Showing papers in "Journal of Economics and Management Strategy in 1996"
TL;DR: In this paper, the authors show that if no restriction is put on trade between integrated and non-integrated firms, integrated firms may continue to purchase inputs from the nonintegrated upstream firms, with the goal of raising their downstream rivals' costs.
Abstract: Whether vertical integration between a downstream oligopolist and an upstream oligopolist is profitable for an integrated pair of firms is shown to depend on whether one means by this that profits increase no matter what other firms do, that all integrated firms are better off when all firms are integrated than when none are, or simply that no downstream-upstream pair of firms has an incentive to deviate from a situation where all firms are integrated. It is also shown to depend on the number of firms in each oligopoly and on the type of interaction that is assumed between firms that are integrated and firms that are not. In particular, it is shown that if no restriction is put on trade between integrated and nonintegrated firms, integrated firms may continue to purchase inputs from the nonintegrated upstream firms, with the goal of raising their downstream rivals' costs. Furthermore, even though firms are identical, asymmetric equilibria, where integrated and nonintegrated firms coexist, may actually arise as an outcome of the integration game.
104 citations
TL;DR: In this article, the authors study the informational role and optimality of the common business practice of money-back guarantees in a signaling model with quality uncertainty and risk-neutral buyers.
Abstract: Why is it so common for the seller to provide guarantees that say “Satisfaction guaranteed or your money back” along with the sale of a product? Newly introduced goods and mail-ordered products are usually sold with such guarantees. In honoring money-back guarantees, why is it a common business practice to pay back exactly the purchase price rather than a portion of it? In this paper we study the informational role and optimality of the common business practice of money-back guarantees in a signaling model with quality uncertainty and risk-neutral buyers. We find that money-back guarantees and price together completely reveal a monopoly firm's private information about product quality, Moreover, the private information is revealed at no signaling cost. Furthermore, we show that in terms of the level of monetary compensation specified by a guarantee, price is the profit-maximizing level of monetary payback in case of product failure.
64 citations
TL;DR: In this article, the effect of a middleman on the search and trading behavior of traders was examined, and it was shown that the buyer and seller types with middle valuations choose to search for each other, while the buyers and sellers with high or low valuations drop out of the search market and choose to trade directly with the middleman.
Abstract: This paper examines the effect of a middleman on the search and trading behavior of the traders. It is shown that the buyer and seller types with middle valuations choose to search for each other, while the buyer and seller types with high or low valuations drop out of the search market and choose to trade directly with the middleman. The ask and bid prices of the middleman act as an outside option for the buyer and seller, and influence the outcome of the bargaining between the two. The model generalizes Gehrig (1993) by endogenizing the traders' search intensities, by allowing the traders to go to an intermediary even if thy have engaged in search, and by enabling the intermediary to provide the service of immediacy.
51 citations
TL;DR: In this article, the authors present a model of industry evolution where the dynamics are driven by a process of endogenous innovations followed by subsequent embodiments in physical capital, and stress the causal relationship between past R&D expenditures and current investments in machinery and equipment.
Abstract: We present a model of industry evolution where the dynamics are driven by a process of endogenous innovations followed by subsequent embodiments in physical capital. Traditionally, the only distinction between R&D and physical investment was one of labeling: the first process accumulates an intangible stock, knowledge, while the second accumulates physical capital. Both stocks affect output in a symmetric fashion. We argue that the story is not that simple, and that there is more to it than differences in the object of accumulation. Our model stresses the causal relationship between past R&D expenditures and current investments in machinery and equipment. This causality pattern, which is supported by the data, also explains the observed higher volatility of physical investment relative to that of R&D expenditures.
51 citations
TL;DR: This paper developed a simple model in which there is both interfirm (or intraproduct) and intrafirm competition and developed a classificatory framework in order to understand product-range or diversification decisions alongside conventional competition.
Abstract: We develop a simple model in which there is both interfirm (or intraproduct) and intrafirm (or interproduct) competition. The purpose is to develop a classificatory framework in order to understand product-range or diversification decisions alongside conventional competition. The equilibrium outcomes commonly involve a limited range of the available goods being produced. Deterrence equilibria and other strategic actions are also examined.
49 citations
TL;DR: In this article, the strategic role of the temporal dimension of contracts in a duopoly market was investigated and it was shown that a long-term contract makes a firm a leader in incentives, while a short-term contracts makes it a follower.
Abstract: This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts.
36 citations
TL;DR: In this paper, a game-theoretic version of the right-to-manage model of firm-level bargaining where strategic interactions among firms are explicitly recognized is developed, and the main aim is to investigate how equilibrium wages and employment react to changes in various labor and product market variables.
Abstract: In this paper we develop a game-theoretic version of the right-to-manage model of firm-level bargaining where strategic interactions among firms are explicitly recognized. Our main aim is to investigate how equilibrium wages and employment react to changes in various labor and product market variables. We show that our comparative statics results hinge crucially on the strategic nature of the game, which in turn is determined by the relative bargaining power of unions and managers.
32 citations
TL;DR: The authors studied managerial incentives in a model where managers choose product market strategies and make takeover decisions, and found that when managers are more aggressive, rival firms earn lower profits and thus are willing to seU out at a lower price.
