This paper develops techniques for empirically analyzing demand and supply in differentiated products markets and then applies these techniques to analyze equilibrium in the U.S. automobile industry. Our primary goal is to present a framework which enables one to obtain estimates of demand and cost parameters for a class of oligopolistic differentiated products markets. These estimates can be obtained using only widely available product-level and aggregate consumer-level data, and they are consistent with a structural model of equilibrium in an oligopolistic industry. When we apply the tech- niques developed here to the U.S. automobile market, we obtain cost and demand parameters for (essentially) all models marketed over a twenty year period.

/pdf/automobile-prices-in-market-equilibrium-1w0xnf91hi.pdf

Automobile prices in market equilibrium

This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.(This abstract was borrowed from another version of this item.)

Moral Hazard in Teams

This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.

https://www.econstor.eu/bitstream/10419/220831/1/cmsems-dp0471.pdf

I NCENTIVES ARE the essence of economics. Despite many wide-ranging claims about their supposed importance, there has been little empirical assessment of incentive provision for workers. The purpose of this paper is to critically overview existing work on the provision of incentives. Since the interests of workers and their employers are not always aligned, a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm's interest. This literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers. These include piece rates, options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred compensation, and so on. My objective here is to evaluate this literature in the light of a growing empirical literature on compensation. Where possible, I will address the literature from two perspectives. First, an underlying assumption of this literature is that individuals respond to contracts that reward performance. Accordingly, I consider whether agents behave in this way, and whether these responses are always in the firm's interest. Second, I address whether firms write contracts with these responses in mind. In other words, do contracts look like the predictions of the theory? Incentives are provided to workers

/pdf/the-provision-of-incentives-in-firms-zlx7fye09q.pdf

The Provision of Incentives in Firms

Audit committee, board of director characteristics, and earnings management

The Puzzles feature in this issue is devoted to answering a puzzle that appeared in the Spring 1988 issue: "The Other Person's Envelope is Always Greener" The response to this puzzle was overwhelming Below, I recap the problem and then discuss the myriad of proposed solutions In the next column, we will return to the regular format of a few speed puzzles and one or two longer questions Contributions from readers are always valued; now they will be rewarded We will begin providing JEP T-shirts to those contributing new puzzles and innovative answers These T-shirts cannot be bought, only earned Please send your answers, comments, and favorite puzzles to me directly: Barry Nalebuff, "Puzzles," Department of Economics, Princeton University, Princeton, NJ 08544-1017

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.3.1.171

Puzzles: The Other Person's Envelope Is Always Greener

Asymmetric equilibria in the war of attrition

In this paper, we show that a firm that sells a bundle of complementary products will have a substantial advantage over rivals who sell the component products individually. Furthermore, this advantage increases with the size of the bundle. Once there are four or more items, the bundle seller does better than when it sells each component individually. This model helps explain one factor in how Microsoft achieved dominance in the Office software suite against pre-existing and well-established rivals in each component. This paper is a sequel to Bundling [Nalebuff (1999) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=185193].

Competing Against Bundles

While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimaly charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if al browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that an essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good.

/pdf/one-way-essential-complements-4l0g0ato9t.pdf

One-Way Essential Complements

The defense of the United States and the defense of Europe ultimately rely on a threat to use nuclear weapons if all else fails. This type of deterrence cannot be based on a cold rational calculation that nuclear retaliation for any attack is assured. Nuclear war is irrational; it would destroy that which we are trying to save. To threaten nuclear war, therefore, is equally irrational. Nuclear deterrence becomes credible only when there exists the possibility for any conventional conflict to escalate out of control. The threat is not a certainty but rather a probability of mutual destruction. Nuclear deterrence involves a fundamental trade-off. There is a value in being able to make the threat of mutual destruction. The nuclear age has been forty years without world war, But, there is the cost of leaving our fate to chance. Nuclear deterrence requires accepting the risk of mutual destruction. Much of the current debate about nuclear deterrence centers on this risk. What can we do to lower the probability of nuclear war without losing the value of deterrence?

Barry Nalebuff

Papers

Puzzles: The Other Person's Envelope Is Always Greener

Asymmetric equilibria in the war of attrition

Competing Against Bundles

One-Way Essential Complements

Brinkmanship and Nuclear Deterrence: The Neutrality of Escalation: