Anti-Limit Pricing

Extending Milgrom and Roberts (1982), we analyze an infinite horizon entry model where an incumbent may use its current price to signal its strength, in order to deter entry. In contrast with conventional limit pricing, we show the entry of weaker firms. We also provide necessary and sufficient conditions for this phenomenon to arise in equilibrium, in the benchmark cases that no second entry is profitable.Dynamic Signaling, Limit Pricing, Entry Deterrence

The Dynamics of Bargaining Postures: The Role of a Third Party

In many real world negotiations, from wage contract bargaining to product liability disputes, the bargaining parties often interact repeatedly and have the option of seeking outside judgement. This paper studies a model of repeated bargaining with a third party to analyze how and why bargaining postures endogenously evolve over time. A privately informed long-lived player bargains with a sequence of short-lived players, one at a time. Should the players fail to reach an agreement, an unbiased yet imperfect third party is called upon to make a judgement. The uninformed short-lived players learn through two channels: observed behavior of the informed player (\soft" information) and, if any, verdicts of the third party (\hard" information). The long-lived player wants to guard his private information by bargaining tough but at the expense of more information disclosure from the third party. As a result of the strategic use of these two sources of information, the players' bargaining postures change as the uninformed players' beliefs evolve. Interestingly, as third party information becomes more precise, the players adopt tough bargaining postures for a wider range of beliefs. Many repeated bargaining problems can be analyzed in this framework. In particular, the equilibrium dynamics provide an explanation for the puzzling contrast between the bargaining postures of Merck and Pfizer in their recent high-profile product liability litigations. The results also help us understand several other phenomena documented in the related literature.bargaining posture, repeated bargaining, third party information, reputation

Market run-ups, market freezes, and leverage

The authors study trade between a buyer and a seller when both may have existing inventories of assets similar to those being traded. They analyze how these inventories affect trade, information dissemination, and price formation. The authors show that when the buyer's and seller's initial leverage is moderate, inventories increase price and trade volume, but when leverage is high, trade may become impossible (a "market freeze"). Their analysis predicts a pattern of trade in which prices and trade volume first increase, and then markets break down. The authors use their model to discuss implications for regulatory intervention in illiquid markets. ; Superseded by Working Paper 12-8Inventories ; Trade ; Markets

Dynamic Adverse Selection: Time-Varying Market Conditions and Endogenous Entry

In this paper I analyze the effects of time-varying market conditions and endogenous entry on the equilibrium dynamics of markets plagued by adverse selection. I show that variation in gains from trade, stemming from market conditions, creates an option value and distorts liquidity when gains from trade are low. An improvement in market conditions triggers a wave of high-quality deals due to the preceding illiquidity and lack of incentives to signal quality. When gains from trade are high, the market is fully liquid; high prices and no delay in trade attract low-grade assets, and the average quality deteriorates. My analysis also reveals that illiquidity can act as a remedy as well as a cause of inefficiency: partial illiquidity allows for screening of assets and restores efficient entry incentives. I demonstrate model implications using several applications: early stage financing, initial public offerings, and private equity buyouts

Information spillovers in asset markets with correlated values

We study information spillovers in a dynamic setting with correlated assets owned by privately informed sellers. In the model, a trade of one asset can provide information about the value of other assets. Importantly, the information content of trading behavior is endogenously determined. We show that this endogeneity leads to multiple equilibria when assets are sufficiently correlated. The equilibria are ranked in terms of both trade volume and efficiency. The model has implications for policies targeting post-trade transparency. We show that introducing post-trade transparency can increase or decrease welfare and trading volume depending on the asset correlation, equilibrium being played, and the composition of market participants.Asriyan acknowledges support from the Spanish Ministry of Economy and Competitiveness Grant (ECO2014-54430-P) and the Barcelona GSE Seed Grant. Fuchs gratefully acknowledges support from the ERC Grant 681575

Gambling Reputation: Repeated Bargaining with Outside Options

We study the role of incomplete information and outside options in determining bargaining postures and surplus division in repeated bargaining between a long-run player and a sequence of short-run players. The outside option is not only a disagreement point but reveals information privately held by the long-run player. In equilibrium, the uninformed short-run players' offers do not always respond to changes in reputation and the informed long-run player's payoffs are discontinuous. The long-run player invokes inefficient random outside options repeatedly in order to build reputation to a level where the subsequent short-run players succumb to his extraction of a larger payoff, but he also runs the risk of losing reputation and relinquishing bargaining power. We investigate equilibrium properties when the discount factor goes to 1 and when the informativeness of outside option diffuses. In both cases, bargaining outcomes become more inefficient and the limit reputation building probabilities are interior

