ACQUISITION AND DISSEMINATION OF INFORMATION IN IMPERFECTLY COMPETITIVE MARKETS

In imperfectly competitive markets, incentives for the acquisition and dissemination of information by prices is significantly affected by strategic considerations. Since prices reveal information, firms possessing market power may choose to set prices which are either biased or not adjusted to all available information so as to distort their information content. Even when information is costlessly available strategic considerations may lead firms to remain uninformed. These results are illustrated in a simple Stackelberg model with price-setting firms where the pricing game is preceded by an information acquisition game.     

Catalog competition: Theory and experimental evidence

This paper compares the standard location-then-pricing Hotelling duopoly with a catalog competition game in which firms simultaneously decide locations and prices. We consider a three-location space and continuous pricing and fully characterize the unique symmetric equilibrium. In both games, firms employ mixed strategies, producing a mainstream product more often than a specialized one. In the catalog game, prices are always above the marginal cost of production, whereas in the sequential model, prices converge to the marginal cost when firms produce the same variety. We experimentally test our theoretical predictions in the laboratory, finding strong evidence in favor of most of them.     

THE NEAR OPTIMALITY OF MARK-UP PRICING

Mark-up pricing policies result in a loss of profits compared to marginal pricing behavior. These losses, however, are often very small, even for large changes in the money supply. But by adopting a simple pricing rule the firm does not have to forecast the future, and avoids the informational and computational costs required to determine the profit maximizing price each period. Thus, even if these costs are small, mark-up pricing policies may be optimal, or approximately so, at least for some firms. In a macro model this is likely to imply large monetary non-neutralities.     

DESIGNED TO FAIL: THE MEDICARE AUCTION FOR DURABLE MEDICAL EQUIPMENT

We examine the theoretical properties of the auction for Medicare Durable Medical Equipment. Two unique features of the Medicare auction are (1) winners are paid the median winning bid and (2) bids are nonbinding. We show that median pricing results in allocation inefficiencies as some high‐cost firms potentially displace low‐cost firms as winners. Further, the auction may leave demand unfulfilled as some winners refuse to supply because the price is set below their cost. We also introduce a model of nonbinding bids that establishes the rationality of a lowball bid strategy employed by many bidders in the actual Medicare auctions and recently replicated in Caltech experiments. We contrast the median‐price auction with the standard clearing‐price auction where each firm bids true costs as a dominant strategy, resulting in competitive equilibrium prices and full efficiency. (JEL D44, I11, H57)     

THEORY AND EXPERIMENTS ON SPATIAL COMPETITION

We present theoretical and experimental results on spatial competition between two firms. Firms choose locations simultaneously along a line representing a linear market. Identical consumers with non-increasing demand functions are uniformly distributed along this line. We solve for symmetric equilibrium payoffs in an infinitely repeated game for the case of linear demand and an arbitrary discount factor. The set of equilibriums found includes both competitive and collusive payoffs. In laboratory experiments in which the final period was unknown to the players in advance, we observed both competitive and collusive outcomes. Non-binding communication led to collusion.     

ZONING UNDER SPATIAL PRICE DISCRIMINATION

This paper investigates zoning in a duopoly model of spatial price discrimination. We find that the zone in which the firms are not allowed to locate depends on the bias of the regulator. A bias toward firms is deduced when locations around the central area are forbidden, and a bias toward consumers exists when firms are only allowed to locate at places around the central area. The design of the zoned area guarantees that firms locate optimally and works under simultaneous or sequential choice of locations by the two firms. (JEL L13, R38)     

AN OPTIMAL MIDDLEMAN FIRM PRICE ADJUSTMENT POLICY: THE "SHORT-RUN INVENTORY-BASED PRICING POLICY"

This paper examines the optimum pricing policies of middleman firms who carry an inventory of goods bought for resale. Each period the firm in the theoretical model is required to post a price before it observes its realized demand. In disequilibrium situations, the firm's profit-maximizing pricing policy is shown to be a "short-run inventory-based pricing policy" which requires the firm to post a price below the long-run equilibrium price upon observing its actual beginning inventory level above its optimum level, and to post a price above the long-run equilibrium price upon observing its actual inventory level below its optimum level. The final section suggests that the use of such policies by middleman firms will lead to market price adjustments which are both consistent with the "law of supply and demand" and which are based on explicit maximizing behavor.     

