STRATEGIC EXCLUSION OF THE HIGHEST‐VALUED BIDDERS IN WHOLESALE AUTOMOBILE AUCTIONS

By restricting bidders to be qualified dealers, wholesale automobile auctions exclude the bidders who place the highest value on the vehicles: consumers. This article provides an explanation for this puzzling entry restriction by modeling the inventory‐management decisions of a firm. If an automobile dealer has more vehicles in inventory than is optimal, it cannot reduce its inventory by selling directly to consumers without impacting the demand for the automobiles that remain. However, if the dealer sells his/her excess inventory to a competitor, the demand for his/her remaining vehicles increases as the competitor responds by acquiring fewer additional vehicles. We demonstrate that for any market demand function and any cost of the competitor acquiring additional vehicles, a dealer with excess inventory does better by selling a subset of its vehicles to a competitor rather than directly to consumers. We discuss the market for wholesale automobiles in relation to other markets where goods are also auctioned but where entry is not restricted to qualified dealers. Doing so allows us to compare our inventory‐management explanation to common explanations provided by industry practitioners. We find that intuitive alternative stories do not consistently explain practices across markets. (JEL D44, L11, L62)     

ENTRY DETERRENCE AND STRATEGIC ALLIANCES

Researchers have written extensively on the impact that strategic alliances between airlines have on airfare, but little is known of the market entry deterrent impact of strategic alliances. Using a structural econometric model, this paper examines the market entry deterrent impact of codesharing, a form of strategic alliance, between incumbent carriers in domestic air travel markets. We find evidence of market entry deterrence, but deterrence impact depends on the specific type of codesharing between market incumbents as well as the identity of the potential entrant. We quantify the extent to which market incumbents' codesharing influences potential entrants' market entry cost and probability of market entry. (JEL L13, L93)     

MULTIPLE EQUILIBRIA AND DETERRENCE IN AIRLINE MARKETS

We use a longitudinal dataset from the U.S. airline industry to estimate three different models for entry games with very general forms of heterogeneity between U.S. carriers in airline markets: a simultaneous game with complete information and two sequential games with or without strategic entry deterrence. In a sequential game with entry deterrence, an incumbent decides whether to incur a cost to deter potential entrants. We show that the model with sequential games with strategic deterrence provides the best fit to the data. We conclude that the results reject the hypothesis of a static model and support the hypothesis of the existence of strategic entry deterrence. (JEL L1)     

CAN ENTRY OR EXIT EVENT STUDIES INFORM HORIZONTAL MERGER ANALYSIS? EVIDENCE FROM GROCERY RETAILING

This study estimates how prices change following the entry and exit of grocery retailers. We estimate the effects of entry (exit) by comparing affected markets to a set of unaffected markets using both a difference‐in‐difference estimator and a synthetic control estimator. We find that entry typically results in reduced prices. More surprisingly, we find that exit is frequently associated with falling prices. Our estimated effects of entry on grocery prices are similar in magnitude to estimates of merger price effects in the supermarket industry. This finding suggests that entry event studies may be a useful tool for horizontal merger analysis. (JEL L11, L4, L81)     

MARKET ENTRY MODE: EVIDENCE FROM THE GOLDEN AGE OF HOLLYWOOD

I examine international market entry modal choice using novel data sources on the early years of the U.S. motion picture industry. These data detail how studios built out their international distribution networks and give unusual access to revenues generated across modes. Motion picture exporters used a variety of entry modes: exports, licensed agents, and offices. Studios opened offices in distant, large markets first and used these markets as platforms to build out their distribution network. This pattern indicates that directed search for export customers is important. Offices generated more total revenue than licensed agents. They allowed headquarters to monitor employees through strict control of financial assets, limiting the diversion of intellectual property. (JEL F14, F21, L22, L24, L82)     