The effect of share repurchases and special dividends on the share prices in South Africa

Abstract : The study investigates the impact of share repurchase and special dividend announcements on the share price of JSE listed companies for the period 1999-2015. On the announcement day of share repurchases negative average abnormal returns of 0.108% were observed. The market delayed by a day to react to the share repurchase announcement as abnormal returns of 0.439% were observed on the 1st day after the announcement. Positive abnormal returns of 1.213% were observed on the announcement day of special dividends. Average positive abnormal returns of 0.154% were observed 25 days before the announcement. Negative abnormal returns of 0.202% were observed on average 25 days after the announcement. The results for share repurchases and special dividends were tested for significance at 95% confidence level and were found to be insignificant.M.Com. (Finance

Selling Mechanisms and The Australian Housing Market

This thesis examines selling mechanisms relevant mainly to auctions and applicable in the context of the housing market. In the first two chapters a context is described in which the seller of an object has private information about its value that is important to potential buyers. If the seller is unable to reveal this information to the buyers at no cost, the problem of adverse selection arises. Among other examples, auctions of arts, wines, and residential properties are most relevant to the current study. The sellers in these markets observe some private characteristics of their objects that are important to buyers but not revealable to them at no cost. In the first chapter we study some common selling mechanisms in this setting. Specifically, we study an ascending auction with two different reserve price regimes for the seller: first, disclosing the reserve price at the beginning of the auction; and second, keeping the reserve price secret and reserving the right to accept or reject the auction price after the bidding ends. We also study the common posted-price mechanism for the purposes of comparison. Throughout this chapter the assumption is that the seller chooses the mechanism from the ex ante point of view-that is, before observing her signal. Thus, the choice of mechanism itself does not reveal any further information to the buyers. The results in the first chapter suggest that in a one-shot game the seller can realise a higher ex ante expected payoff by choosing the secret reserve price regime than the other two mechanisms. At the end this chapter a dynamic setting is studied to examine the possibility of an extension of these static results to a dynamic case. Most of the results for the one-shot game are extendable to the proposed dynamic game. In the second chapter we study an informed seller's best interest among the two previously mentioned reserve price regimes at the interim stage-that is, after the seller has observed her private information. We study how the seller's expected payoff could change if she observes the signal and then chooses the reserve price mechanism. In this case the choice of mechanism itself could reveal some information to buyers. The results show the conditions under which an informed seller, after observing her signal, chooses to keep the reserve price secret or discloses the reserve price. The last two chapters focus specifically on the housing market. The third chapter adds to the theoretical literature of the housing market by proposing a more realistic selling mechanism applicable to this market: the one in which the seller posts a price to attract potential buyers to make a counteroffer. This game is studied in a dynamic setting with the possibility of more than one potential buyer arriving at each period. In the event that one buyer arrives, the seller engages in negotiation with that buyer; in the event that multiple buyers arrive, the seller runs an auction with a reserve price. This explains why sometimes sale prices are higher than the asking price and at the same time proposes a role for the asking price in this market. Other small variations of this mechanism are also studied for the purposes of comparison. The final chapter is an empirical study of the Sydney housing market. We use comprehensive data on the Sydney housing market composed of 25,489 observations for properties sold in the Sydney region in 2011. We consider the fact that both the seller of the property and the real estate agent have a common goal: to sell the property at the highest possible price in the shortest amount of time. The analysis is divided into two major parts. First, we estimate a two-stage least square model to analyse which parameters affect time on the market for a property. Second, we propose a probit model that estimates the parameters that affect a revision in list prices. The results suggest that overpricing increases time spent on the market, and properties with a revised list price stay on the market for a longer time

Buying high and selling low: stock repurchases and persistent asymmetric information

Share prices generally fall when a firm announces a seasoned equity offering (SEO). A standard explanation is that an SEO communicates negative information to investors. We show that if repeated capital market transactions are possible, this same asymmetry of information between firms and investors implies that some firms also repurchase shares in equilibrium. A subset of these firms directly profit from repurchases, while other firms repurchase in order to improve the terms of a subsequent SEO. The possibility of repurchases reduces both SEOs and investment. Overall, our analysis highlights the importance of analyzing SEOs and repurchases in a unified framework