Supply Chain Control: A Theory of Vertical Integration

Improving a company's bargaining position is often cited as a chief motivation to vertically integrate with suppliers. This paper expands on that view in building a new theory of vertical integration. In my model firms integrate to gain bargaining power against other suppliers in the production process. The cost of integration is a loss of flexibility in choosing the most suitable suppliers for a particular final product. I show that the firms who make the most specific investments in the production process have the greatest incentive to integrate. The theory provides novel insights to the understanding of numerous stylized facts such as the effect of financial development on the vertical structure of firms, the observed pattern from FDI to outsourcing in international trade, the effect of technological obsolescence on organizations, etc.vertical integration, supply chain, bargaining, outside options

Supply Chain Control: A Theory of Vertical Integration

Improving a company's bargaining position is often cited as a chief motivation to vertically integrate with suppliers. This paper expands on that view in building a new theory of vertical integration. In my model firms integrate to gain bargaining power against other suppliers in the production process. The cost of integration is a loss of flexibility in choosing the most suitable suppliers for a particular final product. I show that the firms who make the most specific investments in the production process have the greatest incentive to integrate. The theory provides novel insights to the understanding of numerous stylized facts such as the effect of financial development on the vertical structure of firms, the observed pattern from FDI to outsourcing in international trade, the effect of technological obsolescence on organizations, etc.vertical integration, supply chain, bargaining, outside options

Effective Retrieval of Resources in Folksonomies Using a New Tag Similarity Measure

Social (or folksonomic) tagging has become a very popular way to describe content within Web 2.0 websites. However, as tags are informally defined, continually changing, and ungoverned, it has often been criticised for lowering, rather than increasing, the efficiency of searching. To address this issue, a variety of approaches have been proposed that recommend users what tags to use, both when labeling and when looking for resources. These techniques work well in dense folksonomies, but they fail to do so when tag usage exhibits a power law distribution, as it often happens in real-life folksonomies. To tackle this issue, we propose an approach that induces the creation of a dense folksonomy, in a fully automatic and transparent way: when users label resources, an innovative tag similarity metric is deployed, so to enrich the chosen tag set with related tags already present in the folksonomy. The proposed metric, which represents the core of our approach, is based on the mutual reinforcement principle. Our experimental evaluation proves that the accuracy and coverage of searches guaranteed by our metric are higher than those achieved by applying classical metrics.Comment: 6 pages, 2 figures, CIKM 2011: 20th ACM Conference on Information and Knowledge Managemen

Underweighting rare events in experience based decisions: Beyond sample error

Recent research has focused on the \u201cdescription-experience gap\u201d: while rare events are overweighted in description based decisions, people tend to behave as if they underweight rare events in decisions based on experience. Barron and Erev (2003) and Hertwig, Barron, Weber and Elke (2004) argue that such findings are substantive and call for a theory of decision making under risk other than Prospect Theory for decisions from experience. Fox and Hadar (2006) suggest that the discrepancy is due to sampling error: people are likely to sample rare events less often than objective probability implies, especially if their samples are small. A strand of papers has responded examining the necessity of sample error in the underweighting of rare events. The current paper extends the results of such contributions and further strengthens the evidence on underweighting. The first experiment shows that the discrepancy persists even when people sample the entire population of outcomes and make a decision under risk rather than under uncertainty. A reanalysis of Barron and Erev (2003) further reveals that the gap persists even when subjects observe the expected frequency of rare events. The second experiment shows that the gap exists in a repeated decision making paradigm that controls for sample biases and the \u201chot stove\u201d effect. Moreover, while underweighting persists in actual choices, overweighting is observed in judged probabilities. The results of the two experiments strengthen the suggestion that descriptive theories of choice that assume overweighting of small probabilities are not useful in describing decisions from experience. This is true even when there is no sample error, for both decisions under risk and for repeated choices

Deceptive advertising with rational buyers

We study a Bertrand game where two sellers supplying products of different and unverifiable qualities can outwit potential clients through their (costly) deceptive advertising. We characterize a class of pooling equilibria where sellers post the same price regardless of their quality and low quality ones deceive buyers. Although in these equilibria low quality goods are purchased with positive probability, the buyer (expected) utility can be higher than in a fully separating equilibrium. It is also argued that low quality sellers invest more in deceptive advertising the better is their reputation vis-à-vis potential clients — i.e., firms that are better trusted by customers, have greater incentives to invest in deceptive advertising when they produce a low quality product. Finally, we characterize the optimal monitoring effort exerted by a regulatory agency who seeks to identify and punish deceptive practices. When the objective of this agency is to maximize consumer surplus, its monitoring effort is larger than under social welfare maximization

Deceptive advertising with rational buyers

We study a Bertrand game where two sellers supplying products of different and unverifiable qualities can outwit potential clients through their (costly) deceptive advertising. We characterize a class of pooling equilibria where sellers post the same price regardless of their quality and low quality ones deceive buyers. Although in these equilibria low quality goods are purchased with positive probability, the buyer (expected) utility can be higher than in a fully separating equilibrium. It is also argued that low quality sellers invest more in deceptive advertising the better is their reputation vis-à-vis potential clients — i.e., firms that are better trusted by customers, have greater incentives to invest in deceptive advertising when they produce a low quality product. Finally, we characterize the optimal monitoring effort exerted by a regulatory agency who seeks to identify and punish deceptive practices. When the objective of this agency is to maximize consumer surplus, its monitoring effort is larger than under social welfare maximization

Beliefs, Credence Goods and Information Campaigns

We study the role of beliefs about experts' honesty in a market for credence goods with second opinions and overtreatment. Experts are honest or dishonest. The population shares a common belief about the share of honest experts, which may be incorrect. We characterize the belief that maximizes consumer's expected utility and show that it is generically different from the true share of honest experts and larger than the one that maximizes the equilibrium level of honesty. We then analyze the decision of an authority that has learned the actual share of honest experts whether to publicly reveal it through a costless information campaign, thus correcting people's beliefs, and show that it does not depend on how wrong beliefs are. We further show how increasing market transparency (making experts more aware of the number of opinions collected) affects the optimal belief and may have a positive as well as a negative effect on overtreament. Finally, we briefly see how a successful campaign run in Switzerland in the mid '80s to reduce excessive hysterectomy rates can be read through the lenses of our model and how accounting for beliefs about honesty might allow theoretical predictions to better fit experimental evidence