Automated Pricing Rules in Electronic Posted Offer Markets

Internet markets are heralded as enhancing efficiency by providing buyers and sellers with an abundance of information. In these electronic markets, firms have the opportunity to employ "pricebots," computerized algorithms that automatically adjust prices to prevailing market conditions. This article uses laboratory methods to examine the potential market impact of the endogenous selection of three automated pricing algorithms: undercutting, low-price matching, and trigger pricing. We find that the undercutting algorithm leads to prices similar to the game-theoretic prediction. Low-price matching generates significantly higher prices, and trigger pricing results in market prices below the game-theoretic prediction.     

THE IMPACT OF UNIONIZATION ON MOTOR CARRIER COSTS

Union trucking firms have significantly different cost structures than non-union firms. Further, average costs for union firms are higher than for non-union firms even after controlling for higher unionized labor costs. The translog cost function approach used here incorporates a unique dummy variable technique to test not only for overall differences in union/non-union costs, but also to identify which individual cost function parameters differ between the two types of firms. Results suggest that unionized trucking firms are at a competitive disadvantage in the less regulated, post-1980 trucking industry.     

TWO-PART PRICING FOR A MULTI-PRODUCT MONOPOLIST

This paper examines profit-maximizing multi-part pricing arrangements by multi-product monopolists. The results indicate that prices set by such firms will deviate from the marginal-cost-pricing efficiency norm when multi-part tariffs can be set on only a subset of the firm's product line. Per unit prices will be set above marginal cost when the monopolist sells goods that are substitutes, while per unit prices for complements may be set above or below marginal cost. In either case, the pricing strategy will involve increasing the demand for goods on which an entry fee can beset.     

THE NONPROFIT FIRM: A POTENTIAL SOLUTION TO INHERENT MARKET FAILURES

This article analyzes the differences in products offered by nonprofit and for-profit firms in a monopolistically competitive industry where goods are differentiated both by product attributes and by the degree to which benefits are public. Because nonprofit firms receive donations, they provide a Pareto improvement of the equilibrium product set: nonprofit firms will be less biased against goods with a high social good component than will their for-profit counterparts, hi addition, the optimal donations function which equates the nonprofit equilibrium product set to the set which maximizes societal welfare is derived.     

Why unions support mandated benefits

A complete explanation for union support of mandated benefits must recognize that (1) unions promote the interests of their members primarily by restricting entry into labor markets and (2) those restrictions reduce the competitive advantage which unionized firms realize from efficiently providing fringe benefits. Only by exerting pressure on unionized firms to provide particular fringe benefits and then lobbying government to mandate those benefits at nonunion firms can unions hope to overcome a problem of their own creation.     

High Stakes in High Technology: High-Tech Market Values as Options

In science-based industries, world-class scientists drive the most successful firms. These scientists are more likely to follow high-stakes, high-returns R&D strategies instead of more predictable incremental strategies. We develop an options pricing model in which the probability of stock-price jumps increases with knowledge capital. GMM estimates show the probability of stock-price jumps increases with three measures of knowledge capital intensity, two of which can be reasonably estimated contemporaneously. The model explains most variation in biotech firm market values. Firms with two standard deviations more knowledge capital are valued 10–50% more than firms with mean values of all variables.     

SOME EVIDENCE ON LUMP SUM VERSUS CONVEX COSTS OF CHANGING PRICES

Two models in which price stickiness results from price adjustment costs are tested. One, an (s,S) pricing model, assumes lump-sum adjustment costs and predicts firms will make relatively large, infrequent price changes. The other assumes convex adjustment costs and predicts frequent, partial price adjustments. Survey data of firms' price behavior reveal patterns consistent with the (s,S) model. However, many of the patterns are also consistent with partial-adjustment rules, although the high percentage of firms which fix prices for a quarter or more casts doubt on the plausibility of the partial-adjustment hypothesis.     

