Showing papers by "Jean Tirole published in 2007"

A Primer on Foreclosure

Abstract: This chapter analyzes the private rationale and the social costs and benefits of market foreclosure, here defined as a firm's restriction of output in one market through the use of market power in another market. The chapter first focuses on vertical foreclosure (in which full access to a bottleneck input is denied to competitors) and provides an overview of the theory of access to an essential facility in an unregulated environment. It considers a wide array of contexts: possibility of bypass of the bottleneck facility, upstream vs downstream location of this facility, and various exclusionary activities such as vertical integration and exclusive dealing. It identifies a number of robust conclusions as to the social and private costs and benefits of foreclosure. The chapter then turns to horizontal foreclosure, where the monopoly good is sold directly to the end-users, and analyzes recent theories of anti-competitive bundling aimed at reducing competition in the adjacent markets or at protecting the monopoly market. Finally, the chapter tackles exclusive customer contracts and discusses potential efficiency defenses for exclusionary behavior.

Reliability and Competitive Electricity Markets

Abstract: Despite all of the talk about “deregulation” of the electricity sector, a large number of non-market mechanisms have been imposed on emerging competitive wholesale and retail markets. These mechanisms include spot market price caps, operating reserve requirements, non-price rationing protocols, and administrative protocols for managing system emergencies. Many of these mechanisms have been carried over from the old regime of regulated monopoly and continue to be justified as necessary responses to market imperfections of various kinds and engineering requirements dictated by the special physical attributes of electric power networks. This paper seeks to bridge the gap between economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the optimal prices and investment program when there are price-insensitive retail consumers, and their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and retail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyzes the interrelationships between regulator-imposed price caps, capacity obligations, and system operator procurement, dispatch and compensation arrangements. It goes on to explore the implications of potential network collapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements.

The rules of standard‐setting organizations: an empirical analysis

Abstract: May 31, 2006 This paper empirically explores standard-setting organizations’ policy choices. Consistent with Lerner-Tirole (2006), we find (a) a negative relationship between the extent to which an SSO is oriented to technology sponsors and the concession level required of sponsors and (b) a positive correlation between the sponsor-friendliness of the selected SSO and the quality of the standard. We also develop and test two extensions of the earlier model: the presence of provisions mandating royalty-free licensing is negatively associated with disclosure requirements, and the relationship between concessions and user friendliness is weaker when there is only a limited number of SSOs.

Identity, Dignity and Taboos: Beliefs as Assets

Abstract: We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own 'deep values' and infer them from their past choices, which then come to define 'who they are'. Identity investments increase when information is scarce or when a greater endowment of some asset (wealth, career, family, culture) raises the stakes on viewing it as valuable (escalating commitments). Taboos against transactions or the mere contemplation of tradeoffs arise to protect fragile beliefs about the 'priceless' value of certain assets (life, freedom, love, faith) or things one 'would never do'. Whether such behaviours are welfare-enhancing or reducing depends on whether beliefs are sought for a functional value (sense of direction, self-discipline) or for 'mental consumption' motives (self-esteem, anticipatory feelings). Escalating commitments can thus lead to a 'hedonic treadmill', and competing identities cause dysfunctional failures to invest in high-return activities (education, adapting to globalization, assimilation), or even the destruction of productive assets. In social interactions, norm violations elicit a forceful response (exclusion, harassment) when they threaten a strongly held identity, but further erode morale when it was initially weak. Concerns for pride, dignity or wishful thinking lead to the inefficient breakdown of Coasian bargaining even under symmetric information, as partners seek to self-enhance and shift blame by turning down 'insultingly low' offers.

Consensus Building: How to Persuade a Group

Abstract: Many decisions in private and public organizations are made by groups. The paper explores strategies that the sponsor of a proposal may employ to convince a qualified majority of group members to approve the proposal. Adopting a mechanism design approach to communication, it emphasizes the need to distill information selectively to key members of the group and to engineer persuasion cascades in which members who are brought on board sway the opinion of others. The paper unveils the factors, such as the extent of congruence among group members and between them and the sponsor, and the size and governance of the group, that condition the sponsor’s ability to maneuver and get his project approved.

