a principal agent problem with heterogeneous demand distributions for a carbon capture and storage system abstract mechanism design problems optimize contract offerings from a principal to different types of agents who have private information about their demands for a product or a service we study the implications of uncertainty in agents demands on the principal s contracts specifically we consider the setting where agents demands follow heterogeneous distributions and the principal offers a menu of contracts stipulating quantities and transfer payments for each demand distribution we present analytical solutions for the special case when there are two distributions each taking two discrete values as well as a method for deriving analytical solutions from numerical solutions we describe one application of the model in carbon capture and storage systems to demonstrate various types of optimal solutions and to obtain managerial insights

characterization of a class of moral hazard adverse selection games abstract studying a principal agent game in which the agent alone observes the state of the world and reports it but the moral hazard is not reducible shows that if the principal uses all signals then no solution exists i e there is no contract that elicits truth telling and motivates the agent to exert effort when the principal does not use signals on the state of the world that seem irrelevant a solution exists in which some of the ex post signals on outcome are not used even though they obey the informativeness condition of holmstrom bell journal of economics 1979 10 74 91

equilibrium properties of auctions and alternative procedures for allocating transferable permits abstract this paper examines the equilibrium properties of a range of auctions and related procedures placing emphasis on the types of procedures that are likely to be of special interest in environmental management applications nash equilibrium properties are first derived for a very general class of auctions for multiple homogeneous or heterogeneous objects or permits next it is shown that given appropriate assumptions three broad classes of public allocation procedures that do not generate revenues for the government would yield participants equal expected profits these classes are 1 incentive compatible auctions where bidders receive equal lump sum refunds 2 non incentive compatible procedures where refunds are a function of participants bids and 3 free initial distribution of permits on a lump sum basis followed by trading via a competitive market the applicability of the general results is then demonstrated by examining the particular non incentive compatible fair division procedure originally suggested by knaster finally implications of the theoretical results for applications including the allocation of transferable discharge permits and water rights are discussed

the role of firm size in bilateral bargaining a study of the cable television industry we examine the effect of buyer merger on bilateral negotiations between a supplier and n buyers merger may have bargaining effects in addition to the usual efficiency effects the effect of merger on the buyers bargaining position depends on the curvature of the supplier s gross surplus function merger enhances worsens the buyers bargaining position if the function is concave convex based on a panel of advertising revenue in the cable television industry our estimates indicate that the gross surplus function for suppliers of program services is convex this result suggests that cable operators integrate horizontally to realize efficiency gains rather than to enhance their bargaining position vis a vis program suppliers

the ethiopian commodity exchange and spatial price dispersion abstract in this article we study the impact of an institutional intervention on market efficiency in ethiopia more specifically we analyze to what extent the ethiopian commodity exchange ecx in combination with regional warehouses have contributed to a reduction in price spreads between regional markets our hypothesis is that warehouses connected to the ecx reduce the dispersion between export prices and local retail prices in different coffee growing areas as well as the dispersion between export prices and local retail prices in different coffee growing areas by doing so the ecx has the potential to improve the market efficiency to identify the causal effect we combine retail price data with information on the gradual rollout of warehouses connected to the ecx from 2007 to 2012 our results suggest that when two markets both have access to an operating warehouse the average price spread is 0 86 1 78 etb lower than it is for markets where at least one part lacks warehouse access this is a substantial reduction considering that the average price spread over the full period is 3 33 etb the main results are robust to various econometric specifications and our analysis thus suggests that local warehouses connected to the ecx have indeed improved market efficiency

supply response in ethiopia accounting for technical inefficiency few empirical studies of supply response using the profit function have accounted for technical inefficiency using farm level panel data from ethiopia this study examines the effect of incorporating technical inefficiency in estimating the supply response of peasant farmers two systems of output supply and input demand equations are estimated and compared the conventional model in which technical efficiency is assumed and another in which technical inefficiency is explicitly incorporated the model with technical inefficiency is preferred on grounds of theoretical consistency and improved estimates although model comparison tests are not conclusive incorporation of inefficiency generally increases the magnitudes and the statistical significance of own price elasticities substantially so in the case of fertilizer and fertilizer intensive crops and alters the priority attached to nonprice factors an important result is that only the specification with inefficiency reveals a significant effect of access to extension services on output only this specification finds that output increases with household size which one expects as the farms in the sample are largely subsistence and producing for own consumption furthermore the results demonstrate that farmers response to incentives is considerably restricted by inefficiency suggesting that the traditional model would overstate response by excluding the efficiency variable

smuggling and price disparity abstract this paper proposes a model of smuggling consistent with the coexistence of smuggling legal trade and price disparity defined as a domestic price which exceeds is less than the return from legal export import these phenomena have been found to characterize indonesian smuggling a framework is presented in which legal trade is used to cloak smuggling activity with the implication that the greater the volume of legal trade the less the costs of smuggling this model is then used to explain the observation noted above and to show that smuggling may be welfare increasing vis a vis the non smuggling situation and that even if the suppression of smuggling is costless tax revenue maximization may require a positive level of smuggling in addition the model is applied to coffee and rubber exports from indonesia

