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)     

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)     

RESERVE PRICE VERSUS ENTRY FEE IN STANDARD AUCTIONS

Analysis of standard auction rules when bidders are risk averse is usually carried out under the assumption that the seller is able to set an optimal reserve. The role of entry fees has been generally overlooked in that analysis. We consider bidders with constant absolute risk aversion and show that reserve price is an essential tool in the second price auction while entry fee is essential in the first price auction. Furthermore, setting a reserve price and entry fee combination optimally may change some of the rankings of the standard auctions that hold under optimal reserves. (JEL D44)     

FIRMS AND FLEXIBILITY

The United States and France have very similar labor productivity levels while there are considerable differences between the firm‐size distributions and firm dynamics in the two countries. To reconcile these observations we introduce a joint model of endogenous entrepreneurship and firm‐size dynamics with firing costs, unemployment benefits, entry costs, and a tax wedge between wages and labor costs. We use our model to analyze the role of these rigitidies in explaining firm dynamics and productivity patterns in the United States and France. We find that our model with all rigidities goes a long way in accounting for firm‐size differentials between the United States and France while generating similar labor productivity outcomes. (JEL C78, D21, E24, J6)     

PRIZE SCARCITY AND OVERDISSIPATION IN ALL‐PAY AUCTIONS

We compare bidding behavior in complete information all‐pay auction experiments that vary in the prizes and number of players. We confirm the observation from prior single‐prize experiments that there is overbidding relative to equilibrium predictions. Our primary results are that increasing the number of prizes and players proportionally does not reduce overbidding but increasing the number of prizes with a fixed number of players eliminates overbidding. We conclude that the overbidding phenomenon is related to the scarcity of the prize. We provide new theoretical results on the multi‐prize logit equilibrium, and our experimental results are qualitatively consistent with logit equilibrium predictions. (JEL D72, D91, C91, D44)     

THE IMPACT OF TRADE COSTS ON FIRM ENTRY,EXPORTING, AND SURVIVAL IN KOREA

This study examines how changes in trade costs have affected entry, exit, productivity, and exporting in the Korean manufacturing sector. We verify several predictions of heterogeneous‐firm models of international trade. For example, falling import‐trade costs are associated with less entry and lower market shares among existing domestic firms, and higher total factor productivity for Korean manufacturing as a whole. The size of firms plays an important role in many of our results. New domestic firms are more likely to be small, but large firms are less likely to exit and more likely to have an increase in total factor productivity. (JEL F10, D24)     

THE STATE STREET MILE: AGE AND GENDER DIFFERENCES IN COMPETITION AVERSION IN THE FIELD

Gender differences in “competitiveness,” previously documented in laboratory experiments, are hypothesized to play a role in a wide array of economic outcomes. This paper provides evidence of competition aversion in a natural setting somewhere between the simplicity of a laboratory experiment and the full complexity and ambiguity of a labor market. The “State Street Mile” race offers both male and female participants a choice between two different levels of competition. Large, systematic age and gender differences are observed in the relationship between true ability and the decision to enter the more competitive race. Overall, qualified women and older runners are far less likely than qualified young men to enter a competitive race with prizes. However, the fastest young women unanimously enter the competitive race. Therefore, while we confirm age and gender differences in competitiveness in our field setting, the economic consequences to capable young women are rather small. (JEL J1, J7, M5)     

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)     

PRICE ADJUSTMENT POLICIES AND FIRM SIZE

A number of U.S. State Departments of Transportation have adopted a price adjustment policy designed to limit cost fluctuations of oil‐based inputs in government procurement. Similar policies are common in defense contracting, and have been used to offset financial losses of health insurance companies in Medicare and the Affordable Care Act. We show that while all bidders submit lower bids after the policy is introduced, the extent of bid reduction diminishes with firm size. Small new firms are able to compete more frequently, promoting auction competition and efficiency. (JEL H4, H57, D44)     

MAKING FRIENDS TO INFLUENCE OTHERS: ENTRY AND CONTRIBUTION DECISIONS THAT AFFECT SOCIAL CAPITAL IN AN ASSOCIATION

We examine factors affecting entry and contribution to an association that provides different goods using social capital formed by heterogeneous firms that lobby in a political economy environment. We identify how associations attract the most productive firms or the least productive firms in an industry and explain how such associations differ in their intensive and extensive marginal contributions to social capital. We find that the level of regulatory stringency, association products including capital goods for members or lobbying to influence regulation, and government influenceability affect membership and contribution decisions. These results vary with firm productivity. Often, an increase in government influenceability increases social capital in associations composed of highly productive firms because they prefer to influence policy while less productive firms prefer more association‐produced production inputs. (JEL D71, D73)     