Chapter 33 A Primer on Foreclosure

Abstract: This chapter analyzes the private rationale and the social costs and benefits of market foreclosure, here defined as a firm's restriction of output in one market through the use of market power in another market. The chapter first focuses on vertical foreclosure (in which full access to a bottleneck input is denied to competitors) and provides an overview of the theory of access to an essential facility in an unregulated environment. It considers a wide array of contexts: possibility of bypass of the bottleneck facility, upstream vs downstream location of this facility, and various exclusionary activities such as vertical integration and exclusive dealing. It identifies a number of robust conclusions as to the social and private costs and benefits of foreclosure. The chapter then turns to horizontal foreclosure, where the monopoly good is sold directly to the end-users, and analyzes recent theories of anti-competitive bundling aimed at reducing competition in the adjacent markets or at protecting the monopoly market. Finally, the chapter tackles exclusive customer contracts and discusses potential efficiency defenses for exclusionary behavior.

Must-Take Cards and the Tourist Test

Abstract: Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore are forced to accept unacceptably high merchant discounts. The paper attempts to shed light on this must-take cards view from two angles. First, the paper gives some operational content to the notion of must-take card through the tourist test (would the merchant want to refuse a card payment when a non-repeat customer with enough cash in her pocket is about to pay at the cash register?) and analyzes its relevance as an indicator of excessive interchange fees. Second, it identifies four key sources of potential social biases in the payment card associations' determination of interchange fees: internalization by merchants of a fraction of cardholder surplus, issuers' per-transaction markup, merchant heterogeneity, and extent of cardholder multi-homing. It compares the industry and social optima both in the short term (fixed number of issuers) and the long term (in which issuer offerings and entry respond to profitability).

Many-to-one matching with complementarities and peer effects

Abstract: This paper studies many-to-one matching problems such as between students and colleges, and workers and firms in the general case, in which both peer effects and complementarities are allowed. In a matching, an agent on one side, say a firm, employs a subset of agents from the other side (workers), thus forming a coalition. The paper interprets an agent’s payoff in a matching as determined by a division rule applied to the value created by the agent’s coalition. The main results relate stability to pairwise alignment. A matching is stable if no group of agents can profitably deviate. Agents’ preferences are pairwise aligned if any two agents in the intersection of any two coalitions prefer the same one of the two coalitions. The results say that under mild regularity conditions (i) if the division rule generates pairwise-aligned preferences then there exists a stable matching, and (ii) if there exists a stable matching for all profiles of coalitional values then the division rule generates pairwise-aligned preferences. The Nash bargaining and Tullock rent-seeking are examples of division rules that satisfy the proposed pairwise-alignment condition and were not previously linked to stability. 1Department of Economics, Penn State, 418 Kern Graduate Bldg, University Park, PA 16802. Email: pycia@psu.edu. This paper is a revised draft of the first chapter of my dissertation at MIT and was circulated as Pycia (2005). I would like to thank Bengt Holmström, Glenn Ellison, Robert Gibbons, Haluk Ergin, Sergei Izmalkov, Abhijit Banerjee, Michael Piore, and Jean Tirole for their advice and support. For their comments, I am also grateful to Edward Green, Anna Myjak-Pycia, Marco Ottaviani, Alvin Roth, Hannu Vartiainen, and Birger Wernerfelt, as well as William Hawkins, Fuhito Kojima, David McAdams, Guy Michaels, Catherine Tucker, Eric Van den Steen, Zaki Wahhaj, Muhamet Yildiz, William Zame, and lecture and seminar participants at MIT, MIT Sloan, HBS, UCL, Penn State, UCLA, Harvard, Mannheim, the Bonn Matching Conference 2006, Suny Stony Brook Game Theory Festival 2006, and the Society for Economic Design Conference 2006. This project was supported in part by grants from the MIT Industrial Performance Center and Leon Kózmiński Academy of Entrepreneurship and Management in Warsaw.

Identity, dignity and taboos: beliefs as assets

Abstract: We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own “deep values” and infer them from their past choices, which then come to define “who they are”. Identity investments increase when information is scarce or when a greater endowment of some asset (wealth, career, family, culture) raises the stakes on viewing it as valuable (escalating commitments). Taboos against transactions or the mere contemplation of tradeoffs arise to protect fragile beliefs about the “priceless” value of certain assets (life, freedom, love, faith) or things one “would never do”. Whether such behaviors are welfare-enhancing or reducing depends on whether beliefs are sought for a functional value (sense of direction, self-discipline) or for “mental consumption” motives (self-esteem, anticipatory feelings). Escalating commitments can thus lead to a “hedonic treadmill”, and competing identities cause dysfunctional failures to invest in high-return activities (education, adapting to globalization, assimilation), or even the destruction of productive assets. In social interactions, norm violations elicit a forceful response (exclusion, harassment) when they threaten a strongly held identity, but further erode morale when it was initially weak. Concerns for pride, dignity or wishful thinking lead to the inefficient breakdown of Coasian bargaining even under symmetric information, as partners seek to self-enhance and shift blame by turning down “insultingly low” offers.