Strike strategies and the minimum effective union

Research has shown that in an industry-wide strike, a union must be able to reduce output “by a substantial percentage below competitive levels” to impose hardship on producers. But a union may also be effective by pursuing selective strikes. If some producers are struck while others are free to operate, then the targeted producers may bargain with the union, and holdouts can be targeted for strikes. This article analyzes the effects of selective and general strikes on both a competitive industry and a duopoly. If there are side-payments among producers, then general strikes are easier to mount. If there is no mutual aid among employers, then selective strikes are less costly to implement. It is also shown that strikes are easier to mount in a duopoly than in a competitive industry. This may contribute to union formation and collective bargaining in noncompetitive industries. The analysis is modified to allow for firms of different sizes. The results show that unions must be able to remove more output from larger firms than smaller ones, suggesting that union formation may be focused more on larger firms. The author thanks Mark Loewenstein, James Fain, and Campbell McConnell for thoughtful comments and suggestions. The author gratefully acknowledges a research grant from the College of Business Administration of the University of Nebraska. I am responsible for any remaining shortcomings.     

Strategic behavior and the impact of unions on wage incentive plans

This paper analyzes optimal wage incentive plans in situations in which firms make capital investments and employees supply work effort. An efficient contract will take workers’ response into account in its design, leading to a competitive contract that takes the form of a lump sum penalty and full marginal rewards to workers, or equivalently, a base wage and a piece rate above a quota. A union optimizing worker welfare will alter this lump sum amount rather than attempt to control worker effort or the marginal rewards for additional output. The greater utilization of piece rate systems in capital-intensive industries is correctly predicted by the analysis.     

EFFICIENCY IN EMPLOYMENT BASED HEALTH INSURANCE: THE POTENTIAL FOR SUPRA-MARGINAL COST PRICING

Currently, the majority if privately insured individuals in the U.S. are insured through their employers. This has significant implications for competition and the ability qf a "competitive" insurance industry to assure marginal-cost pricing. The central barrier to competition arises when employers restrict their employees' ability to select among insurance carriers. Several models 4 insurer proft maximization are explored which demonstrate that supra-marginal cost pricing is likely to persist euen when the insurance market appears "cornpetitiue."     

Strategic implications of the information age

conclusion The continued enhancements of information technologies facilitate and increase knowl-edge intensity in organizations. As such, knowledge and information technologies play critical roles in the development of competitive advantage by firms. For example, IT facilitates organizational learning and helps firms move into international markets by making it easier to coordinate geographically dispersed units and operations. Even entrepreneurial new venture firms are moving into international markets earlier in their life cycle (Oviatt and MacDougall, 1977; Zahra et al., 2000). IT has become especially important to smaller, entrepreneurial firms to facilitate their networking and coopera-tive ventures with other firms in order to compete more effectively with much larger firms for major projects. Furthermore, information technologies facilitate these firms’ technological learning, a critical element to their survival and long-term success (Zahra et al., 2000). IT has also helped firms from emerging markets (e.g., Korea, Mexico) compete more effectively against firms from developed markets that have more resources. Thus, IT has helped facilitate the increasing globalization of businesses.     

The embeddedness of social relations in inter-firm competitive structures

Collaboration with direct competitors is a valuable, yet risky, strategy that might pave the way for competitive advantages. Thus far, we have lacked a detailed understanding of how competitive relations between firms shape collaborative relations between their managers, and consequently the structural interdependencies at both levels. The primary objective of this study is to understand the multi-level structure underlying the ambiguous relationship of coopetition, a state of simultaneous collaboration and competition. Hence, we investigate the influence of perceived inter-firm competition on interpersonal knowledge flows among managers within three high-tech clusters by applying multi-level exponential random graph models to network data. Our results reveal that the interpersonal exchange of advice and information depends strongly on the inter-firm competitive structure and that competitive structures shape these interpersonal exchanges in different ways. Thereby, our research demonstrates that managers utilize asymmetries by means of perceived competitive relations to seek work-related advice and information from their competitors and that stronger forms of competition are significant, but not insuperable, obstacles to the exchange of knowledge.     

Growing by Leaps and Inches: Creative Destruction, Real Cost Reduction, and Inching Up

Most firms achieve perfective progress, incrementally improving commodities or productivity. But technological progress is concentrated in a few firms achieving metamorphic progress: forming or transforming industries with technological breakthroughs (e.g., biotechnology, lasers, semiconductors, nanotechnology). Unless congruent with incumbents' science and technology base, metamorphic progress promotes entry. Scientific breakthroughs embodied in discovering scientists, protected by natural excludability and transferred by learning-by-doing-with at the bench generally drive metamorphic progress. Embodied knowledge is rivalrous and leads to entry and industry dominance by star scientist–linked firms. Incorporating this scientific entrepreneurial process is essential to improving—if not transforming—endogenous growth models.