Showing papers in "The RAND Journal of Economics in 1984"
TL;DR: The authors analyzes the duality of prices and quantities in a differentiated duopoly and shows that if firms can only make two types of binding contracts with consumers, the price contract and the quantity contract, it is a dominant strategy for each firm to choose the quantity (price) contract, provided the goods are substitutes (complements).
Abstract: This article analyzes the duality of prices and quantities in a differentiated duopoly. It is shown that if firms can only make two types of binding contracts with consumers, the price contract and the quantity contract, it is a dominant strategy for each firm to choose the quantity (price) contract, provided the goods are substitutes (complements).
2,516 citations
TL;DR: In this article, the authors focus on the former constraint and consider the case of a single principal (the monopolist) and show that, under a separability assumption, strong conclusions can be drawn about the nature of optimal incentive schemes.
Abstract: Recent theoretical research on principal-agent relationships has emphasized incentive problems that arise when the parties involved are constrained by either asymmetric information or their inability to monitor each other's actions. Here we concentrate on the former constraint and consider the case of a single principal (the monopolist). The main contribution is to show that, under a separability assumption, strong conclusions can be drawn about the nature of optimal incentive schemes. Although the primary focus is on optimal quantity discounts in a monopolized market, the results also shed light on related topics, such as optimal income taxation and commodity bundling.
1,152 citations
TL;DR: In this paper, a model of parties' litigation and settlement decisions under imperfect information is studied, and the model shows how informational asymmetry influences parties' decisions, and how it might lead to parties' failure to settle.
Abstract: A model of parties' litigation and settlement decisions under imperfect information is studied. The model shows how informational asymmetry influences parties' decisions, and how it might lead to parties' failure to settle. The model is used to identify how the likelihood of settlement and the settlement amount are shaped by various factors--the size of the amount at stake, the magnitude of the parties' litigation costs, and the nature of the parties' information. The model is also used to examine how the likelihood of settlement is affected by various legal rules, such as those governing the allocation of litigation costs.
847 citations
TL;DR: In this paper, a general model of airline costs, which is estimated by using panel data on large and small airlines, is presented. And the authors show that the primary factor explaining cost differences is density of traffic within an airline's network.
Abstract: There has been a perception that U.S. trunk airlines had an inherent cost advantage over smaller regional airlines because of economies of scale. We have formulated a general model of airline costs, which we estimate by using panel data on large and small airlines. Differences in scale are shown to have no role in explaining higher costs for small airlines. The primary factor explaining cost differences is density of traffic within an airline's network. Also of major importance is the average length of individual flights.
721 citations
TL;DR: In this article, the authors developed and tested a model of integration of a marketing function, personal selling, derived from transaction cost analysis as developed principally by Williamson, and formulated as a logistic function, which is estimated with data from the electronic components industry.
Abstract: This article develops and tests a model of integration of a marketing function, personal selling. The model, derived from transaction cost analysis as developed principally by Williamson, is formulated as a logistic function, which is estimated with data from the electronic components industry. As expected, integration is associated with increasing levels of asset specificity, difficulty of performance evaluation, and the combination of these two factors. Contrary to the transaction cost model, neither frequency of transactions nor interaction of specificity and environmental uncertainty is significantly related to integration. The transaction cost model improves significantly upon the fit of a simple model relating integration to company size alone. These results suggest that for studying transactions of this kind, it is fruitful to view the firm as a governance structure.
683 citations
TL;DR: This article analyzed a model in which information about a worker's ability is only directly revealed to the firm employing the worker; other firms, however, use the worker's job assignment as a signal of ability.
Abstract: This article analyzes a model in which information about a worker's ability is only directly revealed to the firm employing the worker; other firms, however, use the worker's job assignment as a signal of ability Three results recur throughout the analysis First, wage rates tend to be more closely associated with jobs than with ability levels Second, there is frequently an inefficient assignment of workers to jobs (ie, even when a firm has complete information about a worker's output) Third, the severity of this inefficiency tends to be negatively correlated with the level of firm-specific human capital in the economy
528 citations
TL;DR: In this paper, the authors used data on 37 chemical products to test a number of hypotheses about the learning curve and industrial price behavior, and found a strong and consistent learning effect.
Abstract: Data on 37 chemical products are used to test a number of hypotheses about the learning curve and industrial price behavior. The results document a strong and consistent learning effect. Learning is found to be a function of cumulated industry output and cumulated investment rather than calendar time. Standard economies of scale appear significant but small in magnitude relative to the learning effect. Variations in the slope of the learning curve are linked to differences in R&D expenditures and capital intensity. Market concentration is found to be a strong influence on price flexibility and the timing of learningrelated price changes.
526 citations
TL;DR: In this article, the role of reputation in a competitive market where product quality is unobservable is considered and it is shown that there can exist equilibria where price is equal to average cost but greater than marginal cost.
