Monopoly with Incomplete Information
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.
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TL;DR: Hayek as mentioned in this paper argued that the problem of rational economic order is determined by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.
Abstract: ONE PARTY TO AN EXCHANGE often knows something relevant to the transaction that the other party does not know. Such asymmetries of information are pervasive in economic activity: for example, in the relationship between employer and employee when the employee's effort cannot be monitored perfectly; between the stockholders and the manager of a firm; between insurer and insured; between a regulated firm and the regulatory agency; between the supplier and the consumers of a public good; between a socialist firm and the central planner; or (as is the subject of this paper) between buyer and seller when the value of the item is uncertain. Forty years ago, F. A. Hayek criticized theories that purport to describe the price system but start from the assumption that individuals have symmetric information: The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources-if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. (Hayek 1945, p. 519)
2,518Â citations
Book•
26 Dec 2001
TL;DR: Laffont and Martimort as mentioned in this paper focus on the principal-agent model, the "simple" situation where a principal, or company, delegates a task to a single agent through a contract, the essence of management and contract theory.
Abstract: Economics has much to do with incentives--not least, incentives to work hard, to produce quality products, to study, to invest, and to save. Although Adam Smith amply confirmed this more than two hundred years ago in his analysis of sharecropping contracts, only in recent decades has a theory begun to emerge to place the topic at the heart of economic thinking. In this book, Jean-Jacques Laffont and David Martimort present the most thorough yet accessible introduction to incentives theory to date. Central to this theory is a simple question as pivotal to modern-day management as it is to economics research: What makes people act in a particular way in an economic or business situation? In seeking an answer, the authors provide the methodological tools to design institutions that can ensure good incentives for economic agents. This book focuses on the principal-agent model, the "simple" situation where a principal, or company, delegates a task to a single agent through a contract--the essence of management and contract theory. How does the owner or manager of a firm align the objectives of its various members to maximize profits? Following a brief historical overview showing how the problem of incentives has come to the fore in the past two centuries, the authors devote the bulk of their work to exploring principal-agent models and various extensions thereof in light of three types of information problems: adverse selection, moral hazard, and non-verifiability. Offering an unprecedented look at a subject vital to industrial organization, labor economics, and behavioral economics, this book is set to become the definitive resource for students, researchers, and others who might find themselves pondering what contracts, and the incentives they embody, are really all about.
2,454Â citations
TL;DR: In this article, a series of theorems relating log-concavity and/or logconvexity of probability density functions, distribution functions, reliability functions, and their integrals are presented.
Abstract: In many applications, assumptions about the log-concavity of a probability distribution allow just enough special structure to yield a workable theory. This paper catalogs a series of theorems relating log-concavity and/or log-convexity of probability density functions, distribution functions, reliability functions, and their integrals. We list a large number of commonly-used probability distributions and report the log-concavity or log-convexity of their density functions and their integrals. We also discuss a variety of applications of log-concavity that have appeared in the literature.
1,104Â citations
Cites background from "Monopoly with Incomplete Informatio..."
...Myerson and Satterthwaite [28], Matthews[26], and Maskin and Riley[25], impose conditions that are implied by log-concavity of the distribution function in order to characterize efficient auctions....
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TL;DR: In this article, Adams and Yellen show that bundling can serve as a useful price discrimination device, even when all consumers' willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product.
Abstract: Through what selling strategy can a multiproduct monopolist maximize his profits when his knowledge about individual consumers' preferences is limited? One possibility, extensively studied in the context of a single-good monopoly, is to use quantity-dependent pricing as a means of discriminating among customers with differing tastes (see, for example, Oi [1971] and Maskin and Riley [1984]). An alternative technique for price discrimination, first suggested by Stigler [1968] and analyzed further by Adams and Yellen [1976], is for the monopolist to package two or more products in bundles rather than selling them separately.' Through a series of examples Adams and Yellen illustrate that bundling can serve as a useful price discrimination device, even when all consumers' willingnesses to pay for each of the goods individually are unaffected by whether they are also consuming the other product. A typical example is illustrated in Figure I (adapted from Figure IV in Adams and Yellen), where there are two goods, three consumers (AB,C) who consume at most one unit of each good (with reservation values for each good that are independent of whether the other good is consumed), and zero costs of production. There, a bundle offered at a price of 100 fully extracts all potential surplus, which would be impossible pricing the goods independently. Unfortunately, though, these authors do not provide any general characterization of the circumstances in which bundling is actually a multiproduct monopolist's optimal strategy. Their examples, however (such as Figure I), create the impression that the profitable use of bundling
866Â citations
Cites background from "Monopoly with Incomplete Informatio..."
