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.     

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)     

Expectation formation in step-level public good games

This article focuses on the process of expectation formation. Specifically, the question is addressed whether individuals think strategically when they form beliefs about other players'behavior. Most belief learning models assume that people abstract from strategic considerations. Using an incentive-compatible mechanism, experimental data are obtained on subjects'expectations in a step-level public good game and in a game against nature. Beliefs in the interactive games develop in the same way as in the game against nature, providing evidence that strategic considerations do not play a role. The evidence is consistent with predictions derived from the naive Bayesian model.     

ASYMMETRIC INFORMATION AND THE EXCESS VOLATILITY OF STOCK PRICES

Evidence suggests the volatility of stock prices cannot be accounted for by information about future dividends. We argue that some of the volatility of stock prices in excess of fundamentals results from fluctuations in the amount of public information over time. Our model assumes that dividends and consumption are constant in the aggregate but that there are good firms and bad firms whose identity may be unknown to the public, as in Akerlof's "lemons" problem. In that case, the collective valuation of the constant dividend stream depends on the degree of informational asymmetry.     

Group incentives or individual incentives? A real-effort weak-link experiment

Motivated by previous research on coordination problems and incentive design in organizations, we compare group incentives and individual incentives in a new experimental test-bed: a real-effort task embedding a weak-link technology. Comparing group-incentive and individual-incentive treatments, we find that the observed dynamics of both individual errors and worst performances within firms, after a phase of learning, are largely indistinguishable. Importantly, and possibly explaining our finding, more than 80% of our laboratory firms, notwithstanding initially widespread inefficiency, were eventually able to achieve and sustain efficient coordination despite the presence of an unforgiving payoff structure. This result, which may be due to the reduced strategic uncertainty so characteristic of chosen-effort weak-link game experiments, stands in stark contrast to standard results in the coordination game literature and provides an interesting challenge to test-beds currently used.     

Volunteering and the strategic value of ignorance

Private provision of public goods often takes place as a war of attrition: individuals wait until someone else volunteers and provides the good. After a certain time period, however, one individual may be randomly selected. If the individuals are uncertain about their cost of provision, but can find out about this cost ahead of the volunteering game, a strategic value is attached to the information, and individuals may prefer not to learn their cost of provision. If the time horizon is sufficiently short, in equilibrium only one individual may acquire information about his cost. For a long time horizon, acquiring information is strictly dominant. The time limit is an important instrument in influencing the efficiency of the volunteering game.     

The minimum wage and productivity differentials

A firm’s ability to adjust its production process to economize on low-skilled labor when faced with a minimum wage increase will differ greatly depending on industry or occupation. For example, more capital-intensive means of cleaning hotel rooms or serving customers at restaurants may not be readily available without degrading service quality. In such situations, the productivity of labor is essentially capped, and firms have few options when the minimum wage increases. This simple observation has implications for studies that rely on microdata to examine the effects of minimum wage increases. If firms only increase prices in response to a minimum wage increase, employment effects are likely small. If the goal of the minimum wage is to redistribute income from firms and consumers to workers, minimum-wage increases targeted at industries and occupations where such rigidities result in an inelastic demand for labor may achieve the desired goal at a lower cost than across-the-board increases. However, such a scheme causes an inefficient allocation of labor and would be subjected to substantial political pressures that may lead to anomalous results. Additionally, it is unreasonable to conclude that policy makers have the necessary information to skillfully set the minimum wage. I thank Brian E. Chezum and Jeff Waddoups for helpful comments. All mistakes, of course, are my own.     

TRANSPARENCY IN MARKETS FOR EXPERIENCE GOODS: EXPERIMENTAL EVIDENCE

We propose an experimental design to investigate the role of information disclosure in the market for an experience good. The market is served by a duopoly of firms that choose both the quality and the price of their product. Consumers differ in their taste for quality and choose from which firm to buy. We compare four different treatments in which we vary the degree to which consumers are informed about quality. Contrary to theoretical predictions, firms do not differentiate quality under full information. Rather, both tend to offer products of similar, high quality, entailing more intense price competition than predicted by theory. Under no information, we observe a “lemons” outcome where quality is low. At the same time, firms manage to maintain prices substantially above marginal cost. In two intermediate treatments, quality is significantly higher than the no‐information level, and there is evidence that prices become better predictors of quality. Taken together these findings suggest that information disclosure is a more effective tool to raise welfare and consumer surplus than theory would lead one to expect. (JEL L15, C91, D82)     

The Manipulation: Socio-economic decision making

We analyze one-shot Prisoner’s Dilemma decisions made by participants of the high-stakes TV game show The Manipulation, and document the influence of social life factors on economic decisions, alongside the participants’ rational considerations. In particular, we employ a social psychology approach to provide a new perspective on the determinants of financial assistance. Our insights from the TV game are corroborated by a controlled laboratory experiment. We find that helping and sharing behavior in strategic situations is explained by Attribution Theory (AT) and beliefs about expected cooperativeness. Specifically, participants’ decisions are influenced by perceived controllability of opponents’ conditions (an attributional characteristic influencing perception of responsibility and related emotions) and social-relations-based beliefs regarding the opponents’ expected cooperativeness.     