markets under price controls in partial and general equilibrium abstract when parallel markets arise in the face of price or other controls two aspects of agents behavior become crucial in analyzing market outcomes first sellers risk will rise with increases in illegal sales but may also fall with increases in legal sales if the latter is true the parallel market price will induce higher output second if consumers can be given access to the price controlled good without incurring search queuing and other transaction costs due to rationing production of the controlled good will be higher these effects are demonstrated in both partial and general equilibrium

estimating demand for local telephone service with asymmetric information and optional calling plans in this paper i study the theoretical and econometric implications of agents uncertainty concerning their future consumption when a monopolist offers them either a unique mandatory nonlinear tariff or a choice in advance from a menu of optional two part tariffs agents uncertainty is resolved through individual and privately known shocks to their types in such a situation the principal may screen agents according to their ex ante or ex post type by offering either a menu of optional tariffs or a standard nonlinear schedule the theoretical implications of the model are used to evaluate a tariff experiment run by south central bell in two cities in kentucky in 1986 the empirical approach explicitly accounts for the existence of informational asymmetries between local telephone users and the monopolist leading to different nested econometric specifications under symmetric and asymmetric information the empirical evidence suggests that there exists a significant asymmetry of information between consumers and the monopolist under both tariff regimes all expected welfare components failed to increase with the introduction of optional tariffs for the estimated value of the parameters copyright 2002 wiley blackwell

the licensing of patents under asymmetric information abstract this paper seeks to explain the use of royalty payments rather than fixed fees in the licensing of patents by the presence of asymmetric information the licensee is assumed to know the value of the patent and makes a single offer of a contract to the licensor it is shown that there is a unique equillibrium satisfying cho and kreps intuitive criterion qualitative properties of the equilibrium contract are derived by considering a continuum of types

dynamic contracting under adverse selection and renegotiation abstract we study the effects of renegotiation in an infinitely repeated screening model with long term contracts we propose a simple and tractable recursive formulation to study equilibria in which the monopolist s profit is maximized after every history we show that the monopolist sequentially screens high type consumers and characterize second degree price discrimination policies the monopolist s ability to extract rent from high type consumers by distorting the allocation of low type consumers vanishes as all parties become more patient as a result all distortions disappear and the allocation becomes efficient

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

on the instability of the r d portfolio in a dynamic monopoly or one cannot get two eggs in one basket abstract firms innovation portfolios include several dimensions ranging from organizational aspects to cost reduction and product characteristics all of these efforts take place during the product life cycle and interact with each other in determining the spectrum of features of the product and its performance on the market this paper contributes to the related theoretical debate focussing on the possibility of having superior product quality levels at lower marginal production cost over time to deal with this issue we investigate the optimal r d portfolio of a single product monopolist investing in cost reducing activities accompanied by efforts improving the quality of its product over an infinite time horizon it turns out that the firm s relative incentives along the two directions are conditional upon market affluence measured by consumers willingness to pay for quality and r d efforts are complements in the neighbourhood of the steady state equilibrium however the dynamics of the two r d controls depend on both quality and marginal cost at every instant consequently as the stability analysis reveals the steady state equilibrium is indeed unstable due to the dynamics of marginal cost thereby implying that one should not expect the firm to supply an increasing quality level at a decreasing production cost hence the dynamic interplay between r d controls and the resulting instability affecting production costs also imply that one may not expect to observe product quality to increase and market price to decrease over the product life cycle

black markets illegality information and rents abstract the analysis of black markets typically treats illegality only in reduced form as an additional cost per transaction we argue that this misses the essential feature of black markets that the risk of detection depends upon the dissemination of information because the cost of information is increased traders will change marketing technology from advertising to sequential approaches to potential customers the trader s decision problem is his offer price as he raises it he must expect to make more approaches per sale and thereby increase detection risk this behavior is important because of its implications at the market level the optimal offer price will be set at a level at which excess demand persists would be consumers are not always able to bid themselves into supplies hence black markets are not sufficient to eliminate the shortages which arise from price controls in an earlier paper the authors established that peasant supply response to crop prices would be perverse in the presence of shortages black markets therefore need not restore normal responses the paper includes evidence from rural tanzania

optimal pricing of a congestible good with random participation abstract this paper studies the optimal pricing of a congestible network good offered by a monopoly who faces a double asymmetry of information concerning both users valuations and users unit waiting costs which leads to a random participation problem we show that the textbook price is lower than the price with random participation

how optimal nonlinear income taxes change when the distribution of the population changes abstract the impacts of changing the number of individuals of a particular skill level on the solutions to two versions of the finite population optimal nonlinear income tax problem are investigated in one version preferences are quasilinear in leisure for this version it is shown that it is possible to sign the directions of change in everyone s optimal consumptions and optimal marginal tax rates in the other version preferences are quasilinear in consumption for this version it is shown that it is possible to sign the directions of change in everyone s optimal before tax incomes and optimal marginal tax rates moreover the directions of change in the optimal marginal tax rates are the same for the two specifications of preferences

symbiosis vs crowding out the interaction of formal and informal credit markets in developing countries abstract it is a common observation in many developing countries that enterprises are active borrowers in both formal and informal credit markets we propose a model in which the formal sector s superior ability in deposit mobilization is traded off against the informational advantage that lenders in the informal sector enjoy the formal sector can screen borrowers by providing only partial financing for projects thereby forcing borrowers to resort to the informal sector for the remainder of the loan we use the model to predict how the market structure responds to changes in the environment and we consider the policy implications of various forms of government intervention

