MONEY AND PRODUCT QUALITY UNDER ASYMMETRIC INFORMATION

This article examines the effects of money on product quality, as well as the price pattern of heterogeneous quality goods, in a search‐theoretical monetary model with divisible money and divisible commodities. We establish the existence and uniqueness/multiplicity of monetary equilibrium in several different cases. The steady‐state equilibrium of our model displays several properties that are absent or distinct from those of previous studies. In particular, we find that under egalitarian bargaining, the Friedman rule cannot achieve socially efficient allocation due to asymmetric information. We find that the price of informed high‐quality goods is higher than the price of uninformed quality goods. We also find that an increase in inflation can improve product quality. (JEL E40)     

ENTRY COORDINATION AND AUCTION DESIGN WITH PRIVATE COSTS OF INFORMATION ACQUISITION

Auction design with endogenous entry is complicated by entry coordination among bidders due to multiple entry equilibria issue. This article studies auction design when information acquisition costs are private information of bidders. We show that this problem can be resolved by sufficient dispersion in these costs. First, we find that a simple second‐price auction with no entry fee and a reserve price equal to the seller's valuation is ex ante efficient, while a revenue‐maximizing auction involves personalized entry fees, which are determined by the hazard rates of their information acquisition cost distribution. Second, we show that sufficient dispersion in the information acquisition costs (more dispersion than a particular uniform distribution by the Bickel‐Lehman dispersive order) can coordinate bidders and implement uniquely the desirable entry. The dispersion in information acquisition costs is also necessary for this “unique implementation” result. (JEL D44, D82)     

SENTIMENT BIAS AND ASSET PRICES: EVIDENCE FROM SPORTS BETTING MARKETS AND SOCIAL MEDIA

Previous research using attendance‐based proxies for sentiment bias in sports betting markets confirmed the presence of investor sentiment in these markets. We use data from social media (Facebook “Likes”) to proxy for sentiment bias and analyze variation in bookmakers' prices investor sentiment. Based on betting data from seven professional sports leagues in Europe and North America, we find evidence that bookmakers increase prices for bets on teams with relatively more Facebook “Likes,” indicating the presence of price‐insensitive investors with sentiment bias. These price changes do not affect informational efficiency in this market. (JEL L81, G14)     

IMPACT OF COMPETITION,INVESTMENT, AND REGULATION ON PRICES OF MOBILE SERVICES: EVIDENCE FROM FRANCE

In this paper, we assess the impact of competition, investment, and regulation on prices of mobile services in France. We estimate hedonic price regressions using data on tariff plans offered by the main mobile telecommunications operator in France between May 2011 and December 2014. In this time period, the obtained quality‐adjusted price index decreased by about 42.8% as compared to a decline in weighted average prices without quality‐adjustment of 8.7%. In a second step, we relate the quality‐adjusted prices to a set of competition, investment, and regulation variables and find that the launch of 4G networks by mobile operators was the main driver of price reductions for classic tariffs with commitment. Low‐cost tariffs without commitment which were introduced to pre‐empt the entry of low‐cost competitor declined at the time of entry. Moreover, we find that regulation, which is approximated by the level of mobile termination charges and international roaming price caps for voice and data, has a joint significant impact on quality‐adjusted prices. In percentage terms, competition is responsible for about 23.4% of total price decline and investments in 4G for 56.1%. We conclude that the reduction in quality‐adjusted prices in the last years was largely caused by competition between operators for a new 4G technology and by entry of a fourth low‐cost operator. (JEL L13, L50, L96)     

SATISFICING AND PRIOR‐FREE OPTIMALITY IN PRICE COMPETITION

We apply a model of satisficing to oligopoly markets with price competition. Sellers have profit aspirations reflecting their conjectures about their competitors' behavior and search for a price guaranteeing these aspirations. Because it seems implausible that people have detailed priors on the others' actions, we postulate that sellers entertain multiple conjectures to which no probabilities can be assigned. This allows us to propose a theory of “prior‐free” optimality and to examine experimentally whether people comply with it. We find that decision makers have difficulties in making prior‐free optimal choices. Most are content to just satisfice, although ways to aspire to more ambitious profits were obviously available. (JEL C92, C72, D43)     

