reform in three specific countries poland the ussr and china and the prospects for economic reform in stes more generally

incomplete contracts vertical integration and supply assurance this paper extends the analysis of transactions cost models of vertical integration to multilateral settings its main focus is on supply assurance concerns which arise when several downstream firms are competing for inputs in limited supply integration reduces supply assurance concerns for an integrating firm but it may increase them for others therefore to explain the scope of any firm one must consider the overall network of production and distribution relations three fundamental questions are addressed 1 what are the effects of different integration structures 2 what are the determinants of the socially efficient integration structures 3 in what way do equilibrium integration structures differ from socially efficient structures

an economic theory of vertical restraints vertical restraints imposed by manufacturers on the prices locations and sales of retail firms represent a puzzling departure from the simple price mediated exchange of conventional markets in this article we analyze the theoretical basis for these restraints in a setting where retailers inform consumers and are imperfectly competitive and where a manufacturer has some monopoly power we identify three potential externalities affecting retailers decisions these externalities lead to the failure of simple uniform price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits we identify the packages of vertical restraints that are minimally sufficient under various conditions to neutralize the externalities and to achieve the joint profit maximum

auction implementation problems using lagrangian relaxation lagrangian relaxation lr is used as an auction method for bidding in a deregulated environment this paper focuses on the problems that occur while using lr as an auction method identical or similar units can prevent lr from finding the optimal solution if the units are similar lr may have trouble selecting some of them for the optimal solution a feasible solution may thus not be found since a heuristic selection of which unit data to alter has to be applied this is inequitable to the unit s not selected and may result in lawsuit s because the dispatcher has to use heuristic selection there is no fair solution to these problems the authors suggest previously published methods to implement auctions sensitivity analysis has also been applied in this paper to show that the percentage difference of similarity between units may affect the solution found

capacity sharing between competitors market competition may lead to mismatch between supply and demand that is overpricing may give rise to underselling and underpricing may yield stockout capacity sharing is a common practice to

a theory of price control price or rent control is but one of many forms of legislative action which interfere with private contracting in the market place to delimit the scope of my analysis i shall use the term price control to refer only to any set of regulations which satisfies the following three conditions first the control must fix the price or income terms of private contracts this categorically excludes any laws which regulate the distribution of income among the contracting parties on a share or percentage basis 2 second the control must involve no appropriation of proceeds to or from the government taxation and subsidization are thus excluded finally the fixing of price must not be associated with direct government sales purchases or manipulation of resources so as to maintain the regulated price 3 by this stipulation price support is also excluded even on such terms legal regulations to control price are still many and varied to evaluate our understanding of the class of phenomena which we seek to explain it is essential that we discover implications refutable by facts by this criterion the available body of economic theory pertaining to price control is deficient indeed the massive literature on the subject offers few such implications 4 an alternative approach to analyzing the observable effects of price control is presented here

public sector pricing and the real exchange rate we examine the effects of consumption subsidies public enterprise pricing and price controls on the real exchange rate under plausible assumptions we show that permanent reform in these areas leads to a permanent real exchange rate appreciation an empirical application to the 1990 fujimori plan in peru is discussed redistribution purposes sometimes even to buy votes by populist leaders since economic reform usually requires the shutting down of loans from the central bank to parastatals reducing consumption subsidies and increasing public enterprise prices price reform plays an important role in imf and world bank programmes edwards 1989a for example found that public enterprise price increases and reductions in consumption subsidies were involved in 79 and 44 per cent respectively of imf programmes between 1983 and 1985 trade reforms in contrast were present in just 35 per cent of cases to date the real exchange rate effects of public sector price policies have

government manipulation of constitutional level transaction costs a general theory of transaction cost augmentation and the growth of government transaction costs are pivotal to the ongoing political choice of where to draw the line between the private sector and the public sector contrary to the dominant paradigm politically important transaction costs are actively manipulated in the public sector by those who perceive potential personal gain from such action over time transaction cost changes so created by government decision makers may fundamentally redefine the role and scope of government to analyze the role of transaction costs in the growth or decline of government it is essential to distinguish transaction costs that are unavoidable realworld constraints from those that are contrived in the sense that they are created by government officials use or extension of their existing authority once discretionary power is vested in the government its officials have both the capacity and the incentive to restructure the transaction costs constraining the revision ofgovernrnental authority this restructuring of transaction costs may take two forms 1 altering people s perceptions of the costs and benefits of governmental authority in a given sphere an information cost problem 1 2 altering the cost of acting upon one s perceptions of the costs and benefits of collectivization in order to procure revision of the scope of governmental authority 2

game theory and empirical generalizations concerning competitive promotions this paper offers the generalization that competitive promotions are mixed strategies first an empirical regularity is established that promotions are independent across competitors this regularity is then elaborated on in the context of a promotion game the promotion game is linked to observable outcomes and a classification of possible situations is developed in particular the classification includes the prisoners dilemma battle of the sexes and marketing models of promotion competition the evidence for the generalization comes from a variety of product markets spanning trade promotions retail price reductions and retail promotions such as advertised specials the product markets include coffee baby diapers toilet tissue saltines dishwashing fluid ketchup and detergents among others the data in some cases were from cooperating grocery chains and in others from iri scanner panels the evidence from extant research and from new analyses is presented each situation is identified as be

economic ethics and institutional change our economic system the market economy is a part of a broader system or society we frequently study the operation of the market economy as if it were autonomous even though there are many complex and mutual relationships between society the economic system and the other systems political cultural religious legal etc that form part of society in a market economy we may identify several components a frame or background in which the economic activity takes place a set of ideas and theories the values shared by this society the set of institutions norms and rules that control the economic behavior of people and the incentives or motivations of the economic agents the play of these elements defines the operation of a market economy is ethics an institution or does it belong to the set of values and ideas in this paper i will discuss the role of institutions norms and rules in society with special reference to the economic system in order to gain insight into the relationship between institutions and ethics i study first the concept and features of social institutions and norms second institutional change and third the relationship between ethics and institutions

decentralized multi area economic dispatch via dynamic multiplier based lagrangian relaxation this paper introduces a dynamic multiplier based lagrangian relaxation approach for the solution to multi area economic dispatch maed in a fully decentralized manner dynamic multipliers refer to the multipliers associated with power balance equations at tie line buses in each area dynamic multipliers can be approximated as linear functions of tie line power exports via sensitivity analysis and can serve as the equivalent supply demand functions to neighboring areas in contrast to the conventional static point wise multiplier which is unable to reflect the marginal cost change that results from variations in the power exchange level the proposed dynamic multiplier provides each area the look ahead capability to foresee the range of the marginal cost for power export over a range of tie line exchange variations in turn this allows for a significantly faster convergence to the global optimal solution the algorithm is also shown to be early termination friendly which is very desirable in practice for ultra large systems such as the state grid of china numerical examples in a 6 bus system a 3 area 354 bus ieee system and large test systems illustrate the benefits of the proposed algorithm

lottery or waiting line auction abstract this paper studies the efficiencies of the two most widely used non price allocation mechanisms lotteries and waiting line auctions as our analysis suggests in addition to the fairness of the mechanism the use of lotteries in lieu of waiting line auctions can be also justified from an efficiency point of view in particular we show that the less dispersed consumers time valuations are the more efficient is a lottery relative to a waiting line auction in addition we identify four conditions under which a lottery dominates a waiting line auction in expected social surplus preserving furthermore the numerical simulations we conduct indicate that over a predominantly wide range of circumstances a lottery is more socially efficient than a waiting line auction as an allocative mechanism in the absence of a conventional price system