multidimensional incentive compatibility and mechanism design abstract incentive compatibility conditions are characterized in general for problems in which several goods are to be allocated and agents types are multidimensional two questions of monopoly pricing under multidimensional uncertainty are then analyzed first we find the optimal nonlinear pricing scheme when the monopolist knows only the distribution of an arbitrarily parameterized family of demand curves and second we solve for the optimal bundling policy for a multiproduct monopolist

nonlinear pricing and type dependent network effects abstract network effects can reduce consumption levels across customers when a monopolist chooses optimal nonlinear pricing the direction and extent of these distortions depend on the relative rates of variation in marginal intrinsic value and marginal network value with customer type

nonlinear pricing of information goods this paper analyzes optimal pricing for information goods under incomplete information when both unlimited usage fixed fee pricing and usage based pricing are feasible and administering usage based pricing may involve transaction costs it is shown that offering fixed fee pricing in addition to a nonlinear usage based pricing scheme is always profit improving in the presence of nonzero transaction costs and there may be markets in which a pure fixed fee is optimal this implies that the optimal pricing strategy for information goods is almost never fully revealing moreover it is proved that the optimal usage based pricing schedule is independent of the value of the fixed fee a result that simplifies the simultaneous design of pricing schedules considerably and provides a simple procedure for determining the optimal combination of fixed fee and nonlinear usage based pricing the introduction of fixed fee pricing is shown to increase both consumer surplus and total surplus the differential effects of setup costs fixed transaction costs and variable transaction costs on pricing policy are described these results suggest a number of managerial guidelines for designing pricing schedules for instance in nascent information markets firms may profit from low fixed fee penetration pricing but as these markets mature the optimal pricing mix should expand to include a wider range of usage based pricing options minimum fees quantity discounts and adoption levels across the different pricing schemes are characterized strategic pricing responses to changes in market characteristics are described and the implications of the paper s results for bundling and vertical differentiation of information goods are discussed

an empirical analysis of competitive nonlinear pricing abstract we estimate a model of competitive nonlinear pricing with multidimensional preference heterogeneity using individual level data on advertisements bought by local businesses e g doctors electricians from two yellow page directories in one u s city market variation in individual choices and payments allows us to identify the joint density of preferences marginal costs of publishing and common utility parameters our estimates suggest substantial welfare loss due to asymmetric information comparing duopoly outcomes with counterfactual monopoly outcomes we find that with less competition i producer surplus increases substantially ii more low type consumers are excluded iii product variety increases but benefits accrue only to the high type consumers iv total consumer surplus decreases v but its distribution across consumers does not change

nonlinear pricing in village economies this paper examines the prices of basic staples in rural mexico we document that nonlinear pricing in the form of quantity discounts is common that quantity discounts are sizable for basic staples and that the well known conditional cash transfer program progresa has significantly increased quantity discounts although the program as documented in previous studies has not affected unit prices on average to account for these patterns we propose a model of price discrimination that nests those of maskin and riley 1984 and jullien 2000 in which consumers differ in their tastes and because of subsistence constraints in their ability to pay for a good we show that under mild conditions a model in which consumers face heterogeneous subsistence or budget constraints is equivalent to one in which consumers have access to heterogeneous outside options we rely on known results to characterize the equilibrium price schedule which is nonlinear in quantity we analyze the effect of nonlinear pricing on market participation as well as the impact of a market wide transfer analogous to the progresa one when consumers are differentially constrained we show that the model is structurally identified from data on prices and quantities from a single market under common assumptions we estimate the model using data on three commonly consumed commodities from municipalities and localities in mexico interestingly we find that relative to linear pricing nonlinear pricing is beneficial to a large number of households including those consuming small quantities mostly because of the higher degree of market participation that nonlinear pricing induces we also show that the progresa transfer has affected the slopes of the price schedules of the three commodities we study which have become steeper as consistent with our model leading to an increase in the intensity of price discrimination finally we find that a reduced form of our model in which the size of quantity discounts depends on the hazard rate of the distribution of quantities purchased in a village accounts for the shift in price schedules induced by the program

hiring and leasing with nonlinear prices this paper examines the problem of a monopolist setting an optimal nonlinear pricing schedule in the face of consumers of unknown type who arrive randomly over time and self select a choice of hire period the major determinant of pricing policy is the customer arrival distribution with the overall level of price higher than in the atemporal yield management nonuniform pricing solution by a margin which increases with the average frequency with which potential customers arrive by contrast the solution is generally fairly insensitive to variations in the time rate of discount although there is a tendency for the rate of price discount to increase with increases in the time discount rate

information exchange and distributional implications of price discrimination with internet marketing in agriculture a price discrimination model is proposed to explain why firms provide extraneous information on internet sites selling agricultural inputs whether an informative site is offered depends on price discrimination potential which depends on how much farmers reveal heterogeneity by internet behavior price discrimination is greater if information benefits are negatively correlated with farm size or other characteristics explaining why extraneous not product related information is offered on internet sales sites price discrimination adversely affects some farmers but may be beneficial on average because it generates free information outcomes depend on whether internet users are aware of price differentials on the basis of clickstream information