CONTRACT DELEGATION WITH BARGAINING

In the theoretical literature on contract delegation, it is assumed that the contractor has all the bargaining power when contracts are proposed to the subcontractee. In this case, the principal prefers centralized to decentralized contracting structures. This paper analyzes the consequences of relaxing this assumption. It is shown that when contracts are determined by bargaining, the principal might prefer decentralization to centralization. Furthermore, it is shown that this can happen even when subcontractees have very little bargaining power. The results explain, for example, the coexistence of centralized and decentralized contracting in public procurement. (JEL D23, D82, L22)     

PRODUCT DIVERSITY,DEMAND STRUCTURES,AND OPTIMAL TAXATION

This article studies optimal taxation in a general equilibrium macroeconomic model with endogenous entry. We compare the constant elasticity of substitution (CES) model to three alternative demand structures: oligopolistic competition in prices, oligopolistic competition in quantities, and translog preferences. Our economy is characterized by two distortions: a labor distortion due to the misalignment of markups on goods and leisure, and an entry distortion due to the misalignment of the consumer surplus effect and the profit destruction effect of entry. The two distortions interact in determining the wedge between the market‐driven and optimal level of product diversity. We show how optimal labor and entry taxes depend on the prevailing demand structure, the nature and size of entry costs, and the degree of substitutability between goods. (JEL E22, E61, E62)     

FORCED INFORMATION DISCLOSURE AND THE FALLACY OF TRANSPARENCY IN MARKETS

A theory advanced in regulatory hearings holds that market performance will be improved if one side of the market is forced to publicly reveal preferences. For example, wholesale electricity producers claim that retail electricity consumers would pay lower prices if wholesale public utility demand is disclosed to producers. Experimental markets studied here featured decentralized, privately negotiated contracts, typical of the wholesale electricity markets. Two conclusions emerge: (1) such markets generally converge to the competitive equilibrium and (2) forced disclosure works to the disadvantage of the disclosing side. Information disclosure would result in higher wholesale and thus higher retail electricity prices. (JEL L50 , L94 , D43 )     

PRODUCT COMPATIBILITY HINDERS PRE-EMPTIVE ADVERTISING

This paper considers competition in systems of complementary products and examines how compatibility affects the use of informative advertising by an incumbent to deter entry. Advertising increases demand for a product; customers become price sensitive and competition increases, pre-empting new market entrants. However, compatibility reduces competition, so incumbent advertising becomes less effective at deterring entry and additional, costly advertising would be required to induce deterrence. Moreover, compatibility increases advertising by a potential entrant; with efficient advertising technology, consumers are informed about all products and the incumbent cannot deter entry by using additional advertising. Therefore, product standardization policies that encourage compatibility can support new market entrants by discouraging pre-emptive advertising strategies. (JEL D21, D43, L13, L15)     

MARKET STRUCTURE AND MEDIA DIVERSITY

We estimate a mixed logit model of the demand for local news service. Results provide evidence that suggest the representative consumer values more diverse news, more coverage of multicultural issues, and more information on community news, and has a distaste for advertising. Demand estimates are used to calculate the impact on consumer welfare from a marginal decrease in the number of independent television stations that lowers the amount of diversity, multiculturalism, community news, and advertising. Consumer welfare decreases, but the losses are smaller in large markets. For example, small‐market consumers lose $45 million annually while large‐market consumers lose $13 million. (JEL C9, C25, L13, L82, L96)     