Abstract: This article considers the role of reputation in a competitive market where product quality is unobservable. It is shown, among other things, that there can exist equilibria where price is equal to average cost but greater than marginal cost. No. firm cuts its price because this would make it more profitable to produce low- rather than high-quality goods; consumers are aware of this and would not buy its products.
524 citations
TL;DR: In this article, the theoretical basis for vertical restraints imposed by manufacturers on the prices, locations, and sales of retail firms is analyzed and the packages of vertical restraints that are minimally sufficient to neutralize the externalities and to achieve the joint-profit maximum are identified.
Abstract: Vertical restraints imposed by manufacturers on the prices, locations, and sales of retail firms represent a puzzling departure from the simple price-mediated exchange of conventional markets. In this article we analyze the theoretical basis for these restraints. In a setting where retailers inform consumers and are imperfectly competitive, and where a manufacturer has some monopoly power, we identify three potential externalities affecting retailers' decisions. These externalities lead to the failure of simple uniform-price contracts to coordinate the incentives of retailers with the objective of maximizing combined manufacturer and retailer profits. We identify the packages of vertical restraints that are minimally sufficient, under various conditions, to neutralize the externalities and to achieve the joint-profit maximum.
511 citations
TL;DR: In this paper, a model of the occurrence of accidents is used to examine liability and safety regulation as a means of controlling risks, and neither liability nor regulation is necessarily better than the other, and as is stressed, their joint use is generally socially advantageous.
Abstract: A model of the occurrence of accidents is used to examine liability and safety regulation as means of controlling risks. According to the model, regulation does not result in the appropriate reduction of risk--because the regulator lacks perfect information--nor does liability result in that outcome--because the incentives it creates are diluted by the chance that parties would not be sued for harm done or would not be able to pay fully for it. Thus, neither liability nor regulation is necessarily better than the other, and as is stressed, their joint use is generally socially advantageous.
493 citations
TL;DR: In this article, the authors analyzed a model of a regulated firm that is better informed about its cost function than is the regulator, where the regulator is assumed to be able to observe the realized cost of the firm.
Abstract: This article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator. By auditing at a cost, however, the regulator is assumed to be able to observe the realized cost of the firm. If the regulator 'finds" that the firm had misrepresented its costs at the time at which prices were set, he can order a refund to consumers. In the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated, given the original report. A separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision. The auditing decision, however, depends on the price that was initially set. The optimal auditing strategy is characterized and the nature of the welfare gains are identified. The methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable.
TL;DR: In this paper, the authors examined the relationship between the decision to adopt new technology and its determinants and found that larger banks and banks operating in more concentrated local banking markets register a higher conditional probability of adopting this new technology, all else equal.
Abstract: Using data on the adoption of automatic teller machines by firms in the banking industry, this study examines the relationship between the decision to adopt new technology and its determinants. Since banking firms differ considerably in terms of the competitive environments in which they operate, focusing on this one innovation in this industry allows a stronger test of the relationship between market structure and the adoption of new technology than has been previously conducted. Using a failure time estimation procedure, we find that larger banks and banks operating in more concentrated local banking markets register a higher conditional probability of adopting this new technology, all else equal. We also find that other results are consistent with the underlying model and that the bank's regulatory environment shapes its adoption decision in plausible ways.
TL;DR: In this article, the optimal spot prices for an electrical system are derived for a transmission network, customers, central generators, and independent generators, where the system is subject to stochastic failures and stochastically demand parameters.
Abstract: An electrical system is modelled with a transmission network, customers, central generators, and independent generators. The system is subject to stochastic failures and stochastic demand parameters. Optimal spot prices are derived for the system. They vary stochastically with space and time, and depend on electrical load flow patterns. The price difference between two locations or two voltage levels, and the wheeling charge between them, will change magnitude and sometimes sign over time, as a function of events throughout the network. Current spatial pricing methods are significantly different from the spot-price-based methods derived here.
TL;DR: This paper used Tobin's q, the ratio of the market value of a firm to the replacement value of its physical assets, to measure monopoly power and examine the relationship between market structure and profitability.
Abstract: This article uses Tobin's q, the ratio of the market value of a firm to the replacement value of its physical assets, to measure monopoly power and to examine the relationship between market structure and profitability. Tobin's q is a better measure of monopoly profits than indices of single-period profitability because it measures long-run monopoly power. In addition, it is subject to less measurement error and it contains an adjustment for risk. The relationship between q and long-run monopoly power is established. Provided that all inputs are supplied competitively, q should be highly sensitive to even small amounts of monopoly power. Since the level of q is generally not high in the American economy, the result suggests either that monopoly power is absent or that unions manage to capture monopoly rents. Empirical tests of the relationship between Tobin's q and measures of market structure and unionization provide evidence that unions do capture most monopoly rents.
