Issue 4

Volume 17 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Winter 2008

Almost Common Value Auctions: An Experiment

Susan L. Rose and John H. Kagel
In almost common value auctions one bidder has a higher (private) value for the item than the other bidders. Theory predicts that even a small private value advantage can have an explosive effect in English auctions, with advantaged bidders always winning and sharp decreases in revenue. These predictions fail to materialize for experienced bidders who have learned to avoid the worst effects of the winner's curse. Bidding is better characterized as proportional, with advantaged bidders tending to bid as in a pure common value auction after adding their private value advantage to their estimated value of the item.

Market Segmentation: The Role of Opaque Travel Agencies

Dmitry Shapiro and Xianwen Shi
This paper investigates the role of discount travel agencies such as Priceline and Hotwire in the market segmentation of the hotel and airline industries. These agencies conceal important characteristics of the offered services, such as hotel locations or flight schedules. We explicitly model this opaque feature and show that it enables service providers to price discriminate between those customers who are sensitive to service characteristics and those who are not. Service providers can profit from such discrimination despite the fact that the opaque feature virtually erases product differentiation and thus intensifies competition. The reason is that the intensified competition for less sensitive customers enables service providers to commit to a higher price for more sensitive customers, which leads to higher profits overall. This explains why airlines or hotels are willing to lose the advantage of product differentiation and offer services through discount travel agencies.

Recruitment, Training, and Career Concerns

Heski Bar-Isaac and Juan-José Ganuza
We examine training and recruitment policies in a two-period model that nests two forms of production, “routine” work where ability and effort are substitutes and “creative” work where they are complements. Alternative ways of improving average ability have opposite implications for agents' career concerns. Although teaching to the top (training complementary to ability) or identifying star performers increases agents' career concerns, teaching to the bottom has the opposite effect. The paper also makes more general comments relating to models of reputation.

Input Suppliers, Differential Pricing, and Information Sharing Agreements

Anthony Creane
It is common for firms to systematically share information with their input suppliers. Although such agreements with horizontal rivals have been analyzed, there has been little work examining vertical sharing, and that analysis has focused on suppliers that set uniform prices. However, there has been a systematic change in the US policy toward vertical relationships in the past decades: both FTC inaction and courts rulings have curtailed the effect of Robinson-Patman, a law meant to prevent differential pricing. Furthermore, it is not clear if differential pricing reflects the suppliers' or the buyers' power. The interaction of these effects is examined.

Buying Back Subcontractors: The Strategic Limits of Backward Integration

Didier Laussel
In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its n subcontractors the prices of the complementary components which enter its product, we show that backward integration is limited by a strategic negative effect: the prices and profits of independent suppliers increase when a merger reduces their number. Mergers are profitable only if the downstream firm buys at least two thirds of its suppliers. In an endogenous acquisition game à la Kamien and Zang (1990) the only merged equilibrium occurs when there is only one subcontractor. In a sequential acquisition game full integration is not an equilibrium when the number of suppliers is at least five.

Little Firms and Big Patents: A Model of Small-Firm Patent Signaling

Wolfgang Gick
Patent strategies of small technology-intensive firms are difficult to explain with standard incentive arguments based on intellectual property rights. This paper develops a rationale for patent filing as a disclosure strategy. We develop a two-sender signaling game to study patenting incentives of two technology start-ups to file in a large-scale patent system with the goal to attract a user firm. Both start-ups may decide to invest in costly modification of their patent application before filing. The paper identifies a separating equilibrium in which the high-quality inventor files and so separates from its technology competitor. Of particular interest is the study of pooling and semi-separating equilibria, as well as the impact of subsidies. We find that a higher quality of a country's inventions, reflected in the possible innovative steps and thus in higher expected profits for foreign user firms, may increase the chance of the relatively lower-quality inventor to enter international technology markets.

Signaling Quality in an Oligopoly When Some Consumers Are Informed

Yaron Yehezkel
This paper considers a signaling game between two competing firms and consumers. The firms have common private information concerning their qualities, and some of the consumers are informed about the firms' qualities. Firms use prices and uninformative advertising as signals of quality. The model reveals that in the separating equilibrium, prices are first climbing and then declining with the proportion of informed consumers, while the expenditure on uninformative advertising is declining. Firms' profits are highest when the proportion of informed consumers is at an intermediate level. Pooling equilibria exist if the proportion of informed consumers is below a certain threshold.

Sustaining Collusion in Growing Markets

Hélder Vasconcelos
The impact of demand growth on the collusion possibilities is investigated in a Cournot supergame where market growth may trigger future entry and the collusive agreement is enforced by the most profitable ‘grim trigger strategies’ available. It is shown that even in situations where perfect collusion can be sustained after entry, coping with a potential entrant in a market which is growing over time may completely undermine any pre-entry collusive plans of the incumbent firms. This is because, before entry, a deviation and the following punishment phase may become more attractive thanks to their additional effect in terms of delaying entry.

The Quest for Quality: A Quality Adjusted Dynamic Regulatory Mechanism

Gianni De Fraja and Alberto Iozzi
In situations where quality is fixed, the widely used RPI-X regulatory mechanism has a number of desirable properties, such as convergence to a second best optimum. Theoretical analysis of this mechanism in the case of endogenous quality is limited and therefore regulators have typically imposed constraints on the firm's quality choice in ad hoc manners, either by mandating quality levels, or by including quality adjustment factors in the RPI-X mechanism. In this paper, we construct the rigorous theoretical counterpart of these manners of including quality measures in the constraints faced by a regulated firm. This mechanism converges to second best optimum. It works by offering the firm trade-offs between prices and qualities based on the choice it made in the previous period; however, reflecting the practical problem valuing quality, the informational requirement to select these trade-offs appropriately is qualitatively stronger than in the fixed quality case