HORIZONTAL MERGERS IN THE PRESENCE OF CAPACITY CONSTRAINTS

We examine a merger between two competitors in a Bertrand‐Edgeworth model. We find that the effects of merger depend on the tightness of capacity constraints. The combination of two firms has no price effect if and only if the capacity constraints of all firms are binding both before and after the merger. However, a merger may turn a binding capacity constraint into a slack one, which results in higher prices. In an industry where excess capacity drives the premerger prices of all firms to the marginal cost, a merger may cause prices to rise even though aggregate capacity remains constant. (JEL L13, L40)     

Size and distributional uncertainty, public information and the information paradox

In this paper we examine the strategic implications of collective acquisition of information in a committee or in a legislature. We show that the prospect of acquiring information can harm a majority even if information is only available by the support of a majority. Moreover, the model provides two results about incentives to acquire information. First, for policies with high distributional uncertainties, we expect that less information is acquired collectively by a committee than for other policies. Second, for policies that show only size uncertainty, our model predicts intense efforts to acquire information collectively. Received: 20 January 1997/Accepted: 15 February 1999     

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.     

STRATEGIC INFORMATION DISCLOSURE: THE CASE OF MULTIATTRIBUTE PRODUCTS WITH HETEROGENEOUS CONSUMERS

We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multidimensional preferences under which a firm, no matter whether producing a high‐ or low‐quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory. (JEL L15, L5)     

FORECASTING WITH SOCIAL MEDIA: EVIDENCE FROM TWEETS ON SOCCER MATCHES

Social media is now used as a forecasting tool by a variety of firms and agencies. But how useful are such data in forecasting outcomes? Can social media add any information to that produced by a prediction/betting market? We source 13.8 million posts from Twitter, and combine them with contemporaneous Betfair betting prices, to forecast the outcomes of English Premier League soccer matches as they unfold. Using a microblogging dictionary to analyze the content of Tweets, we find that the aggregate tone of Tweets contains significant information not in betting prices, particularly in the immediate aftermath of goals and red cards. (JEL G14, G17)     

Motivational crowding out effects in charitable giving: Experimental evidence

This paper tests motivational crowding out in the domain of charitable giving. A novelty is that our experiment isolates alternative explanations for the decline of giving, such as strategic considerations of decision-makers. Moreover, preference elicitation allows us to focus on the reaction of donors characterized by different degrees of intrinsic motivation. In the charitable-giving setting subjects donate money to the German “Red Cross” in two consecutive donations. The first dictator game is modified, i.e., donors face with equal probability an ex post reimbursement or a subsequent payment. The second game is a standard dictator game. We find that after an ex post change in the price of giving of the first donation, substantially more donors with a high degree of intrinsic motivation decrease donations than subjects with a low degree of intrinsic motivation and donors who did not experience a price effect. In a replication study we find support for these results for subjects who have previously participated in at least one economic experiment.     

Information efficiency and majority decisions

The analysis is concerned with the characterization of equilibria of a two-stage voting game involving private information acquisition. Rational ignorance and information efficiency are identified. It turns out that information efficiency is not always desirable. By restricting the payoff domain, we are able to characterize completely the set of equilibria. In this case, information acquisition by few voters benefits a majority, or even the whole community. Economic Literature Classification Number D70, D71, D80.The author would like to thank Peter Bernholz, MartinHellwig, Tilman Börgers, Harald Nedwed and a referee for helpful comments and suggestions.     

BEYOND KEYNESIANISM AND MONETARISM

Though there is consensus among economists about microeconomic theory, neither the Keynesian nor the Monetarist theory of macroeconomics has attracted a consensus, presumably because neither is compelling enough to persuade the skeptical. A new approach to the subject that combines insights from each of the familiar schools with considerations that both schools have overlooked is accordingly offered here. This argument accepts the evidence that involuntary unemployment and depressions sometimes occur and thus rejects the finding of the new classical or equilibrium macroeconomics, that markets always clear and that all individuals and firms are in equilibrium. It also rejects the Keynesian assumption of wages or prices arbitrarily fixed at disequilibrium levels, and insists that any adequate theory must show what interests are served by the existence of involuntary unemployment. The theory offered here shows that an institutional or organizational arrangement common in all societies which have experienced widespread unemployment and deep recessions entails that many firms and individuals will be in disequilibrium. This disequilibrium becomes more severe when there is unexpected deflation or disinflation. The disequilibrium is of precisely the type commonplace in recessions and entails involuntary unemployment. The theory also shows how groups of individuals and firms can gain from practices that entail involuntary unemployment and underutilization of resources for others.     

CONSUMPTION BENEFITS OF NATIONAL HOCKEY LEAGUE GAME TRIPS ESTIMATED FROM REVEALED AND STATED PREFERENCE DEMAND DATA

This paper examines the demand for hockey game trips among metropolitan and nonmetropolitan residents of Alberta, Canada. Using data on both revealed and stated preference game‐trip behavior from a telephone survey conducted throughout Alberta, we estimate the effect of ticket prices, team quality, arena amenities, and capacity on the latent demand for National Hockey League hockey games. We find that lower ticket prices, higher team quality, and additional capacity encourage attendance. In the status quo scenario, consumer surplus per game is $50 for those who had attended hockey games and about 50% less for those who had not attended games. Exploiting the stated preference data, we develop a number of other consumer surplus estimates. We also include travel costs in the estimation of the demand function and estimate the full value of the game trip considering both ticket prices and travel costs. Sold‐out arenas in Calgary and Edmonton generate annual consumption benefits of $40 and $35 million when only ticket prices are used to calculate consumer surplus (i.e., excluding travel costs). Considering the full‐price consumer surplus for the Calgary Flames of $103 per game trip, the annual consumption benefits may be as high as $82 million. (JEL R22, L83, D61)     

The impact of union-sponsored boycotts on the stock prices of target firms

An empirical analysis of the impact of union-sponsored boycotts on the stock prices of target firms strongly suggests that union boycott announcements initially lead to economically and statistically significant losses in the stock prices of the target firms. However, this short-term price decline is almost completely erased by rebounds in stock prices over the ensuing 15 trading days.     

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.