push or pull performance pay incentives and information we study a principal agent model wherein the agent is better informed of the prospects of the project and the project requires both an observable and unobservable input we show 1 performance pay may not be optimal even if output is the only informative signal of an essential input 2 total surplus tends to be higher if one input is unobservable than if both inputs are observable and 3 bunching may arise amongst low and intermediate types we explore the implications for push and pull programs used to encourage r d activity but our results have applications beyond this context

peasant supply response in rationed economies abstract when peasants do not have reliable access to goods on the black market government price controls may result in rationing of peasants demand for consumer goods we show that supply response is then perverse and that the economy may collapse as exports fall and rural shortages intensify such a crisis may initially be disguised as peasants sell export goods to build up money stocks we consider the policy options for governments facing such problems

contracting with endogenous entry we analyze entry in markets where a principal contracts with a privately informed agent before learning his production cost the agent knows his probability of having a low cost his ex ante type and decides whether to pay an entry fee to contract with the principal there are two cut off equilibria that determine the possible types of an agent who actually enters the market and neither equilibrium can be discarded by standard selection criteria contrasting with standard intuition in the equilibrium with the highest cut off an increase in the entry fee reduces the marginal type of the agent who enters thus increasing entry and the expected cost of an entrant this equilibrium is selected by a criterion based on robustness to equilibrium risk even though the equilibrium with the lowest cut off is pareto dominant for the agent public policies that increase entry barriers may be welfare improving

price discrimination of digital content abstract this paper considers the simplest drm which permits either free or no copying with incomplete information about the type of consumer we first obtain results concerning separability of consumers in a general situation and show that there is a critical type of consumer a higher utility type selects a menu of free copying whereas a lower one chooses not to copy in a two type model we indicate that optimal pricing for a producer is different from that under two part tariffs this price strategy brings about greater profits and social welfare if and only if self production is more efficient than that of a producer

price discrimination using linear and nonlinear pricing simultaneously abstract price discrimination practiced by using linear and nonlinear pricing simultaneously raises the average price for heterogenous consumers paying linear price but lowers for homogeneous group who pay nonlinear price discrimination lowers consumer surplus for both groups but increases total surplus

quality discrimination among income constrained consumers abstract this paper provides a complete characterization of equilibrium menus offered by a monopolist to the income constrained consumers in a vertically differentiated market even when all consumers have the same marginal willingness to pay the monopolist can profitably discriminate between them provided they have different binding budget constraints

optimal nonlinear pricing by a monopolist with information ambiguity we consider the optimal nonlinear pricing by an ambiguity averse monopolist the monopolist s subjective belief about the distribution of buyers is described by contamination of an additive probability we find that under a maxmin utility decision rule and with a continuum of buyers ambiguity aversion leads to bunching at the bottom in the optimal contract and the distortion at the bottom is reduced other high valuation buyers are offered the same quantity as in the case without ambiguity but they get a greater discount

a dynamic theory of countervailing power in this article i develop a model of an infinitely repeated procurement auction with one buyer and several sellers the buyer can accumulate a backlog of unfilled orders which similar to a boom in demand forces the sellers to collude on a low price to prevent undercutting if the buyer s cost of shifiing its consumption over time is low enough then the extent of collusion is bounded away from the joint profit maximizing level even for discount factors approaching one the model is extended to allow for multiple buyers large buyers are shown to obtain lower prices from the sellers buyer mergers increase pro t for all buyers not just the merging pair at the expense of the sellers in contrast buyer growth through addition harms buyers that do not grow and benefits sellers

the welfare performance of sequential pricing mechanisms consumers are commonly required to subscribe to particular tariff options before uncertainty regarding their future purchases gets resolved since the general comparison of welfare performance of different pricing mechanisms is ambiguous this article empirically evaluates the expected welfare associated with standard nonlinear pricing and optional tariffs by using information directly linked to the type of individual consumers results show that tariffs composed of nonlinear options do not necessarily outperform simpler pricing strategies in terms of expected profits furthermore evidence suggests that a menu of optional two part tariffs dominates any other pricing strategy from an expected welfare perspective

price discrimination through refund contracts in airlines this paper shows how an airline monopoly uses refundable and non refundable tickets to screen consumers who are uncertain about their travel our theoretical model predicts that the difference between these two fares diminishes as individual demand uncertainty is resolved using an original data set from u s airline markets we find strong evidence supporting our model price discrimination opportunities through refund contracts decline as the departure date nears and individuals learn about their demand

transportation state marketing and the taxation of the agricultural hinterland in raising revenues governments of poor countries affect farm gate prices for export crops because agriculture is dispersed interventions have spatial effects leading to an integrated analysis of taxation marketing and transportation policies to be used singly or together include land export and transportation taxes subsidies and variants of state marketing in which only government procures crops an export tax and a transport subsidy may be optimal with state marketing important aspects of buying depots are numbers locations spatial pattern of prices paid and movement of output toward or away from the ultimate market these policies also affect transport investment strategies

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

cost functions in non linear pricing abstract this paper compares the optimal selling strategies with symmetric and asymmetric information when monopolist s cost function depends both on individual and aggregate production we show how standard underproduction and higher exclusion with incomplete information are affected

revenue implications of money creation under leviathan most governments possess a monopoly franchise in the creation of money economists provide an analytical justification for this institutional arrangement either in terms of the use of monetary aggregates for macro economic stabilization or in terms of the alleged inability of competitive markets to generate tolerably efficient monetary results any complete case for the government s monetary monopoly must however depend on a comparison of market and political arrangements a comparison that requires predictions about how governments are likely to behave once a monopoly franchise is assigned similarly such predictions are crucial in evaluating restrictions that might be imposed on the government s exercise of its money creation power in designing a monetary constitution in the analysis of political arrangements the revenue implications of the money creation power are probably more significant than considerations of either macro economic stability or optimality in the money supply although those revenue implications are incidental to demonstrating the nature of market failure in monetary arrangements they are fundamental in understanding how the government might exploit a monopoly in money creation once granted our interest in the revenue effects of money creation stems from a broader study of constitutional restrictions on the revenueraising authority of government see our book the power to create money is naturally encompassed in this restrictions on the revenue raising power must embody restrictions on the power to create money consequently the fiscal constitution has important implications for the monetary constitution in this paper we examine both the revenue implications of money creation and desirable consitutional restrictions on the money creation power within the context of a specific model of political processes

monopoly with incomplete information recent theoretical research on principal agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other s actions here we concentrate on the former constraint and consider the case of a single principal the monopolist the main contribution is to show that under a separability assumption strong conclusions can be drawn about the nature of optimal incentive schemes although the primary focus is on optimal quantity discounts in a monopolized market the results also shed light on related topics such as optimal income taxation and commodity bundling

optimal nonuniform prices we consider optimal nonuniform pricing schedules where the price depends upon the amount purchased such schedules are regularly used by public utilities and other services welfare optimal nonuniform prices are related to the theory of optimal uniform prices developed by ramsey we characterize situations in which upward or downward discontinuities in pricing schedules are optimal our results are applicable to a number of related problems including optimal taxation insurance and incentives economic theory has confined most of its attention to markets with uniform prices in which the price per unit charged is invariant to the level of a customer s purchases this focus is warranted when goods are resellable since any attempt to charge nonuniform prices could be circumvented by reselling amongst customers but when goods are not resellable nonuniform prices are not only possible but common public utilities have declining block pricing with lower unit charges for large levels of consumption many agencies providing services including communications transportation even education use two part pricing with a fixed entry or retainer charge and a further charge per unit consumption nonuniform price schedules can be expected to be ever more common as services become a larger fraction of total output the increasing prevalence of nonuniform pricing policies have made them the focus of recent public and economic attention oi 1971 feldstein 1972 and ng and weisser 1974 have examined optimal two part pricing policies leland and meyer 1976 examine block pricing and show by example that optimal welfare policies may require nonuniform prices if zero profit constraints are binding in this paper we consider arbitrary nonuniform pricing policies using variational techniques two part and block pricing schedules are of course special cases of the environment we consider the work most closely related to our examination is the seminal paper by spence 1978 and subsequent analysis by roberts 1979 spence however does not pay explicit attention to the key role played by constraints on optimal pricing schedules roberts considers upward price discontinuities which lead to bunching of consumers at a given level of consumption but not downward price discontinuities which lead to regions in which no consumer chooses to consume gaps bunching or gaps may appear in the optimal price schedule even when underlying demand and cost functions are smooth and well behaved the prevalence of discontinuous pricing schedules e g the block pricing structures of public utilities argues that these questions are of practical as well as theoretical interest

the simple economics of extortion evidence from trucking in aceh this paper tests whether the behavior of corrupt officials is consistent with standard industrial organization theory we designed a study in which surveyors accompanied indonesian truck drivers on 304 trips during which they observed over 6 000 illegal payments to police soldiers and weigh station attendants using plausibly exogenous changes in the number of checkpoints we show that market structure affects the level of illegal payments we further show that corrupt officials use complex pricing schemes including third degree price discrimination and a menu of two part tariffs our findings illustrate the importance of considering the market structure for bribes when designing anticorruption policy

on the undervaluation of privatized companies privatizations are commonly associated with underpricing and undervaluation underpricing has received significant attention in the literature but there is no equivalent literature that explains undervaluation this paper provides a theoretical model of why regulated privatized assets are prone to undervaluation

the value of buyer s ignorance in monopoly abstract a non linear pricing monopolist always prefers to sell to buyers with no private information about their tastes for the product if the marginal production cost is smaller than the marginal utility of consumption for all buyers

contract theory and implications for perennial energy crop contracting abstract this article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops we discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges we focus primarily on the mechanism design or complete contracts approach to contracting which involves optimizing some objective function e g profits costs etc with respect to contract terms subject to important incentive constraints the solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and or minimize costs

when are local incentive constraints sufficient we study the question of whether local incentive constraints are sufficient to imply full incentive compatibility in a variety of mechanism design settings allowing for probabilistic mechanisms we give a unified approach that covers both continuous and discrete type spaces on many common preference domains including any convex domain of cardinal or ordinal preferences single peaked ordinal preferences and successive single crossing ordinal preferences local incentive compatibility suitably defined implies full incentive compatibility on domains of cardinal preferences that satisfy a strong nonconvexity condition local incentive compatibility is not sufficient our sufficiency results hold for dominant strategy and bayesian nash solution concepts and allow for some interdependence in preferences

