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on Industrial Competition |
| By: | Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko |
| Abstract: | This paper investigates the existence and nature of equilibrium in a competitive insurance market under adverse selection with endogenously determined information structures. Rothschild-Stiglitz (RS) characterized the self-selection equilibrium under the assumption of exclusivity, enforcement of which required full information about contracts purchased. By contrast, the Akerlof price equilibrium described a situation where the insurance firm has no information about sales to a particular individual. We show that with more plausible information assumptions - no insurance firm has full information but at least knows how much he has sold to any particular individual - neither the RS quantity constrained equilibrium nor the Akerlof price equilibrium are sustainable. But when the information structure itself is endogenous - firms and consumers decide what information about insurance purchases to reveal to whom - there always exists a Nash equilibrium. Strategies for firms consist of insurance contracts to offer and information-revelation strategies; for customers - buying as well as information revelation strategies. The equilibrium set of insurance contracts is unique: the low risk individual obtains insurance corresponding to the pooling contract most preferred by him; the high risk individual, that plus (undisclosed) supplemental insurance at his own actuarial odds resulting in his being fully insured. Equilibrium information revelation strategies of firms entail some but not complete information sharing. However, in equilibrium all individuals are induced to tell the truth. The paper shows how the analysis extends to cases where there are more than two groups of individuals and where firms can offer multiple insurance contracts. |
| JEL: | D82 D86 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23556&r=com |
| By: | Biais, Bruno; Heider, Florian; Hoerova, Marie |
| Abstract: | We study the interaction between contracting and equilibrium pricing when risk- averse hedgers purchase insurance from risk-neutral investors subject to moral hazard. Moral hazard limits risk-sharing. In the individually optimal contract, margins are called (after bad news) to improve risk-sharing. But margin calls depress the price of investors' assets, affecting other investors negatively. Because of this fire-sale externality, there is too much use of margins in the market equilibrium compared to the utilitarian optimum. Moreover, equilibrium multiplicity can arise: In a pessimistic equilibrium, hedgers who fear low prices request high margins to obtain more insurance. Large margin calls trigger large price drops, confirming initial pessimistic expectations. Finally, moral hazard generates endogenous market incompleteness, raises risk premia, and induces contagion between asset classes. |
| Keywords: | Insurance; Derivatives; Moral hazard; Risk-management; Margin requirements; Contagion; Fire-sales |
| JEL: | D82 G21 G22 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:31764&r=com |
| By: | Thomas W. Quan (University of Georgia); Kevin R. Williams (Cowles Foundation, Yale University) |
| Abstract: | Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data - sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 30% lower than previous studies. |
| Keywords: | Product Variety, Demand Estimation, Long Tail, Online Retail |
| JEL: | C13 L67 L81 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2054r&r=com |
| By: | Edlin, Aaron; Roux, Catherine; Schmutzler, Armin; Thoeni, Christian |
| Abstract: | We study the anti-competitive effects of predatory pricing and the efficacy of three policy responses. In a series of experiments where an incumbent and a potential entrant interact, we compare prices, market structures and welfare. Under a laissez-faire regime, the threat of post-entry price cuts discourages entry, and allows incumbents to charge monopoly prices. Current U.S. policy (Brooke Group) does not help. A policy suggested by Baumol (1979) lowers post-exit prices, while Edlin’s (2002) proposal reduces pre-entry prices and encourages entry. While both policies show outcomes after entry that are less competitive than under Laissez-Faire, they nevertheless increase consumer welfare. |
| Keywords: | Antitrust Law; entry deterrence; Experiment ent; Firm Strategy; Predatory Pricing |
| JEL: | C91 D21 K21 L12 L13 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12125&r=com |
| By: | Pavan, Giulia; Pozzi, Andrea; Rovigatti, Gabriele |
| Abstract: | We study the effect of competition on preemption incentives. An unexpected change in regulation in the Italian retail market for compressed natural gas fuel allows us to identify the potential entrants and creates exogenous variation in their number. We document that markets with a larger pool of potential competitors experience faster entry. We provide evidence suggesting that this occurs because a larger number of potential entrants raises firms' incentives to preempt. |
| Keywords: | potential entrants; preemption; retail fuel market |
| JEL: | L12 L22 L81 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12113&r=com |
| By: | Foros, Øystein (Dept. of Business and Management Science, Norwegian School of Economics); Nguyen, Mai Thi (Dept. of Business and Management Science, Norwegian School of Economics); Steen, Frode (Dept. of Economics, Norwegian School of Economics) |
| Abstract: | First, we analyze how regular days off from competition and a time-dependent price pattern affect firm performance. Second, we examine the effects on firms' profitability from consumers’ changing search- and timing behavior. We use microdata from gasoline retailing in Norway. Since 2004, firms have practiced an industry-wide day off from competition, starting on Mondays at noon, by increasing prices to a common level given by the recommended prices (decided and published in advance). Hence, firms know when and to what level to raise their price. In areas without local competition, retail prices are always equal to the recommended prices. Hinged on this, we regard recommended prices as the monopoly price level. In turn, a foreseeable low-price window is open before every restoration. During the data period, we observe an additional weekly restoration on Thursdays at noon. We show that an additional day off from competition increases firm performance. As expected, a conventional price search of where to buy reduces firms’ profitability. In contrast, consumers who are aware of the cycle and spend effort on when to buy have a positive impact on firms’ profitability. If consumers spend effort on when to buy rather than where to buy, price competition might be softened even in the low-price windows. |
| Keywords: | Consumer Behavior; Firm Performance; Gasoline Retailing |
| JEL: | L00 |
| Date: | 2017–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2017_009&r=com |
| By: | Simplice Asongu (Yaoundé/Cameroun); Nicholas Biekpe (Cape Town, South Africa.) |
| Abstract: | This study assesses how market power in the African banking industry is affected by the complementarity between information sharing offices and information and communication technology (ICT). The empirical evidence is based on a panel of 162 banks consisting of 42 countries for the period 2001-2011. Four estimation techniques are employed, namely: (i) instrumental variable Fixed effects to control for the unobserved heterogeneity; (ii) Tobit regressions to control for the limited range in the dependent variable; and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of market power. Whereas results from Fixed effects and Tobit regressions are not significant, with QR: (i) the interaction between internet penetration and public credit registries reduces market power in the 75th quartile and (ii) the interaction between mobile phone penetration and private credit bureaus increases market power in the top quintiles. Fortunately, the positive net effects are associated with negative marginal effects from the interaction between private credit bureaus and mobile phone penetration. This implies that mobile phones could complement private credit bureaus to decrease market power when certain thresholds of mobile phone penetration are attained. These thresholds are computed and discussed. |
| Keywords: | Financial access; Information asymmetry; ICT |
| JEL: | G20 G29 L96 O40 O55 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:17/022&r=com |
| By: | Wallmeier, Hans-Martin (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:155&r=com |
| By: | Requate, Till (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:194&r=com |
| By: | Allen, Beth (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:211&r=com |
| By: | Selten, Reinhard (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:117&r=com |
| By: | Selten, Reinhard (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:8&r=com |
| By: | Selten, Reinhard (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:129&r=com |
| By: | Klein, Ulrich (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:126&r=com |
| By: | Selten, Reinhard (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:55&r=com |
| By: | Selten, Reinhard (Center for Mathematical Economics, Bielefeld University) |
| Date: | 2017–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:bie:wpaper:18&r=com |