A highly acclaimed result in contract theory is that tournaments are superior to piece rate contracts when the agents are risk averse and their production activities are subject to a relatively large common shock. The reason is that tournaments allow the principal to trade insurance for lower income to the agents. Our analysis shows that this celebrated result does not carry over to the case when a limited liability constraint limits the payments the principal can make, provided that the liquidation value of the firm is sufficiently small. This finding has important implications for the vast number of limited liability firms. Tournaments are still optimal when the liquidation value of the firm is intermediate or large, even though the limited liability constraint is still binding for intermediate values. Surprisingly, uncertainty in the price of output strengthens the need for tournaments by expanding the range of liquidation values over which tournaments are optimal, because price uncertainty introduces additional bankruptcy risk.
TV stations (TV stations) for their upcoming programs. In this paper, I like it for a couple of months. Importantly, each TV station is fully informed. Viewers receive information via tune-ins, if any, or switching across stations. I’m not sure where to find the rival’s program. In this case, it can be socially better. However, it’s possible that they can improve their careers by helping them.
Lowest-Unmatched Price Auctions (LUPAs) specify that the lowest bid placed by only one participant wins. They are used in internet trading and TV and radio shows. We model LUPAs as games with minimal restrictions, in particular allowing players to place more than one bid, since multiple bids have been observed in most actual LUPAs. Though LUPAs are games for which a closed-form solution does not seem to exist in general, our model generates several testable implications about the type of strategies played in equilibrium and the highest bid in a given LUPA. Our analysis suggests that players follow strategic considerations and arrive at decisions which, at least in the aggregate, are generally consistent with theoretical predictions, yet there are some remarkable deviations.
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 study whether SAAs and CCAs generate prices that reflect bidders’ opportunity costs.•
When bidders have preferences to raise rivals’ cost, CCAs may fail to generate market-oriented prices.•
Even when a CCA ends with excess supply, it may fail to generate market-oriented prices.
The objective many telecom regulators want to achieve when they decide to auction spectrum is that acquiring firms pay a market price (based on the opportunity cost principle). The simultaneous ascending auction may fail in this respect, as it provides bidders with an opportunity to engage in strategic demand reduction. This paper asks whether the combinatorial clock auction (CCA) fares better in this respect. We show that the answer to this question depends on the objectives bidders have. If bidders have only the slightest preference to raise rivals' cost, they will use the opportunities the CCA provides them to engage in strategic demand expansion. This is even the case when the clock phase ends with excess demand. © 2016 Elsevier B.V.
This paper argues that asymmetry in countries' trade exposure is an important determinant of firms' R&D, productivity and countries' welfare. We model a choice of R&D in a given trade network focusing on asymmetric hub-and-spoke networks and symmetric networks. We find that R&D, productivity and total surplus are highest in a hub economy and lowest in a spoke, while intermediate levels are exhibited by countries in a symmetric network. Thus, regional/preferential trade agreements, resulting in asymmetric trade networks, benefit hubs but harm spokes. By contrast, multilateral trade agreements, resulting in a complete network, generate equal R&D and welfare benefits for all countries.
We study how a monopoly manufacturer optimally manages her contractual relations with retailers in markets with consumer search. By choosing wholesale prices, the manufacturer affects the degree of competition between retailers and the incentives of consumers to search. We show that depending on whether or not the manufacturer can commit to her price decisions and on the search cost, the manufacturer may be substantially better off choosing her wholesale prices not independent of each other, consciously allowing for asymmetric contracts. Thus, our analysis may shed light on when we may expect sales across different retailers to be positively or negatively correlated. Our model may be able to generate loss leaders at the wholesale level and show the rationale for creating “premium resellers”.