Issue 4

Volume 25 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Winter 2016

The Effect of Performance Standards on Health Care Provider Behavior: Evidence from Kidney Transplantation

Sarah S. Stith, Richard A. Hirth
Performance standards are designed to ensure a basic level of quality, and through public reporting of firm performance, encourage firms to compete on quality thus allowing the market to determine the optimal level of quality. In a context of excess demand induced by price controls, we show that information alone has no impact and enforcement may actually increase market inefficiencies; firms respond to costly quality requirements, not by improving quality, but by reducing supply, which exacerbates the disequilibrium between supply and demand, and by cream-skimming, which reduces access to transplantation among sicker patients.

Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive

Jason Pearcy
In markets where consumers have switching costs and firms cannot price-discriminate, firms have two conflicting strategies. A firm can either offer a low price to attract new consumers and build future market share or a firm can offer a high price to exploit the partial lock-in of their existing consumers. This paper develops a theory of competition when overlapping generations of consumers have switching costs and firms produce differentiated products. Unlike previous studies, this paper demonstrates that the number of firms also determines whether switching costs are pro- or anticompetitive, and with a sufficiently large (small) number of firms switching costs are pro- (anti-) competitive.

When Does Aftermarket Monopolization Soften Foremarket Competition?

Yuk-fai Fong, Jin Li, Ke Liu
This paper investigates firms' abilities to tacitly collude when they each monopolize a proprietary aftermarket. When firms' aftermarkets are completely isolated from foremarket competition, they cannot tacitly collude more easily than single-product firms. However, when their aftermarket power is contested by foremarket competition as equipment owners view new equipment as a substitute for their incumbent firm's aftermarket product, profitable tacit collusion is sustainable among a larger number of firms. Conditions under which introduction of aftermarket competition hinders firms' ability to tacitly collude are characterized.

Advertising Media Planning, Optimal Pricing, and Welfare

Lola Esteban, José M. Hernández
This paper analyzes optimal media planning strategies in a pricing-advertising competition model where firms can use mass and specialized advertising. We find that although targeted advertising avoids the wasting of ads, firms might find it optimal to mix specialized advertising with the mass media. We also show that the characteristics of the specialized media available crucially affect the outcome of price competition between firms, which can range from a full fragmentation of the market into local monopolies to lower average prices (compared to the case where firms had only mass advertising available). Regarding welfare, we prove that although the use of specialized advertising can lower consumer surplus and drive a fragment of consumers out of the market, this advertising technology is welfare-improving, and can be Pareto superior.

Autonomy and Monitoring

Marco a. Barrenechea-méndez, Pedro Ortín-Ángel, Eduardo C. Rodes
This paper provides a theoretical and empirical analysis of an under-explored consequence of granting autonomy to workers: monitoring. In the principal-agent model that we develop, granting autonomy allows workers to carry out innovative tasks in the workplace. Given that innovative tasks are more difficult to monitor, the model predicts a positive relationship between autonomy and monitoring. Relying on information about blue-collar workers coming from a dataset of Spanish industrial plants, we provide strong support for this prediction.

Role of Information Rents in Relational Contracts

Akifumi Ishihara
We study a repeated contracting model in which the agent has private information and the performance measure is unverifiable. In an optimal stationary contract, when the discount factor is not high, the principal's objective shifts from purely reducing the information rent toward increasing the total surplus to sustain the relational contract. As a result, the total surplus is not monotonically increasing in the discount factor and could decrease when the unverifiable performance measure becomes verifiable.

Team Incentives and Reference-Dependent Preferences

Kohei Daido, Takeshi Murooka
We investigate a multi-agent moral-hazard model where agents have expectation-based reference-dependent preferences à la Kőszegi and Rabin (2006, 2007). We show that even when each agent's probability of success in a project is independent, a principal may employ team incentives. Because the agents are loss averse, they have first-order risk aversion to wage uncertainty. This causes the agents to work harder when their own failure is stochastically compensated through other agents' performance. In the optimal contract, agents with high performance are always rewarded, whereas agents with low performance are rewarded if and only if other agents' performance is high.

The Role of Public Information in Corporate Social Responsibility

Aleix Calveras, Juan-José Ganuza
Many of the attributes that make a good “socially responsible” (SR) are credence attributes that cannot be learned by consumers either through search or experience. We show both that in more transparent markets a larger number of firms will be SR, and that in a market with more intense competition, a higher degree of transparency is required in order to sustain a given number of SR firms.

Imminent Entry and the Transition to Multimarket Rivalry in a Laboratory Setting

Charles F. Mason, Owen R. Phillips
In this paper we study the behavior of rivals when there is a known probability of imminent entry. Experimental markets are used to collect data on pre- and postentry production when there is an announced time of possible entry; some markets experience entry and other do not. In all preentry markets competition is more intense. Postentry behavior in all markets is more competitive compared to a baseline that had no threat. There is evidence that postentry multimarket contact raises outputs in those markets that did not experience entry, behavior we generally refer to as a conduit effect.

Learning through Simultaneous Play: Evidence from Penny Auctions

Ricardo Gonçalves, Miguel A. Fonseca
This paper contributes to the emerging empirical literature on penny auctions, a particular type of all-pay auctions. We focus on the potential learning effects that bidders may experience over time but also (and particularly) across auctions as a result of their auction participation. Using detailed bid-level information, we find that, similarly to earlier literature, bidders suffer from a sunk cost fallacy, whereby their probability of dropping out of an auction is decreasing in the number of bids they have already placed in that auction. Although we do find that learning through repeated participation alleviates the sunk cost fallacy, participation in simultaneous penny auctions emerges as a much more effective learning mechanism, ultimately contributing toward bidders earning higher individual surpluses.