DISAGGREGATE EVIDENCE ON PRICE STICKINESS AND IMPLICATIONS FOR MACRO MODELS

We use the methodology applied at the aggregate level by Gali and Gertler (1999) to analyze price and cost data for U.S. six‐digit North American Industry Classification System (NAICS) industries. Industries with price adjustment periods of at least 6 quarters generate no more than about 43% of total sales of industries we analyze. Industries with estimated price adjustment speeds of less than a year generate at least 44% of sales. Our conclusion is that disaggregate U.S. data provide as much support in favor of relatively high price flexibility as they do for the assumption of widespread price stickiness utilized in many modern macroeconomic theories. (JEL E31, L16)     

ALL‐PAY AUCTIONS WITH A BUY‐PRICE OPTION

This paper studies all‐pay auctions in which there is a buy‐price option for bidders to guarantee purchases at a seller‐specified price. We analyze symmetric increasing bidding equilibria in the first‐ and second‐price all‐pay auctions with the buy‐price option. While the optimal buy‐price in the second price is higher than are those in the first‐price all‐pay auction, both formats maintain the same expected profit. With an endogenous entry process, all‐pay auctions with the buy‐price can attract more consumers and ultimately reach a higher expected profit than does the uniform posted‐price selling mechanism. (JEL D44, L11, L81)     

RESERVE PRICE EFFECTS IN AUCTIONS: ESTIMATES FROM MULTIPLE REGRESSION‐DISCONTINUITY DESIGNS

We present evidence from 260,000 online auctions of second‐hand cars to identify the impact of public reserve prices on auction outcomes. We exploit multiple discontinuities in the relationship between reserve prices and vehicle characteristics to present causal regression‐discontinuity estimates of reserve price impacts. We find an increase in reserve price decreases the number of bidders, increases the likelihood the object remains unsold, and increases expected revenue conditional on sale. We then combine these estimates to calibrate the reserve price effect on the auctioneer's ex ante expected revenue. This reveals the auctioneer's reserve price policy to be locally optimal. (JEL D44, L11, L62)     

EXPERT OPINION AND PRODUCT QUALITY: EVIDENCE FROM NEW YORK CITY RESTAURANTS

We analyze whether consumers' quality perception and/or producer investment of New York City restaurants, measured by Zagat scores, responds to newly appearing expert opinion, measured by Michelin scores. Answering this question is of general economic interest as it applies to all markets with information asymmetries. Employing a difference‐in‐differences approach as well as a propensity score matching approach we find significant Michelin treatment effects on food and décor quality. Based on these changes, we find a Michelin‐induced price increase of approximately 30% per Michelin star. To examine whether the improved food and nonfood quality is based on restaurant investments or is merely imagined, we analyze nonfood investments by referring to Wine Spectator wine list awards. Our analysis suggests that Michelin‐reviewed restaurants are significantly more likely to invest in their wine list than others. As a result, Michelin reviewed restaurants are more likely to improve food and nonfood (esp. décor) quality leading to significant price increases. However, while restaurants that increase prices only due to décor and service improvements are more likely to go out of business, food improvements appear to secure a restaurant's survival. (JEL D11, L15, L66)     

THE WELFARE EFFECTS OF THIRD‐DEGREE PRICE DISCRIMINATION IN A DIFFERENTIATED OLIGOPOLY

This article examines the welfare effects of third‐degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the “strong” market (where the discriminatory price is higher than the uniform price) than in the “weak” market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely owing to an increase in the firms' profits in the case of linear demands. (JEL D43, L11, L13)     

THE IMPACT OF MERGERS ON FARES STRUCTURE: EVIDENCE FROM EUROPEAN LOW‐COST AIRLINES

This paper examines mergers that lead to an almost immediate replacement of the target firm's business model in favor of that of the acquiring firm. We examine the post‐merger behavior of the two leading European dedicated low‐cost airlines, EasyJet and Ryanair, each acquiring another low‐cost airline, Go Fly and Buzz, respectively. We find that both takeovers had an immediate and sustained impact on both the pricing structures and the extent of intertemporal price schedules used on the acquired routes, with early booking fares noticeably reduced and only very late booking fares increased. The analysis suggests that the takeovers had a net beneficial effect for consumers, at least in price terms, as a consequence of the introduction of the acquiring firms' business models and associated yield management pricing systems. (JEL L11, L13, L93)     

QUALITY DIFFERENCES,THIRD‐DEGREE PRICE DISCRIMINATION,AND WELFARE

We propose a model with two markets to analyze the welfare implications of price discrimination with quality differences. In each market a local firm that operates in that market only competes against a global firm that operates in both markets. Local firms produce higher‐quality goods than the global firm. If the quality levels of the local firms' products are the same, price discrimination is never welfare‐decreasing. If they differ, discrimination is welfare‐increasing if quantity increases. Because of a positive allocation effect of price discrimination, there are parameter values such that welfare increases while total output decreases with price discrimination. (JEL D43, D60)     