a reduced form optimal nonlinear income tax problem abstract for a finite population with quasilinear preferences it is shown how mirrlees optimal nonlinear income tax problem can be simplified to a reduced form problem involving only the allocation of the consumption good this result is a finite version of a proposition established in the continuum by s lollivier and j c rochet

peasant household behaviour with missing markets some paradoxes explained a model of peasant household behavior under varying degrees of household specific food and labor market failures is constructed to show that these structural features can explain several well known patterns of peasant response which have often been attributed to peculiar motives presumed specific to peasants the model explains sluggish response to cash crops prices and high instability in perceived food and labor scarcities the key role of manufactured consumer goods prices in stimulating peasants effort in cash crops production the effectiveness of taxation as opposed to incentives in stimulating cash crops production and the key role of technological change in food production to enhance cash crop production results are obtained analytically in the case of one market failure and by numerical simulation with more than one

intertemporal quality discrimination of a durable good monopolist abstract consider a durable good monopolist facing the technology constraint that when he introduces a new product he cannot produce a cheaper variant without a time lag we show that the qualities of his high end and low end products are higher than their efficient quality levels

strategic environmental policy under incomplete information this paper introduces incomplete information into recent analyses of strategic environmental policy it is shown how asymmetric information between planners and producers affects national incentives to impose strategic environmental standards on domestic industries in international oligopolistic competition relative to the full information case incomplete information is likely to mitigate allocative distortions originating from strategic behaviour a countervailing effect tending to raise distortion is however revealed from the analysis this effect is absent when governments intervene in free trade through direct production subsidies the results suggest that incentives to capture foreign rents are less reduced due to private information when environmental standards rather than direct production subsidies are the strategic instrument

market segmentation by price quality schedules some evidence from automobiles discrimination among heterogeneous buyers of a product is possible through the use of multiple quality variants this article quantifies various implications of the standard mussa rosen model of price quality discrimination as applied to the u s automobile industry it demonstrates that the price quality variants of a major manufacturer indeed segment the market as predicted by the model distortions in the range and nature of products offered in their prices and in the resulting consumer surplus in the automobile market are measured and shown to be significant copyright 1992 by university of chicago press

profit maximizing nonlinear pricing if the preferences of the consumers are represented by utility functions that are differentiable quasi linear and satisfy the single crossing condition the characteristics of the profit maximizing nonlinear outlay schedule for a monopolist are well known we demonstrate that these characteristics are robust against weaker assumptions on the utility functions

profitable pricing when market segments overlap in this paper we analyze profitable pricing strategies when market segments overlap overlapping markets are segments that are not perfectly sealed and leakage between them can occur different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low price market a monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy in particular the monopolist must decide whether to charge a single price or to price differentiate conditions are derived under which price differentiation will be the most profitable strategy when price differentiation is optimal the equilibrium amount of leakage is determined endogenously unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination we show that zero leakage is not necessary for differential pricing to be optimal and that

group buying on the web a comparison of price discovery mechanisms web based group buying mechanisms are being widely used for both business to business b2b and business to consumer b2c transactions we survey currently operational online group buying markets and then study this phenomenon using analytical models we build on the literatures in information economics and operations management in our analytical model of a monopolist offering web based group buying under different kinds of demand uncertainty we derive the monopolist s optimal group buying schedule under varying conditions of heterogeneity in the demand regimes and compare its profits with those that obtain under the more conventional posted price mechanism we further study the impact ofproduction postponement by endogenizing the timing of the pricing and production decisions in a two stage game between the monopolist and buyers our results have implications for firms choice of price discovery mechanisms in e markets and for the scheduling of production and pricing decisions in the presence and absence of scale economies of production

nonlinear pricing and price cap regulation abstract this paper analyzes profit maximizing nonlinear pricing by a firm that is subject to price cap regulation two forms of regulatory constraint are considered i a cap on the firm s average revenue and ii a constraint that the firm must continue to offer each consumer the option of buying at the uniform price optimal nonlinear price schedules in these regimes are shown to have simple characterizations that are related to the nonlinear tariffs that an unregulated monopolist would charge of the regulatory regimes the firm prefers the average revenue constraint to the option constraint and likes uniform pricing least consumers in aggregate prefer the option regime to uniform pricing and like the average revenue constraint least but there are also distributional effects between consumers although the optional tariff regime pareto dominates uniform pricing it is ambiguous whether welfare is higher under uniform pricing or under the average revenue regime an example is used to illustrate the nature of the ambiguity

an adjustment scheme for nonlinear pricing problem with two buyers we examine a contracting problem with asymmetric information in a monopoly pricing setting traditionally the problem is modeled as a one period bayesian game where the incomplete information about the buyers preferences is handled with some subjective probability distribution here we suggest an iterative online method to solve the problem we show that when the buyers behave myopically the seller can learn the optimal tariff by selling the product repeatedly in a practical modification of the method the seller offers linear tariffs and adjusts them until optimality is reached the adjustment can be seen as gradient adjustment and it can be done with limited information and so that it benefits both the seller and the buyers our method uses special features of the problem and it is easily implementable