Occupational licensing and the transition from welfare to work

Occupational licensing laws erect barriers to entry into various labor markets, impeding the upward mobility of welfare recipients seeking to transition into employment. This paper, recognizing that labor market interventions have often been used precisely because of this effect, proceeds to examine various restrictions which directly affect low-skilled workers in the U.S. economy who now have stronger incentives to participate in labor markets in response to recent welfare policy reforms. Three distinct types of labor market restrictions are identified: (1) the licensing of professional, high-skilled occupations tends to crowd workers into lower-skilled occupations, lowering such wages and thus weakening work incentives among the welfare population; (2) quantity license restrictions (permits which set quotas limiting the overall number of suppliers in a market) suppress demand for low-skilled workers, and may substantially reduce work opportunities and, thus, incentives. Taxi license restrictions alone, for instance, may result in several hundreds of thousands of lost employment opportunities throughout the United States; and (3) quality license restrictions, where entrants face higher entry costs (typically through educational requirements above the requirements of the market), may paradoxically provide welfare recipients with enhanced opportunities for employment, particularly when coupled with job-training subsidies typically extended to welfare recipients. This we call a “de facto liberalization” of occupational licensure. While incumbent workers are certain to resist enhanced entry by welfare recipients into licensed occupations, vocational schools should aggressively support such entry, affording a possible realpolitik to the migration path envisioned. More interestingly, once entry has accelerated under de facto liberalization, occupational license rents will predictably decline, thus increasing the likelihood of explicit liberalization, and further opening labor markets to competitive entry.     

Costs and Benefits of Relational Contracting in China’s Transition

This paper is an attempt to account for the social foundations of China’s economic transition from central planning to a market economy which is a process of the completion and perfection of markets. In the early stage of China’s transition, relational contracts and interlinked arrangements constitute effective substitutes for missing and imperfect markets. However, relational contracting is becoming more costly as China’s economy develops. Its costs include, diseconomy of scale, undermining the development of arm-length transactions and formal institutions, among others. There are two possible future trajectories of China’s reform. One possibility is that the markets are so developed so that they are dis-embedded from sociopolitical powers. A second is that the markets are less developed and embedded in sociopolitical powers.     

THE EXTENT OF THE MARKET AND INTEGRATION THROUGH FACTOR MARKETS: EVIDENCE FROM WHOLESALE ELECTRICITY

We document the influence of factor markets in determining the extent of the market, appealing to the Mundell hypothesis that trade in goods and factor markets are substitutes. We confirm this influence using the U.S. wholesale market for electric power. Although the Eastern, Western, and Texas regions cannot trade electricity, inputs such as natural gas move freely across these regions. Through a set of price transmission ratios, and a supply model for natural gas, we find regional electricity shocks do propagate across regions. We conclude output markets institutionally in autarky achieve modest degrees of economic integration through factor markets. (JEL C32, L94, Q41)     

CONTRACTS AS RENT‐SEEKING DEVICES: EVIDENCE FROM GERMAN SOCCER

Recent theoretical research has identified many ways how contracts can be used as rent‐seeking devices vis‐à‐vis third parties, but there is no empirical evidence on this issue so far. To test some basic qualitative properties of this literature, we develop a theoretical and empirical framework in the context of European professional soccer where (incumbent) teams and players sign binding contracts which, however, are frequently renegotiated when other teams (entrants) want to hire the player. Because they weaken entrants in renegotiations, long‐term contracts are useful rent‐seeking devices for the contracting parties. However, they reduce the likelihood of (mutually beneficial) transfers, which generates a trade‐off in the spirit of Aghion and Bolton (1987). Using a data set from the German “Bundesliga,” our model predictions are broadly confirmed. (JEL L14, J63, L40, L83)     

INFORMATION VALUE UNDER DEMAND UNCERTAINTY AND ENDOGENOUS MARKET LEADERSHIP

In an oligopoly model with firms choosing to produce in one of two periods, we identify the circumstance under which a firm's having early information regarding stochastic demand results in market leadership. High demand volatility leads to Stackelberg competition with the information‐advantaged firm leading. In the N‐firm case an equilibrium with multiple leaders and multiple followers emerges endogenously. In a duopoly information acquisition game we identify conditions that determine whether neither, one, or both firms will pay to acquire early information and note that one firm's obtaining early information may generate a positive externality benefitting its competitor. Both symmetric and asymmetric outcomes are possible and Stackelberg market leadership may occur in equilibrium, but only when firms have different costs of information. Our finding that an information advantage may convey leadership which then affects the value of information to the players applies to other settings exhibiting first‐mover advantage such as certain public good provision games. (JEL C72, D82, L13)     

