Non-reservation price equilibria and consumer search
Reservation price equilibria (RPE) do not accurately assess market power in consumer search markets. In most search markets, consumers do not know important elements of the environment in which they search (such as, for example, firms' cost). We argue that when consumers learn when searching, RPE suffer from theoretical issues, such as non-existence and critical dependence on specific out-of-equilibrium beliefs. We characterize equilibria where consumers rationally choose search strategies that are not characterized by a reservation price. Non-RPE always exist and do not depend on specific out-of-equilibrium beliefs. Non-RPE have active consumer search and are consistent with recent empirical findings.
This paper examines the effect of price matching guarantees (PMGs) on market outcomes in a sequential search model. PMGs are simultaneously chosen with prices and some consumers (shoppers) know the firms’ decisions before buying, while others (non-shoppers) enter a shop before observing the price and whether or not the firm has a PMG. In such an environment, PMGs increase the value of buying the good and therefore increase consumers’ reservation prices. This increase is so large that even after accounting for the possible execution of PMGs, firms’ profits are larger in an equilibrium where PMGs are offered than in an equilibrium without PMGs. We also consider the incentives of firms to choose PMGs and show that an equilibrium where all firms offer PMGs does not exist because of a free-riding problem.
We attempt to prove the hypothesis that, under certain conditions, a phenomenon of propitious selection may arise on the higher education market: When talented university entrants favor applying to branded universities, the latter are able to automatically build up a positive reputation without having to actually improve the quality of their educational process. We have performed an econometric modeling and regression analysis on a set of data that were obtained from a survey of Moscow university freshmen to show that high school graduates with high scores on the Unified State Exam (USE) really are oriented toward branded universities and that these prospective students believe that obtaining a prestigious degree is even more important than entering any particular profession. Entrants lack complete information about the quality of education at any given university. The analysis of university rankings presented in this article shows that they are unable to completely solve this information asymmetry since they contain signal distortions introduced by their ranking methodology. These rankings primarily prioritize the research activity of faculty members, and they ignore their teaching performance and work with students. Therefore, often universities design their policies in such a way as to privilege the criteria that are used in rankings, and they focus on improving precisely these indicators at the expense of other considerations. As a result, branded universities are able to distinguish themselves from conventional higher education institutions not by actually providing higher quality educational services, but by selecting the best applicants and benefiting from the powerful peer effect of having these students study together. In this way, these universities can produce excellent graduates that ensure their positive reputation in the eyes of employers and at the same time increase their brand value by raising their position in the rankings.
The purpose of political campaigns in democracies is to provide voters with information that allows them to make “correct” choices, that is, vote for the party/candidate whose proposed policy or “position” is closest to their ideal position. In a world where political talk is often ambiguous and imprecise, it then becomes important to understand whether correct choices can still be made. In this paper we identify two elements of political culture that are key to answering this question: (i) whether or not political statements satisfy a so-called “grain of truth” assumption, and (ii) whether or not politicians make statements that are comparative, that is contain information about politicians’ own positions relative to that of their adversaries. The “grain of truth” assumption means that statements, even if vague, do not completely misrepresent the true positions of the parties. We find that only when political campaigning is comparative and has a grain of truth, will voters always make choices as if they were fully informed. Therefore, the imprecision of political statements should not be a problem as long as comparative campaigning is in place.
The paper studies a problem of optimal insurer’s choice of a risk-sharing policy in a dynamic risk model, so-called Cramer-Lundberg process, over infinite time interval. Additional constraints are imposed on residual risks of insureds: on mean value or with probability one. An optimal control problem of minimizing a functional of the form of variation coefficient is solved. We show that: in the first case the optimum is achieved at stop loss insurance policies, in the second case the optimal insurance is a combination of stop loss and deductible policies. It is proved that the obtained results can be easily applied to problems with other optimization criteria: maximization of long-run utility and minimization of probability of a deviation from mean trajectory.