durable products time inconsistency and lock in many durable products cannot be used without a contingent consumable product e g printers require ink ipods require songs razors require blades etc for such products manufacturers may be able to lock in consumers by making their products incompatible with consumables that are produced by other firms we examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable under a lock in strategy the manufacturer has pricing power over the contingent consumable which she can use to extract additional rents from higher valuation consumers but such pricing power may also reduce consumers willingness to pay for the durable because it subjects them to being held up with higher consumables prices in the future restricting our attention to linear pricing policies we find that if the manufacturer can commit to shutting down production of her durable after an initial one time sale then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers fears of being held up on the other hand when the manufacturer cannot commit to shutting down production of her durable then her own output of additional durables gives her an incentive to keep consumables prices low and competition in the consumables market is less beneficial this paper was accepted by pradeep chintagunta and preyas desai special issue editors this paper was accepted by pradeep chintagunta and preyas desai special issue editors

equivalence between the diamond dybvig banking model and the optimal income taxation model abstract it is shown that the diamond dybvig journal of political economy 96 1983 768 banking model with a continuum of types of agents has the same analytical structure as the standard optimal income taxation model review of economic studies 38 1971 175 review of economic studies 43 1976 261 insights from the income taxation literature immediately imply that a bank run equilibrium exists in the banking model as long as the long term project is sufficiently costly to liquidate

competitive screening under heterogeneous information we study the interplay between informational frictions and second degree price discrimination our theory recognizes that consumers differ in their tastes for quality as well as in the information they possess about available offers which leads to dispersion over price quality menus in equilibrium while firms are ex ante identical we show that their menus are ordered so that more generous menus leave more surplus to consumers of all valuations we explore the cross section of equilibrium menus and variations in market conditions to generate empirical predictions on prices qualities and markups across firms and within a firm s product line for instance more competition may raise prices for low quality goods yet consumers are better off as the qualities they receive also increase the predictions of our model illuminate empirical findings in many markets such as those for cell phone plans yellow pages advertising cable tv and air travel

regulation competition and asymmetric information abstract this article studies a model of regulation under asymmetric information when there exists a competitive fringe of unregulated alternative producers the correlation between the unknown cost parameters of the fringe and of the regulated firm allows the regulator to use the threat of entry by the fringe to reduce the informational cost of regulation the presence of the fringe is welfare enhancing the allocative distortions can be larger or smaller than those in the no fringe case and the optimal contract sometimes allows inefficient entry the optimal contract can exhibit non standard bunching phenomena and discontinuities

involuntary unemployment and worker self selection abstract consider a firm that lacks information about the reservation wage or ability of any specific worker but is aware that workers with higher reservation wages tend to be more able on average we show that under a simple condition that the efficiency wage exceeds the lowest reservation wage the optimal hiring policy for the firm involves 1 no wage discrimination and 2 rationing of jobs when demand for its product is low the result also extends to the case where hours of work are variable provided each worker is most productive when working a strictly positive number of hours per week

optimal number of standards under economies of scope in quality abstract stivers stivers andrew e 2003 quality standards with exogenously distributed quality economics letters 80 1 130 136 finds the optimal segmentation of quality when the distribution of quality is exogenous this paper characterizes the optimal number of standards as the cost of information falls both the number of standards and the market coverage of the firm rise

the target incentive system vs the price incentive system under adverse selection and the ratchet effect abstract in a dynamic adverse selection type of principal agent relationship where the principal is committed over time to a particular incentive system with fixed structure but variable parameters but not to any intertemporal incentive scheme with both fixed structure and parameters the ratchet effect arises but varies with different incentive systems we show that compared with using prices as the sole planning mode the principal can attenuate the ratchet effect by stipulating targets as well as a result the target incentive system entails higher expected welfare than the price incentive system in a perfect bayesian equilibrium

the multiproduct firm quality choice and regulation a monopolist facing a market of heterogeneous consumers will distort the quality a rray this paper explores three regulatory remedies minimum quality s tandards mqs maximum price regulation mpr and rate of return re gulation rorr that can counteract this distortion mqs and mpr rais e the quality offered to consumers with a low willingness to pay for quality while mqs have no effect on the quality offered to consumers with a high willingness to pay mpr decreases the quality offered to this group if production of high low quality goods is capital i ntensive rorr increases decreases the quality offered to both grou ps copyright 1988 by blackwell publishing ltd

general equilibrium with parallel markets for goods and foreign exchange theory and application to ghana abstract this paper presents a simple model of a distorted economy with parallel markets which is motivated by the ghanaian experience the model has simultaneous illegal trade in goods and foreign exchange markets its general equilibrium determines the black market foreign exchange rate and the price of consumer goods after determining some comparative statics the predictions are tested on ghanaian monthly data from 1982 1983 the empirical results are shown to be consistent with those from the theoretical model

income portfolios in rural ethiopia and tanzania choices and constraints the article analyses the different income portfolios of households using survey data from rural ethiopia and rural tanzania it suggests that the different portfolios held by households cannot be e