TL;DR: In this article, the authors provide empirical evidence on the relationship between managerial welfare and takeover bid resistance and show that the existence or absence of bid resistance is directly related to the personal wealth changes of the target firm's managers.
Abstract: Tender offers provide an ideal setting for the analysis of agency relationships since the best interests of the principal (target firm shareholders) and agent (target firm managers) are often in conflict. Moreover, the actions and stated rationale of target managers in resisting or not resisting tender offers are readily observable, and the size of the possible agency costs is great. This research provides direct empirical evidence on the relationship between managerial welfare and takeover bid resistance. Tests on a sample of cash tender offers provide support for the managerial welfare hypothesis. The existence or absence of bid resistance is found to be directly related to the personal wealth changes of the target firm's managers. The relationships between managerial actions and bid premium size, bidder nationality, conglomerate offers, and "ex post settling up" are also examined.
TL;DR: In this paper, the authors explain why RPM might exist in these instances and demonstrate that manufacturers will desire to adopt RPM even when they are permitted to shape the set of stores handling their products through refusals to deal.
Abstract: Resale price maintenance (RPM) has been applied to a number of products that do not seem to require tangible presale dealer services. This article explains why RPM might exist in these instances. We show that RPM will be adopted when a manufacturer wishes to "purchase" quality or style certification from reputable dealers. We demonstrate that manufacturers will desire to adopt RPM even when they are permitted to shape the set of stores handling their products through refusals to deal. Although we do not claim that this is the only explanation of RPM, we nevertheless believe that our explanation has wide applicability.
TL;DR: In this article, the authors test whether insider trading is associated with public release of information about earnings, dividends, bond ratings, mergers, and bankruptcies, and the results are weakly consistent with some use of private information, but most insider trading appears to be unrelated to these information events.
Abstract: Prior knowledge of certain public information events can lead to abnormal returns on securities. Insiders generally have access to information before the public. Several studies have shown that abnormal returns are earned by portfolios which are constructed on the basis of the trading behavior of corporate insiders. We test whether this demonstrably profitable trading is associated with the public release of information about earnings, dividends, bond ratings, mergers, and bankruptcies. The results are weakly consistent with some use of private information, but most insider trading appears to be unrelated to these information events.
TL;DR: In this article, the authors considered a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to sell it.
Abstract: This article considers a situation where the buyer or the seller of a good must engage in expenditures on specific capital before the exchange either to prepare to use the product or to prepare to sell it. It is assumed that postbreach bargaining is possible and carried out in a cooperative fashion, and that buyers and sellers form expectations about the outcome of such bargaining in a specific way. Without enforceable contracts, the potential appropriability of specific rents results in inefficiently low levels of investment. Three damage measures commonly used to enforce contracts are shown to produce inefficiently high levels of investment and to be Pareto-ranked from best to worst as follows: specific performance, expectation damages, and reliance damages.
TL;DR: In this paper, the authors consider a one-sided, incomplete information variant of the game in which the monopolist allows for the possibility that the entrant is committed to endure a price war to the limit of his capability.
Abstract: In an earlier paper we presented an entry game with a monopolist and a potential entrant facing financial constraints in which the unique perfect equilibrium involved no entry. Here we consider a one-sided, incomplete information variant of the game in which the monopolist allows for the possibility that the entrant is committed to endure a price war to the limit of his capability. We find a unique sequentially perfect equilibrium in which entry sometimes occurs. When it does, predatory price wars may result, with the incumbent sometimes driving out the entrant but other times eventually abandoning the fight.
TL;DR: In this article, a monopoly producer of a durable good is examined under the (previously uninvoked) assumption that the good depreciates, and hence replacement sales must occur if a fixed stock of the good is to be maintained.
Abstract: A monopoly producer of a durable good is examined under the (previously uninvoked) assumption that the good depreciates, and hence that replacement sales must occur if a fixed stock of the good is to be maintained. We find two ways in which the no-depreciation result, that the monopoly will always (at least eventually) produce a stock equal to that produced by a competitive market, may not hold. If the length of the trading period is nonzero, the limiting stock produced by the firm will be lower than the competitive stock, to ensure the profitability of future replacement sales. If the firm is able to constrain its production capacity, it may choose a constraint that always binds in the sense that it will be impossible for the firm to achieve a stock equal to the competitive stock.
TL;DR: In this article, the authors developed a methodology to test alternative oligopoly models and to analyze the effects of entry restrictions on conduct in the Uruguayan banking sector, whose legal entry barriers were significantly relaxed during the late 1970s.
Abstract: This article develops a methodology to test alternative oligopoly models and to analyze the effects of entry restrictions on conduct. This methodology is applied to the Uruguayan banking sector, whose legal entry barriers were significantly relaxed during the late 1970s. The results are consistent with a von Stackelberg type of industry where the degree of oligopolistic interaction among the leading firms is reduced as a consequence of the relaxation of the legal entry barriers.