SEPARATING BETWEEN UNOBSERVED CONSUMER TYPES: EVIDENCE FROM AIRLINES

We propose an alternative approach to identify unobserved consumer types and assess whether firms price discriminate. Unlike other screening schemes that rely on quantity discounts or product differentiation, in our finite mixture structure individuals have unit demands and the product is homogeneous. We implement the model using an original U.S. airlines data set. The results support the existence of two demand types. The high‐type “business” traveler is less price sensitive, has a higher valuation, and pays a higher price than the low type “tourist.” The proportion of high types also increases as the departure date nears. (JEL C23, L93, R41)     

HEDONIC IMPUTATION AND THE PRICE INDEX PROBLEM: AN APPLICATION TO HOUSING

In this study, we show how use of the hedonic imputation method complicates the price index problem. In addition to the usual choice between formulas such as Fisher and Törnqvist, the fact that index compilers have some discretion over which prices are imputed implies that it is necessary to choose as well between different varieties of each formula. The functional form of the hedonic model must also be taken into account. We illustrate the importance of these issues in a housing context using house price data for three regions in Sydney over a 3‐yr period. (JEL C43, E31, O47, R31)     

BERTRAND COMPETITION WITH ASYMMETRIC MARGINAL COSTS

This article tests the prediction of three discrete asymmetric duopoly price competition games in the laboratory. The games differ from each other in terms of the size of the cost asymmetry that induces a systematic variation in the difference between the firms' marginal costs. While the standard theory requires the low‐cost firm to set a price just equal to the high‐cost firm's marginal cost, which is identical across all three games, and win the entire market, intuition suggests that market price may increase with a decrease in the absolute difference between the two marginal costs. We develop a quantal response equilibrium model to test our competing conjecture. (JEL L11, L12, C91, D43)     

INFLATION DYNAMICS AND SUBJECTIVE EXPECTATIONS IN THE UNITED STATES

We estimate a forward‐looking New Keynesian Phillips Curve (NKPC) for the United States using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters independently of whether we use the output gap or unit labor costs as a measure of marginal costs. Moreover, when estimating a Phillips curve where lagged inflation enters due to price indexation by nonreoptimizing firms, we obtain significant parameter estimates of the sign predicted by theory independently of the marginal cost measure used. (JEL E31)     

MULTIPRODUCT PRICING IN MAJOR LEAGUE BASEBALL: A PRINCIPAL COMPONENTS ANALYSIS

The empirical analysis of multiproduct pricing lacks clear theoretical guidance and appropriate data, which often render traditional regression‐based analyses impractical. Under these circumstances the factors underlying price variation can be inferred using a new methodology based on principal components. Analyzing ticket, parking, and concession pricing in Major League Baseball with this methodology demonstrates that general demand shifts are the primary factor, but explain only half of overall price variation. Also important are price interactions deriving from demand interrelationships between goods and attempts to maximize the capture of consumer surplus in the presence of heterogeneous demand. (JEL D40, L11, L13)     

SIGNAL EXTRACTION AND RATIONAL INATTENTION

In this paper we examine the implications of two theories of informational frictions, signal extraction (SE) and rational inattention (RI), for optimal decisions and economic dynamics within the linear‐quadratic‐Gaussian (LQG) setting. We first show that if the variance of the noise and channel capacity (or marginal information cost) is fixed exogenously in the SE and RI problems, respectively, the two environments lead to different policy and equilibrium asset pricing implications. Second, we find that if the signal‐to‐noise ratio and capacity in the SE and RI problems are fixed, respectively, the two theories generate the same policy implications in the univariate case, but different policy implications in the multivariate case. We also show that our results do not depend on the presence of correlation between fundamental and noise shocks. We then discuss the applications to macroeconomic models of permanent income and price‐setting. (JEL C61, D81, E21)     

AN EXPERIMENT ON INNOVATION AND COLLUSION

This paper examines the relationship between product innovation and the success of price collusion using novel laboratory experiments. Average market prices in low innovation (LO) experiments are significantly higher than those in high innovation, but otherwise identical experiments. This price difference is attributed to LO experimental subjects' greater common market experience. The data illustrate how collusion can be perceived as the “only way to make it” in LO markets where product innovation is not a viable strategy for increasing profits. They suggest that product homogeneity can be a proximate cause, and product innovation an ultimate cause, of collusion. (JEL L41, L10, C92)