...For a slightly different interpretation of the sufficient condition for bundling to be profitable, note that the expression {[1 - G*(-) ]/gj(* )} commonly arises in adverse-selection problems (see, for example, Myerson [1981], Maskin and Riley [1984], McAfee and McMillan [1987]). Its expectation is the expected difference between the first-order and second-order statistics, which is exactly the amount of rent the buyer must be left with if he is not to understate his valuation. If this informational rent decreases in the valuation of the other good, then the optimality of bundling is ensured. 14. The covariance between vl and v2 can be written as f{J[v2 - E(V2)] 2(V2I vl)dv2} [vl - E(vD)]hj(vj)dvj. If, for example, G2(. I vj) is decreasing in vi, then the expression in curly brackets is increasing in vl (see Milgrom [1981] ), and thus the entire expression is positive....
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..., Maskin and Riley [1984]), for example, implicitly assumes that purchases can be monitored since the monopolist does not worry about consumers purchasing multiple subquantities (though this problem disappears when quantity discounts exist just as it disappears when bundle discounts are used here)....
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..., Maskin and Riley [1984]), for example, implicitly assumes that purchases can be monitored since the monopolist does not worry about consumers purchasing multiple subquantities (though this problem disappears when quantity discounts exist just as it disappears when bundle discounts are used here). 7. It can be shown that a simple pricing policy of this sort is the optimal single-good selling strategy as long as the single-good profit function is concave in price. In particular, in that case no randomized selling procedure can improve profits. McAfee and McMillan [1988] also derive a sufficient condition for the optimal multiproduct sales policy to be nonstochastic....
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...For a slightly different interpretation of the sufficient condition for bundling to be profitable, note that the expression {[1 - G*(-) ]/gj(* )} commonly arises in adverse-selection problems (see, for example, Myerson [1981], Maskin and Riley [1984], McAfee and McMillan [1987])....
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Book•
01 Jan 1992TL;DR: The economics of uncertainty and information (EoI) as mentioned in this paper is a theory of human endeavours constrained by our limited and uncertain knowledge, but only recently has an accepted theory of EO evolved.
Abstract: Economists have always recognised that human endeavours are constrained by our limited and uncertain knowledge, but only recently has an accepted theory of uncertainty and information evolved. This theory has turned out to have surprisingly practical applications: for example in analysing stock market returns, in evaluating accident prevention measures, and in assessing patent and copyright laws. This book presents these intellectual advances in readable form for the first time. It unifies many important but partial results into a satisfying single picture, making it clear how the economics of uncertainty and information generalises and extends standard economic analysis. Part One of the volume covers the economics of uncertainty: how each person adapts to a given fixed state of knowledge by making an optimal choice among the immediate 'terminal' actions available. These choices in turn determine the overall market equilibrium reflecting the social distribution of risk bearing. In Part Two, covering the economics of information, the state of knowledge is no longer held fixed. Instead, individuals can to a greater or lesser extent overcome their ignorance by 'informational' actions. The text also addresses at appropriate points many specific topics such as insurance, the Capital Asset Pricing model, auctions, deterrence of entry, and research and invention.
832Â citations
References
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7,666Â citations
TL;DR: Optimal auctions are derived for a wide class of auction design problems when the seller has imperfect information about how much the buyers might be willing to pay for the object.