Abstract: The paper studies managerial incentives in a model where managers choose product market strategies and make takeover decisions. The equilibrium contract includes an incentive to increase the firm's sales, under either quantity or price competition. This result contrasts with previous findings in the literature, and hinges on the fact that when managers are more aggressive, rival firms earn lower profits and thus are willing to seU out at a lower price. However, as a side-effect of such a contract, the manager might undertake unprofitable takeovers.
31 citations
TL;DR: In this article, the authors developed a theory of capital structure based on the attempts of a firm to alleviate a holdup problem that arises in its bilateral relationship with a buyer, and showed that by issuing debt to outsiders, the firm can improve its ex post bargaining position vis-a-vis the buyer and capture a larger share of the ex post gains from trade Debt, however, is costly because the buyer may find the required price too high and refuse to trade
Abstract: This paper develops a theory of capital structure based on the attempts of a firm to alleviate a holdup problem that arises in its bilateral relationship with a buyer It is shown that by issuing debt to outsiders, the firm can improve its ex post bargaining position vis-a-vis the buyer and capture a larger share of the ex post gains from trade Debt, however, is costly because the buyer may find the required price too high and refuse to trade Since debt raises the payoff of claimholders, it strengthens the firm's incentive to make relationship-specific investments, and therefore alleviates the well-known underinvestment problem A comparative static analysis yields a number of testable hypotheses regarding the firm's financial strategy
21 citations
TL;DR: It is argued that a combination of factors, including the structure of health care delivery, reimbursement systems, the presence of option demand, and high consumer switching costs, create circumstances in which medical specialists may be able to exercise significant seller power.
Abstract: This paper discusses the supplier power of medical specialists. We argue that a combination of factors, including the structure of health care delivery, reimbursement systems, the presence of option demand, and high consumer switching costs, create circumstances in which medical specialists may be able to exercise significant seller power. We explore the implications of this for the pricing and organization of medical care.
19 citations
TL;DR: In this article, the authors consider the incentive of a firm with power in a market for one good to tie in the sale of a complementary good even though the complementary good is produced in a zero profit market.
Abstract: This paper considers the incentives of a firm with power in a market for one good to tie in the sale of a complementary good even though the complementary good is produced in a zero profit market. If the zero-profit price of the tied good is greater than the marginal cost (which occurs for example when the technology is characterized by a fixed cost and a constant marginal cost), a firm will fie in order to increase the sales of the complementary good, which at the margin is profitable. We show that such tying will lower the effective prices paid by customers and increase welfare. This incentive exists if the firm with market power is a monopolist or one of several competing oligopolists.
TL;DR: In this paper, the authors show that if the profits of the seller and the buyers are monotonic in each term of the contract, then applying MFC protection to each term allows a manager to solve his commitment problem in complex contacting situations.
Abstract: DeGraba and Postlewaite (1992) show that the seller of a durable input can solve the time inconsistency problem by offering most-favored-customer (MFC) protection to buyers. McAfee and Schwartz (1994) show that if a supplier sells inputs to competing firms using two-part tariffs, MFC protection that allows a firm to replace its contract with a contract executed by any other firm will not solve the commitment problem, and argue this implies managers cannot use MFCs as a strategic commitment device in complex contracting situations. This paper shows that if the profits of the seller and the buyers are monotonic in each term of the contract, then applying MFC protection to each term of a contract allows a manager to solve his commitment problem in complex contacting situations. We show that “standard” contract arrangements (two-part tariffs, declining block tariffs, and royalties as a percentage of sales) meet this condition.
TL;DR: In this paper, the optimal long-term contract with a termination clause, which specifies that the principal will switch agents in the second period when the first-period cost is high, is analyzed.
Abstract: Many long-term contracts incorporate a termination clause. This paper argues that when agents have hidden information, such a clause has a beneficial incentive effect—it enables a principal to screen agents' private information at a lower cost. In a two-period model, this paper characterizes the optimal long-term contract with a termination clause, which specifies that the principal will switch agents in the second period when the first-period cost is high. The analysis delineates how the optimality of this clause depends on the intertemporal cost correlation structure, on the limits to agents' liability, and on the principal's degree of commitment.
TL;DR: In this paper, financial support from Universit`a Bocconi, progetto di ricerca "Approccio individualistico ai fenomeni di auto-organizzazione e diffusione dell'informazione nel sistema economico" and from the Spanish Ministry of Education, Proyecto de la DGICYT PB92-1138, is gratefully acknowledged.
Abstract: Financial support from Universit`a Bocconi, progetto di ricerca “Approccio individualistico ai fenomeni di auto-organizzazione e diffusione dell’informazione nel sistema economico”, and from the Spanish Ministry of Education, Proyecto de la DGICYT PB92-1138, is gratefully acknowledged.
TL;DR: In this paper, the authors examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market.
Abstract: We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.
TL;DR: In this article, the authors show that the effect of product differentiation on industry profit breaks down in the presence of firm-specific cost shocks, which leads to more intense price competition.
Abstract: It is generally believed that industries with greater product differentiation have higher rates of return. This paper shows that this effect breaks down in the presence of firm-specific cost shocks. Greater substitutability in products generates two opposing effects: (1) it allows a larger increase in demand when a firm has a favorable cost shock, which more than compensates for the reduction in demand when it has an unfavorable cost shock, and (2) it results in more intense price competition. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation.