Issue 2

Volume 15 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Summer 2006

A Model of Direct and Intermediated Sales

Terrence Hendershott and Jie Zhang
We examine a model in which an upstream firm can sell directly online and through heterogeneous intermediaries to heterogeneous consumers engaging in time-consuming search. Direct online sales may be more or less convenient and involve costly returns if the good fits consumers poorly. Direct selling appeals to higher-value consumers and increases the upstream firm's profits by allowing price discrimination. Competition and segmentation due to direct sales results in lower intermediary prices, making all consumers better off. Thus, entry by an upstream firm increases consumer surplus at the expense of intermediaries with the net result being an increase in social welfare.

State Dependence at Internet Portals

Avi Goldfarb
This study offers evidence of the existence of switching costs on the Internet. It uses more flexible methods than previously possible to separate switching costs from serially correlated unobservables at Internet portals. The data contain nearly 1,000 observations per household, allowing for household-specific regressions that control for all household-specific heterogeneity. The results show that households exhibit switching costs. The loyalty generated by these costs drives a large fraction of portal visits and generates considerable revenues; however, these revenues are not large enough to justify the losses incurred by Internet portals in the 1990s while building market share. The results also suggest that random coefficients models overestimate true state dependence.

Reputation in Auctions: Theory, and Evidence from eBay

Daniel Houser and John Wooders
Employing a procedure suggested by a simple theoretical model of auctions in which bidders and sellers have observable and heterogenous reputations for default, we examine the effect of reputation on price in a data set drawn from the online auction site eBay. Our main empirical result is that seller's, but not bidder's, reputation has an economically and statistically significant effect on price.

License Auctions and Market Structure

Heidrun C. Hoppe, Philippe Jehiel and Benny Moldovanu
We analyze the interplay between license auctions and market structure in a model with several incumbents and several potential entrants. The focus is on the competitiveness induced by the number of auctioned licenses. Under plausible conditions, we show that auctioning more licenses need not result in a more competitive final outcome, contrary to what common sense suggests. This is due to the nature of competition among incumbents, which sometimes exhibits free-riding. We illustrate some results with examples drawn from the recent European license-auctions for third generation (3G) mobile telephony.

Platform Sharing in a Differentiated Duopoly

Arghya Ghosh and Hodaka Morita
Platform sharing across manufacturers has become common practice in the automobile industry. Although platform sharing reduces the degree of product differentiation, manufacturers can reduce their procurement costs by taking advantage of the commonality of components. We investigate this trade-off through analyzing a model that incorporates manufacturer–supplier relationships into a differentiated duopoly model, and find an interesting inverse relationship between the advantage of platform sharing and manufacturers' costs to communicate with their potential suppliers. We also explore welfare consequences of the Internet trading exchanges by considering an extension that allows the manufacturers to jointly establish a business-to-business electronic marketplace.

Feints

Kenneth Hendricks and R. Preston McAfee
In both economic and military situations, agents may try to mislead rivals about their true types or plans, whatever they may be. We consider a simple model in which one player attacks and the other player defends. We show that such environments have two types of possible equilibrium behavior, depending upon the signaling technology. If the signal is not very revealing about the attacker's plans, then the attacker always invests more resources in attack than in misdirection. If the technology is revealing, then the attacker does not always feint, but when he feints, he invests more than half of his resources into misdirection. Comparative statics also depend on whether the technology is revealing.

Optimal Task Design: To Integrate or Separate Planning and Implementation?

Fahad Khalil, Doyoung Kim and Dongsoo Shin
Integrating planning and implementation, by having one agent perform both tasks, may be effective in encouraging planning activity whose outcome is not observable. Emphasizing its information-generating role, we find that planning activity is best encouraged by partially integrating the tasks. This is because the value of information is nonmonotonic in the degree of task integration. Therefore, the threat of using a second agent to implement the project may relax the moral hazard constraint associated with the planning task. The project size is distorted to increase the value of information, and there can be overinvestment relative to the first best.

Trade Liberalization and Industrial Restructuring: The Role of Cross-Border Mergers and Acquisitions

Olivier Bertrand and Habib Zitouna
This paper analyzes industry adjustments to trade liberalization. It introduces cross-border mergers and acquisitions (M&A) as an alternative mode of industrial restructuring to firms' exit. In a two-country Cournot model, we examine the responses of domestic and foreign firms endowed with different technologies for different stages of trade openness. It is found that the less efficient firm loses market shares in its home market at the beginning of trade liberalization. Only for a more advanced level of liberalization, does it take advantage of a larger access to foreign demand. Trade liberalization may therefore harm its profits too strongly, forcing it to leave the market. However, although its incentives decrease with trade liberalization, the high-technology firm may be willing to take it over for low organizational and technological costs of firms' integration. In addition, it may buy it out even if the less efficient firm manages to stay. Then, trade liberalization affects M&A incentives depending on the technological gap. For low and high (medium) gap, there is an inverted U- (W-) shaped relation between trade costs and incentives to merge. Moreover, although technology transfer is assumed to be complete, M&A may lead to a reduction in consumers' welfare. Firms may capture some pro-competitive gains from economic openness. Lastly, an empirical analysis based on a data set of OECD members' multinationals gives some support to these theoretical predictions.

Relational Contracting in Partnerships

Katherine Doornik
When performance is not verifiable, firms in a long-term relationship may rely on incentive contracts that are self-enforced or “relational.” This paper studies the optimal design and performance of relational contracts in partnerships such as joint ventures or buyer-seller alliances. Optimal contracts look the same in each period as long as the relationship continues, but may require termination of the relationship after bad outcomes. Payments between the partners depend on their relative performance. In the special case of bilateral trade with specific investments, optimal relational contracting results in a price that varies with cost and demand conditions but is more stable than under spot market bargaining. Parallels are drawn with “Japanese style” subcontracting.