Abstract: This paper considers the problem faced by a seller who has a single object to sell to one of several possible buyers, when the seller has imperfect information about how much the buyers might be willing to pay for the object. The seller's problem is to design an auction game which has a Nash equilibrium giving him the highest possible expected utility. Optimal auctions are derived in this paper for a wide class of auction design problems.
6,003Â citations
Book•
01 Jan 1920
TL;DR: Aslanbeigui et al. as mentioned in this paper discussed the relationship between the national dividend and economic and total welfare, and the size of the dividend to the allocation of resources in the economy and the institutional structure governing labor market operations.
Abstract: The Economics of Welfare occupies a privileged position in economics. It contributed to the professionalization of economics, a goal aggressively and effectively pursued by Pigou's predecessor and teacher Alfred Marshall. The Economics of Welfare also may be credited with establishing welfare economics, by systematically analyzing market departures and their potential remedies. In writing The Economics of Welfare, Pigou built a bridge between the old and the new economics at Cambridge and in Britain. Much of the book remains relevant for contemporary economics. The list of his analyses that continues to play an important role in economics is impressive. Some of the more important include: public goods and externalities, welfare criteria, index number problems, price discrimination, the theory of the firm, the structure of relief programs for the poor, and public finance. Pigou's discussion of the institutional structure governing labor-market operations in his Wealth and Welfare prompted Schumpeter to call the work "the greatest venture in labor economics ever undertaken by a man who was primarily a theorist." The Economics of Welfare established welfare economics as a field of study. The first part analyzes the relationship between the national dividend and economic and total welfare. Parts II and III link the size of the dividend to the allocation of resources in the economy and the institutional structure governing labor-market operations. Part IV explores the relationship between the national dividend and its distribution. In her new introduction, Nahid Aslanbeigui discusses the life of Pigou and the history of The Economics of Welfare. She also discusses Pigou's theories as expressed in this volume and some of the criticisms those theories have met as well as the impact of those criticisms. The Economics of Welfare is a classic that repays careful study.
5,145Â citations
TL;DR: In this paper, the authors make the following simplifying assumptions: (1) Intertemporal problems are ignored; (2) the tax system that would bring about that result would completely discourage unpleasant work; and (3) what such a tax schedule would look like; and what degree of inequality would remain once it was established.
Abstract: you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We enable the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org. 1. INTRODUCTION One would suppose that in any economic system where equality is valued, progressive income taxation would be an important instrument of policy. Even in a highly socialist economy, where all who work are employed by the State, the shadow price of highly skilled labour should surely be considerably greater than the disposable income actually available to the labourer. In Western Europe and America, tax rates on both high and low incomes are widely and lengthily discussed3: but there is virtually no relevant economic theory to appeal to, despite the importance of the tax. Redistributive progressive taxation is usually related to a man's income (or, rather, his estimated income). One might obtain information about a man's income-earning potential from his apparent I.Q., the number of his degrees, his address, age or colour: but the natural, and one would suppose the most reliable, indicator of his income-earning potential is his income. As a result of using men's economic performance as evidence of their economic potentialities, complete equality of social marginal utilities of income ceases to be desirable, for the tax system that would bring about that result would completely discourage unpleasant work. The questions therefore arise what principles should govern an optimum income tax; what such a tax schedule would look like; and what degree of inequality would remain once it was established. The problem seems to be a rather difficult one even in the simplest cases. In this paper, I make the following simplifying assumptions: (1) Intertemporal problems are ignored. It is usual to levy income tax upon each year's income, with only limited possibilities of transferring one year's income to another for tax purposes. In an optimum system, one would no doubt wish …
4,157Â citations
TL;DR: In this article, a new general auction model was proposed, and the properties of affiliated random variables were investigated, and various theorems were presented in Section 4-8 and Section 9.
Abstract: : In Section 2, we review some important results of the received auction theory, introduce a new general auction model, and summarize the results of our analysis. Section 3 contains a formal statement of our model, and develops the properties of affiliated random variables. The various theorems are presented in Sections 4-8. In Section 9, we offer our views on the current state of auction theory. Following Section 9 is a technical appendix dealing with affiliated random variables.
3,857Â citations