CAPS IN SEQUENTIAL CONTESTS

We study a sequential two‐stage all‐pay auction with two identical prizes. In each stage, the players compete for one prize and each player can win either one or two prizes. The designer may impose a cap on the players' bids in each of the stages. We analyze the equilibrium in this sequential all‐pay auction with bid caps and show that capping the players' bids is profitable for a designer who wishes to maximize the players' expected total bid. (JEL D44, D82, J31, J41)     

CARROTS AND STICKS: PRIZES AND PUNISHMENTS IN CONTESTS

We study optimal contest design in situations where the designer can reward high performance agents with positive prizes and punish low performance agents with negative prizes. We link the optimal prize structure to the curvature of distribution of abilities in the population. In particular, we identify conditions under which, even if punishment is costly, punishing the bottom is more effective than rewarding the top in eliciting effort input. If punishment is costless, we study the optimal number of punishments in the contest. (JEL D44, D82, J31, J41)     

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)     

CREDIBLE SIGNALS OF THE RELEASE OF NEW VERSIONS

Prices can credibly signal whether a durable‐goods monopolist will offer an improved good in the future. When the future release of a new version is private information, a monopoly seller will reveal a failure to develop and market a new version with a lower price than he or she would charge in full information. A firm would be willing to pay more to innovate when consumers are uncertain than if they are informed ex ante because a failure to innovate is punished by a low equilibrium price. Consumers' uncertainty about innovation intensifies an unsuccessful innovator's Coasian problem and increases consumer welfare. (JEL D82, L12, L15)     

CONTEST DESIGN: AN EXPERIMENTAL INVESTIGATION

This paper experimentally compares the performance of four simultaneous lottery contests: a grand contest, two multiple prize settings (equal and unequal prizes), and a contest which consists of two subcontests. Consistent with the theory, the grand contest generates the highest effort levels among all simultaneous contests. In multi‐prize settings, equal prizes produce lower efforts than unequal prizes. The results also support the argument that joint contests generate higher efforts than an equivalent number of subcontests. Contrary to the theory, there is significant over‐dissipation. This over‐dissipation can be partially explained by strong endowment size effects. Subjects who receive higher endowments tend to over‐dissipate, whereas such over‐dissipation disappears when the endowments are lower. This behavior is consistent with the predictions of a quantal response equilibrium. We also find that less risk‐averse subjects over‐dissipate more. (JEL C72, C91, D72)     

ROBUSTNESS OF BIDDER PREFERENCES AMONG AUCTION INSTITUTIONS

In previous work, we found that bidders strongly prefer the ascending to the first‐price sealed‐bid auction on a ceteris paribus basis, but perhaps surprisingly, they are not willing to pay up to an entry price for the ascending auction that would equalize the profits. Risk aversion was proposed as an explanation. In this study, we examine two alternative explanations for the observed behavior: loss aversion and aversion to the dynamic bidding process. We find that neither alternative explanation can account for bidders’ auction choice behavior, leaving risk aversion as the only unfalsified hypothesis. (JEL C91, D44)     

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)     

AN OPEN‐ECONOMY MODEL WITH MONEY,ENDOGENOUS SEARCH,AND HETEROGENEOUS FIRMS

This paper describes a new monetary open‐economy model where firms have market power due to search frictions in the goods market, and endogenous search effort by consumers mitigates this market power. The optimal inflation rate generally depends positively on the cost of search effort, the cost of firm entry, and the cost of trade. Higher inflation always improves a country's terms‐of‐trade against its trading partners. I also characterize a general class of matching processes which offer a novel approach to modeling firm sales. (JEL D43, E40, F12)     

EX ANTE EFFICIENT MECHANISM WITH PRIVATE ENTRY COSTS

This paper studies ex ante efficient resource allocation mechanism in an environment where agents endowed with their private values must incur private entry costs to participate. Due to the nature of this bidimensional screening problem and the difficulty in fully characterizing all implementable endogenous entries, the domain of the related social planner's problem that is essential for establishing the existence of efficient mechanism needs to be carefully designed. We find that a second-price auction among the entrants with a reserve price equal to the seller's valuation is ex ante efficient, and any ex ante efficient mechanism must be ex post efficient. (JEL D44, D61, D82)     

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)