TL;DR: This paper showed that when workers care about relative income and are free to choose their coworkers, the equilibrium distribution of wages within firms must be less dispersed than the corresponding distribution of marginal products.
Abstract: This article shows by example that when workers care about relative income and are free to choose their coworkers, the equilibrium distribution of wages within firms must be less dispersed than the corresponding distribution of marginal products An implicit market for within-firm status is shown to produce welfare gains by sorting workers among firms in accordance with how much they are willing to pay for high rank The resulting equilibrium Pareto dominates allocations in which each worker is paid his marginal product
TL;DR: In this article, the authors explain why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision.
Abstract: It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.
TL;DR: In this paper, the authors consider the general structure of self-selection models and provide a characterization of the distortions inherent in the sorting process, by imposing conditions which permit the ordering of agents by their preferences.
Abstract: This article considers the general structure of self-selection models. By imposing conditions which permit the ordering of agents by their preferences, we provide a characterization of the distortions inherent in the sorting process.
TL;DR: In this paper, the authors consider a scenario where a sequence of firms enters or attempts to enter at distinct points in time and examine the qualitative nature of the deterrence decision undertaken by incumbent firms.
Abstract: Industrial entry deterrence is typically studied in a setting where an established firm or firms confront and attempt to deter a single potential competitor. During the evolution of most industries, however, a sequence of firms enters (or attempts to enter) at distinct points in time. Consideration of issues arising from sequential entry fundamentally alters the qualitative nature of the deterrence decision undertaken by incumbent firms. Within a sequential setting, counterintuitive behavior may be observed. Specifically, numerous government policies designed to decrease industrial concentration (penalties for anticompetitive practices, subsidization of entry, consent decrees, restructuring industries) may have the opposite effect.
TL;DR: In this paper, the authors develop a theory of competition in markets with indivisible and irreversible investments, where the consequences of competition depend on the strategies and information available to the competitors.
Abstract: In markets with increasing returns to scale in investment, competition will occur over both the amount and the timing of new capital construction. This article develops a theory of competition in markets with indivisible and irreversible investments. The consequences of competition depend on the strategies and information available to the competitors. Iffirms act as Nash competitors with binding contracts, revenues will exceed costs for any number offirms and otherwise identicalfirms will earn different profits. In the absence of binding contracts, competition over the timing of investment can completely dissipate profits in a subgame perfect equilibrium with two or more firms.
TL;DR: In this article, the authors examined the competitive discipline of contested markets with a "natural monopoly"-type cost structure where sunk costs are neither zero nor infinite, and found that these costs weaken the support for strong interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance.
Abstract: This article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a "natural monopoly"-type cost structure where sunk costs are neither zero nor infinite. Several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design. Sunk costs are found to weaken the support for "strong" interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance. Yet the disciplining power of contestability remains impressive, with no indications of sustained monopoly pricing.
TL;DR: In this article, the authors estimate the effective concentration in wholesale markets in the contiguous United States in 1978, based on simulated oligopolistic equilibria, the characteristics of which are derived from a new and comprehensive data base.
Abstract: To inform debates about deregulation of wholesale markets for electricity, we estimate effective concentration in those markets in the contiguous United States in 1978. Our estimates are based on simulated oligopolistic equilibria, the characteristics of which are derived from a new and comprehensive data base. We find, among other things, that effective concentration is highly dependent on the adequacy of transmission capacity in each area, about which usable data are unavailable, and on the behavior of the existing public enterprises in this industry. Policy implications of our findings are discussed.
TL;DR: In this article, the authors present a theory of such phenomena as coupons valid for the next purchase of a good and high initiation fees for clubs, which can be explained by a model in which a monopolist sells a good, and the buyers are uncertain of their taste for the product but not of the quality of the product per se.
Abstract: This article presents a theory of such phenomena as coupons valid for the next purchase of a good and high initiation fees for clubs. In these cases the price of a nondurable good is lowered for second-time buyers. We show here that this can be explained by a model in which a monopolist sells a good, and the buyers are uncertain of their taste for the product but not of the quality of the product per se.
TL;DR: In this article, the authors show that merger levels are characterized by a white-noise process or by a stable first-order autoregressive scheme, which contrasts with the common perception that mergers occur in "waves," but their results are derived from a relatively small number of observations in some subperiods.
Abstract: Using annual data on U.S. mergers from 1895-1979, we are not able to reject the hypothesis that merger levels are characterized by a white-noise process or by a stable first-order autoregressive scheme. This result contrasts with the common perception that mergers occur in "waves." Our results are derived from a relatively small number of observations in some subperiods, which weakens the power of our tests, but the results are based on the same data from which the existence of waves has been formed.