Public Policy toward Patent Pools

Abstract: The past two decades have seen an explosion of patent awards and litigation across a wide variety of technologies, which numerous commentators have suggested has socially detrimental consequences. Patent pools, in which owners of intellectual property share patent rights with each other and third parties, have been proposed as a way in which firms can address this patent-thicket problem. The paper discusses the current regulatory treatment of patent pools and highlights why a more nuanced view than focusing on the extreme cases of perfect complements and perfect substitutes is needed. It also highlights the importance of regulators' stance toward independent licensing, grantback policies, and royalty control. We also present case-study and large-sample empirical evidence.

Tying-In Two-Sided Markets and the Honour All Cards Rule

Abstract: Payment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card market' to exclude on-line debit cards and thereby monopolize the 'debit card market'. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions (debit and credit) and two platforms. In the benchmark model, in the absence of HAC rule, the interchange fee (IF, the transfer from the merchant's bank to the cardholder's bank) on debit is socially too low, and that on credit is either optimal or too high (depending on downstream members' market power). In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect: The HAC rule allows the multi-card platform to better perform the balancing act by raising the IF on debit and lowering it on credit, ultimately raising volume. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between debit and credit; merchant heterogeneity; and platform differentiation. While the HAC rule may no longer raise social welfare under all values of the parameters, the basic and socially beneficial rebalancing effect unveiled in the benchmark model is robust.

Consensus Building: How to Persuade a Group

Abstract: Many decisions in private and public organizations are made by groups. The paper explores strategies that the sponsor of a proposal may employ to convince a qualified majority of group members to approve the proposal. Adopting a mechanism design approach to communication, it emphasizes the need to distill information selectively to key members of the group and to engineer persuasion cascades in which members who are brought on board sway the opinion of others. The paper unveils the factors, such as the extent of congruence among group members and between them and the sponsor, and the size and governance of the group, that condition the sponsor's ability to maneuver and get his project approved.

Identity, Dignity and Taboos: Beliefs as Assets

Abstract: We analyze social and economic phenomena involving beliefs which people value and invest in, for affective or functional reasons. Individuals are at times uncertain about their own deep values and infer them from their past choices, which then come to define who they are. Identity investments increase when information is scarce or when a greater endowment of some asset (wealth, career, family, culture) raises the stakes on viewing it as valuable (escalating commitments). Taboos against transactions or the mere contemplation of tradeoffs arise to protect fragile beliefs about the priceless value of certain assets (life, freedom, love, faith) or things one would never do. Whether such behaviors are welfare-enhancing or reducing depends on whether beliefs are sought for a functional value (sense of direction, self-discipline) or for mental consumption motives (self-esteem, anticipatory feelings). Escalating commitments can thus lead to a hedonic treadmill, and competing identities cause dysfunctional failures to invest in high-return activities (education, adapting to globalization, assimilation), or even the destruction of productive assets. In social interactions, norm violations elicit a forceful response (exclusion, harassment) when they threaten a strongly held identity, but further erode morale when it was initially weak. Concerns for pride, dignity or wishful thinking lead to the inefficient breakdown of Coasian bargaining even under symmetric information, as partners seek to self-enhance and shift blame by turning down insultingly low offers.

Financing and Access in Cooperatives

Abstract: Cooperative undertakings account for a substantial share of developed market economies and that share is likely to grow with the advent of the new economy. The paper develops a dynamic investment framework that relates access policies, financing and growth of cooperatives. It shows how discriminating among users affects the viability of cooperatives and impacts social efficiency. It then argues that in most circumstances, the cooperative form, even when viable on a stand-alone basis, is a weak competitor against alternative organizational forms. Last, the paper stresses that access policies involve a standard social trade-off between static efficiency and innovation.

Tying-in Two-Sided Markets and the Honour All Cards Rule

Abstract: Payment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card market' to exclude on-line debit cards and thereby monopolize the 'debit card market'. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions (debit and credit) and two platforms. In the benchmark model, in the absence of HAC rule, the interchange fee (IF, the transfer from the merchant’s bank to the cardholder’s bank) on debit is socially too low, and that on credit is either optimal or too high (depending on downstream members’ market power). In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect: The HAC rule allows the multi-card platform to better perform the balancing act by raising the IF on debit and lowering it on credit, ultimately raising volume. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between debit and credit; merchant heterogeneity; and platform differentiation. While the HAC rule may no longer raise social welfare under all values of the parameters, the basic and socially beneficial rebalancing effect unveiled in the benchmark model is robust.