Imperfect Certification

This paper proposes a model for a certification market with an imperfect testing technology. Such a technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one.When only one certifier with such testing technology is present in the market, it is found that this monopoly certifier can be completely ignored in equilibrium, in contrast to the prediction of a model with perfect testing technology. A separating equilibrium is also supported in which only relatively high quality types (products) choose to pay for the certification service. It is true that in such an equilibrium having a certificate is better than not. The exact value of a certificate, however, depends both on the prior distribution of product quality and the nature of the testing technology.Welfare accounting shows that the monopolistic certifier’s profit maximizing conduct can lead to under or over supply of certification service depending on model specification. Optimal certification fee is always positive and such that it makes all positive types choose to test. In the case of two competing certifiers with identical testing technologies, the intuition of Bertrand competition does not necessarily hold. Segmentation equilibrium in which higher seller types choose the more expensive certification service and not so high types choose the less expensive service can be supported. As an application, we argue that the fee differentiation between major and non-major auditing firms need not be a result of any differences in their auditing technologies.Asymmetric information, imperfect certification

The Inefficiency of Market Transparency – A Model with Endogenous Entry

Including the entry decision in a Bertrand model with imperfectly informed consumers, we introduce a trade-off at the level of social welfare. On the one hand, market transparency is beneficial when the number of firms is exogenously given. On the other, a higher degree of market transparency implies lower profits and hence makes it less attractive to enter the market in the first place. It turns out that the second effect dominates: too much market transparency has a detrimental effect on consumer surplus and on social welfare.Market transparency; endogenous entry; homogenous products

A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand

This paper revisits the excess entry theorem in spatial models à la Vickrey (1964) and Salop (1979) while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity.We find that the excess entry theorem does only hold when demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function.Elastic demand, spatial models, excess entry theorem

Transparency, entry, and productivity

This paper studies the relationship between transparency on the consumer side and productivity of firms. We show that more transparent markets are characterized by higher average productivity as firms with low productivity abstain from entering these markets. --Market Transparency,Firm Productivity,Salop Model,Heterogeneous Firms

Price-dependent demand in spatial models

This paper introduces price-dependent individual demand into the circular city model of product differentiation. We show that for any finite number of firms, a unique symmetric price equilibrium exists provided that demand functions are not too convex. As in the case of unit demand, the number of firms under free entry decreases in the fixed cost of entry while increases in the transportation cost of consumers. However, this number is no longer always in excess of the socially optimal level. Insufficient entry occurs when the fixed and transportation costs are high. --spatial models,price-dependent demand,horizontal product differentiation,demand elasticity,excess entry theorem

Wage and Employment Eff ects of Workplace Representation – A ”Right To Co-Manage” Model

Government agencies and other national and international institutions are asked to perform foThis paper introduces a two-stage union-oligopoly-council model of wage and employment determination wherein at the fi rst stage wage is negotiated through collective bargaining and at the second stage employment in each fi rm is co-determined by the employer and its works council. We provide a full characterization of the model outcome for all parameter values of bargaining power and co-determination power. In particular, works councils always increase employment while their impact on wage can be non-monotonic. Overall, individual works councils’ pursuit of own workers’ interests may well harm the workers as a union.Workplace representation; union-oligopoly bargaining; fi rm-council codetermination

Wage and employment effects of workplace representation: a "Right To Co-Manage" model

This paper introduces a two-stage union-oligopoly-council model of wage and employment determination wherein at the first stage wage is negotiated through collective bargaining and at the second stage employment in each firm is co-determined by the employer and its works council. We provide a full characterization of the model outcome for all parameter values of bargaining power and co-determination power. In particular, works councils always increase employment while their impact on wage can be non-monotonic. Overall, individual works councils’ pursuit of own workers’ interests may well harm the workers as a union. JEL-Classification: J50; J54; L1

Essays on industrial and societal organization

In this dissertation I report three doctoral research projects: the application of imperfect certification in markets with asymmetric information, the impact of elastic demand on market supplied product variety in differentiated product markets and a microeconomic analysis of gift giving when individuals are concerned with social approval (face). It consists of six chapters including a general introduction, four research papers and an outlook for further projects. Chapter 2 proposes a model for a certification market with an imperfect testing technology. Such a technology only assures that whenever two products are tested the higher quality product is more likely to pass than the lower quality one. When only one certifier with such testing technology is present in the market, it is found that this monopoly certifier can be completely ignored in equilibrium, in contrast to the prediction of a model with perfect testing technology. A separating equilibrium is also supported in which only relatively high quality types (products) choose to pay for the certification service. It is true that in such an equilibrium having a certificate is better than not. The exact value of a certificate, however, depends both on the prior distribution of product quality and the nature of the testing technology. Welfare accounting shows that the monopoly certifier's profit maximizing conduct can lead to under or over supply of certification service depending on model specification. Socially optimal certification fee is always positive and such that it makes all positive types choose to test. In the case of two competing certifiers with identical testing technologies, the intuition of Bertrand competition does not necessarily hold. Segmentation equilibrium wherein higher seller types choose the more expensive certification service and not so high types choose the less expensive service can be supported. As an application, we argue that the fee differentiation between major and non-major auditing firms need not be a result of any differences in their auditing technologies. Chapter 3 revisits the excess entry theorem in spatial models a la Vickrey (1964) and Salop (1979) while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity. We find that the excess entry theorem does only hold when demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function. Chapter 4 generalizes on Chapter 3. We introduce consumers with a generic quasi-linear utility function in the framework of the Salop (1979) model. In addition to the results found in Chapter 3, we are able to pin down conditions for efficient variety in entry cost and transportation cost. A proof for the existence and uniqueness of symmetric equilibrium when price elasticity of demand is increasing in price is also provided. Chapter 5 studies further into the warm-glow that donors may benefit from their act of giving. Within the framework of concern for social approval, we emphasize an individual's relative position in social network and introduce the concept of face. When individuals are concerned with face, the wealthier will need to contribute more than the poorer in order to gain an equal level of social approval. In aggregate, other things being equal, the more individuals are concerned with face, the more they tend to donate. While this approach is proposed in the context of social acceptance, it is also applicable in morally motivated situations

Curbing obfuscation: Empower consumers or regulate firms?

This paper develops a market model where consumers refrain from buying products that they are unable to understand and a firm can influence the probability of a consumer understanding its offer. In equilibrium, firms artificially increase product complexity, and firms that offer more transparent products choose on average higher prices. We study two sets of public policies. We show that consumer side policies may have the unintended consequence of encouraging obfuscation while firm side policies are always effective in curbing obfuscation. Interestingly, a consumer side policy can even harm consumers when it protects consumers so much that it greatly increases the marginal effectiveness of obfuscation. Policies on both sides can either increase or decrease social welfare depending on the marginal effectiveness and the marginal cost of obfuscation. Our main insights hold in both asymmetric and symmetric obfuscation equilibria