LABOR CONTRACTS AND FLEXIBILITY: EVIDENCE FROM A LABOR MARKET REFORM IN SPAIN

This paper evaluates the effects of a labor market reform in Spain that removed restrictions on fixed‐term or temporary contracts. Our empirical results are based on longitudinal firm‐level data that cover observations before and after the reform. We posit and estimate a dynamic labor demand model with indefinite and fixed‐term labor contracts, and a general structure of labor adjustment costs. Experiments using the estimated model show important positive effects of the reform on total employment (i.e., a 3.5% increase) and job turnover. There is a strong substitution of permanent by temporary workers (i.e., a 10% decline in permanent employment). The effects on labor productivity and the value of firms are very small. In contrast, a counterfactual reform that halved all firing costs would produce the same employment increase as the actual reform, but much larger improvements in productivity and in the value of firms. (JEL J23, J32, J41)     

Market entry: An experimental investigation

Experimental oligopoly markets for homogeneous products were conducted to investigate cooperative behaviors when subjects were allowed to choose whether or not to enter the market. Two types of games were designed. One was a one-stage game in which subjects were given a payoff table and asked only to make an entry decision; the other was a two-stage game in which subjects had to decide whether or not to enter and then compete either in prices or in quantities. Data indicated a significant tendency to establish entry cycles, with players entering one at a time, in the one-stage “price-setting” markets. On the contrary, this tendency was never observed in the one-stage “quantity-setting” markets. The results in the two-stage game reinforced the difference in the observed behaviors between the price- and quantity-setting markets. In the former, subjects generally behaved in conformity with the Nash equilibrium predictions, whereas in the latter these predictions were not observed.     

TECHNOLOGICAL ASYMMETRY AMONG FOREIGN INVESTORS AND MODE OF ENTRY

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? This article develops a simple model of entry mode choice and evaluates its main testable implication using data on foreign investors in Eastern European countries and the successor states of the Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following trade‐off: while a joint venture (JV) helps a foreign investor secure a better position in the product market vis‐à‐vis its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a JV and more likely to enter directly relative to the inefficient investor. Our empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to JVs. This empirical finding is robust to controlling for host country–specific effects and other commonly cited determinants of entry mode. (JEL F13, F23, O32)     

Labor Market Structure and Career Occupational Status Mobility: A Theoretical Model*

Sociological explanations of career or intragenerational occupational status mobility generally have not taken into explicit account the effects of labor market structure. Rooted in structural-functionalist sociological theory or neoclassical economic theories of the labor market, models typically misrepresent the process of individual occupational status mobility, primarily by including only individual characteristics. Dual labor market theory is introduced, direct as well as indirect effects of labor market structure on career occupational status mobility are outlined, and a theoretical model is presented. It is hypothesized that labor market structure will have direct effects on opportunities for career occupational status mobility that are independent of the effects of individual characteristics. Additional indirect effects are suggested: through their effects on social network structures, labor markets operate as job opportunity information filters.     

REPEATED LOBBYING BY COMMERCIAL LOBBYISTS AND SPECIAL INTERESTS

Developing a lobbying model of repeated agency, we explain previously unexplained features of the real‐world lobbying industry. Lobbying is divided between direct representation by special interests to policymakers, and indirect representation where special interests employ professional intermediaries called commercial lobbyists to lobby policymakers on their behalf. Our analytical structure allows us to explain several trends in lobbying. For example, using the observation that in the United States over the last 20 years, policymakers have spent an increasing amount of their time fundraising as opposed to legislating, we are able to explain why the share of commercial lobbyist activity in total lobbying has risen dramatically and now constitutes over 60% of the total. The key scarce resource in our analysis is policymakers' time. Policymakers allocate this resource via implicit repeated agency contracts that are used to incent special interests and commercial lobbyists to provide a mix of financial contributions and information on policy proposals. These implicit agency contracts solve both an information problem in the presence of unverifiable policy information and a contracting problem in the absence of legal enforcement. These repeated relationships, that are often described using the pejorative term “cronyism” in the popular press, may in certain circumstances be welfare improving. (JEL D72, D82, H1, P16)