reverse price discrimination with bayesian buyers this paper studies price discrimination under the situation in which buyers prior valuations are initially observable by a seller but buyers receive further information about a product or service which remains private thereafter the buyers interpret new information via bayes rule we show that in this environment prices are not monotone in buyers prior valuations interestingly this results in the possibility that a seller intentionally offers a higher price to a low valuation buyer rather than a high valuation buyer reverse price discrimination we derive this result in both monopoly and duopoly markets

efficiency properties of non linear pricing schedules without the single crossing condition this paper investigates efficiency properties of profit maximizing non linear outlay schedules it demonstrates that some well known efficiency characteristics of the profit maximizing non linear outlay schedule may not continue to hold when the single crossing condition is relaxed

all units discounts and double moral hazard abstract an all units discount is a price reduction applied to all units purchased if the customer s total purchases equal or exceed a given quantity threshold since the discount is paid on all units rather than marginal units the tariff is discontinuous and exhibits a negative marginal price cliff at the threshold that triggers the discount this paper shows that all units discounts arise in optimal agency contracts between upstream and downstream firms that face double moral hazard i present conditions under which all units discounts dominate two part tariffs and other continuous tariffs i also examine these tariffs when the upstream market faces a threat of entry in the case considered all units discounts deter entry by less efficient rivals without distorting price and investment whereas continuous tariffs either accommodate such entry or deter it by distorting price and investment

why do amusement parks only charge a fixed admission fee abstract we come up with some explanations on why amusement parks adopt pass pricing even when no additional transaction costs exist for implementing non linear pricing schemes the related factors include much fun generated by any ride and a higher transportation cost

monopoly and quality distortion effects and remedies a monopolist that sells in a market in which consumers differ in their willingness to pay for quality will distort and enlarge the range of products offered for sale we examine the positive and normative impacts of remedies used to counteract such distortions for the case of a price ceiling the monopolist improves quality at the low quality end of the market offsetting the distortion induced by the unregulated exercise of monopoly power social welfare can be shown to increase for a sufficiently slight degree of price regulation for minimum quality standards the social welfare implications are ambiguous because the standards may exclude some consumers from the market

smuggling and supply response coffee in ethiopia abstract during the 1980s substantial smuggling of coffee has been taking place in ethiopia the recent devaluation has raised hopes that substantial quantities of coffee will flow back to the official channels in this study data on the incentives to supply to the different channels are collated a model of official supplies is formulated which nests an empirical test between the smuggling models by bhagwati and hansen 1973 and by pitt 1981 the econometric results favor the latter and show a small but significant effect of the premium in the black market and a positive total supply response relative to the main competing crop chat the results imply that the increases in export earnings from the devaluation will be quite limited

why do larger buyers pay lower prices intense supplier competition abstract the paper provides a theoretical explanation of the common claim that larger buyers pay lower prices in the model suppliers compete more aggressively for the business of larger buyers much as they do in boom periods of rotemberg and saloner

economic reform growth and the poor evidence from rural ethiopia abstract a new decomposition of poverty changes is developed to analyse the determinants of poverty changes during a period of economic reform 1989 1995 in villages in ethiopia poverty fell substantially but with diverse experiences across villages shocks mattered but the main factors driving consumption changes were relative prices changes resulting in changes in the returns to land labour human capital and location the experience of the poor is mixed one group of the poor in 1989 with relatively good land and location outperformed all other households while another group with much poorer endowments and location experienced virtually unchanged and persistent poverty

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

regulating a monopolist with unknown costs we consider the problem of how to regulate a monopolistic firm whose costs are unknown to the regulator the regulator s objective is to maximize a linear social welfare function of the consumers surplus and the firm s profit in the optimal regulatory policy prices and subsidies are designed as functions of the firm s cost report so that expected social welfare is maximized subject to the constraints that the firm has nonnegative profit and has no incentive to misrepresent its costs we explicitly derive the optimal policy and analyze its properties in their classic papers dupuit 2 and hotelling 5 considered pricing policies for a bridge that had a fixed cost of construction and zero marginal cost they demonstrated that the pricing policy that maximizes consumer well being is to set price equal to marginal cost and to provide a subsidy to the supplier equal to the fixed cost so that a firm would be willing to provide the bridge this first best solution is based on a number of informational assumptions first the demand function is assumed to be known to both the regulator and to the firm while the assumption of complete information may be too strong the assumption that information about demand is as available to the regulator as it is to the firm does not seem unnatural a second informational assumption is that the regulator has complete information about the cost of the firm or at least has the same information about cost as does the firm this assumption is unlikely to be met in reality since the firm would be expected to have better information about costs than would the regulator as weitzman has stated an essential feature of the regulatory environment i am trying to describe is uncertainty about the exact specification of each firm s cost function in most cases even the managers and engineers most closely associated with production will be unable to precisely specify beforehand the cheapest way to generate various hypothetical output levels because they are yet removed from the production process the regulators are likely to be vaguer still about a firm s cost function 12 p 684 as this observation suggests it is natural to expect that a firm would have better information regarding its costs than would a regulator the purpose of this paper is to develop an optimal regulatory policy for the case in which the regulator does not know the costs of the firm one strategy that a regulator could use in the absence of full information about costs is to give the firm the title to the total social surplus and to delegate the pricing decision to the firm in pursuing its own interests which would then be to maximize the total social surplus the firm would adopt the same marginal cost pricing strategy that the regulator would have imposed if the regulator had