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on Contract Theory and Applications |
| By: | Martimort, David; Pouyet, Jérôme |
| Abstract: | A retailer may boost demand for a manufacturer’s product through unobservable promotional efforts. Fixed fees cannot be used to freely allocate profit within the vertical structure. When manufacturers have market power, the equilibrium wholesale contract features a retail price below cost together with a rebate for incremental units bought by the retailer when effort has succeeded in boosting sales. Loss leading emerges as an incentive device in such an incomplete contracting scenario. A ban on below-cost pricing leads to a higher retail price and a lower promotional effort. |
| Keywords: | Vertical restraints; loss leading; promotional allowances; below-cost; pricing |
| JEL: | L11 L42 L81 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129692 |
| By: | Lukasz Szpruch; Marc Sabat\'e Vidales; Tanut Treetanthiploet; Yufei Zhang |
| Abstract: | We study the loan contracts offered by decentralised loan protocols (DLPs) through the lens of financial derivatives. DLPs, which effectively are clearinghouses, facilitate transactions between option buyers (i.e. borrowers) and option sellers (i.e. lenders). The loan-to-value at which the contract is initiated determines the option premium borrowers pay for entering the contract, and this can be deduced from the non-arbitrage pricing theory. We show that when there are no market frictions, and there is no spread between lending and borrowing rates, it is optimal to never enter the lending contract. Next, by accounting for the spread between rates and transactional costs, we develop a deep neural network-based algorithm for learning trading strategies on the external markets that allow us to replicate the payoff of the lending contracts that are not necessarily optimally exercised. This allows hedge the risk lenders carry by issuing options sold to the borrowers, which can complement (or even replace) the liquidations mechanism used to protect lenders' capital. Our approach can also be used to exploit (statistical) arbitrage opportunities that may arise when DLP allow users to enter lending contracts with loan-to-value, which is not appropriately calibrated to market conditions or/and when different markets price risk differently. We present thorough simulation experiments using historical data and simulations to validate our approach. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2409.04233 |
| By: | Albrecht, James (Georgetown University); Cai, Xiaoming (Peking University); Gautier, Pieter A. (Vrije Universiteit Amsterdam); Vroman, Susan (Georgetown University) |
| Abstract: | This paper considers competitive search equilibrium in a market for a good whose quality differs across sellers. Each seller knows the quality of the good that he or she is offering for sale, but buyers cannot observe quality directly. We thus have a "market for lemons" with competitive search frictions. In contrast to Akerlof (1970), we prove the existence of a unique equilibrium, which is separating. Higher-quality sellers post higher prices, so price signals quality. The arrival rate of buyers is lower in submarkets with higher prices, but this is less costly for higher-quality sellers given their higher continuation values. For some parameter values, higher-quality sellers post the full-information price; for other values these sellers have to post a higher price to keep lower-quality sellers from mimicking them. In an extension, we show that if sellers compete with auctions, the reserve price can also act as a signal. |
| Keywords: | competitive search, signaling |
| JEL: | C78 D82 D83 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17246 |