Quality uncetainty and informative advertising.

We consider a single period model where a monopolist introduces a product of uncertain quality. Before pricing and informative advertising decisions take place, the producer observes the true quality of the good while consumers receive an independent signal which is correlated with the true quality of the product. We show that if advertising occurs in equilibrium, there must exist some pooling. We then characterize the constellations of parameters for which advertising occurs in equilibrium: For an advertising full pooling equilibrium to exist, (a) the consumers' valuation for the high quality must be high enough, (b) the informativeness of the market signal must be sufficiently low, (c) the costs of advertising must be high enough and (d) the consumers' priori probability of high quality must be sufficiently high. Existence of an advertising semi-separating equilibrium also requires the three first conditions but, in contrast, the consumers' a priori probability of high quality cannot be too large. When advertising occurs in equilibrium, the adverse selection problem is mitigated. Moreover, the lower are advertising costs, the more intense is the alleviation of that problem.Informative Advertising; Quality uncertainty; signaling;

A Model of Strategic Targeted Advertising

We study a simultaneous move game of targeted advertising and pricing in a market with various consumer segments. In this setting we explore the implications of market segmentation on firm competitiveness. If firms are unable to target their ads on different consumer segments, a unique zero-profit equilibrium exists. By contrast, if firms employ targeted advertising, they can obtain positive profits. In equilibrium firms price very aggressively when they address the most profitable segment, quite gently when they target their ads on the least profitable segment and moderately aggressive when they advertise in the entire market.segmentation, targeted advertising, oligopoly, price dispersion, price discrimination

Quality uncetainty and informative advertising

We consider a single period model where a monopolist introduces a product of uncertain quality. Before pricing and informative advertising decisions take place, the producer observes the true quality of the good while consumers receive an independent signal which is correlated with the true quality of the product. We show that if advertising occurs in equilibrium, there must exist some pooling. We then characterize the constellations of parameters for which advertising occurs in equilibrium: For an advertising full pooling equilibrium to exist, (a) the consumers' valuation for the high quality must be high enough, (b) the informativeness of the market signal must be sufficiently low, (c) the costs of advertising must be high enough and (d) the consumers' priori probability of high quality must be sufficiently high. Existence of an advertising semi-separating equilibrium also requires the three first conditions but, in contrast, the consumers' a priori probability of high quality cannot be too large. When advertising occurs in equilibrium, the adverse selection problem is mitigated. Moreover, the lower are advertising costs, the more intense is the alleviation of that problem

Strategic Wage Setting and Coordination Frictions with Multiple Applications

We examine wage competition in a model where identical workers choose the number of jobs to apply for and identical firms simultaneously post a wage. The Nash equilibrium of this game exhibits the following properties: (i) an equilibrium where workers apply for just one job exhibits unemployment and absence of wage dispersion; (ii) an equilibrium where workers apply for two or for more (but not for all) jobs always exhibits wage dispersion and, typically, unemployment; (iii) the equilibrium wage distribution with a higher vacancy-to-unemployment ratio first-order stochastically dominates the wage distribution with a lower level of labor market tightness; (iv) the average wage is non-monotonic in the number of applications; (v) the equilibrium number of applications is non-monotonic in the vacancy-to-unemployment ratio; (vi) a minimum wage increase can be welfare improving because it compresses the wage distribution and reduces the congestion effects caused by the socially excessive number of applications; and (vii) the only way to obtain efficiency is to impose a mandatory wage that eliminates wage dispersion altogether.wage setting, unemployment, minimum wage, Nash equilibrium

Dumping in Developing and Transition Economies

We build a simple theoretical model to understand why developing and transition economies have increasingly applied anti-dumping laws. To that end, we investigate the strategic incentives of oligopolistic exporting firms to undertake dumping in these economies. We show that dumping may be due to cross-country differences in income, to the extent of tariff protection and to the exchange rate depreciations observed recently. Dumping may arise even if consumers exhaust all arbitrage possibilities.dumping, exchange rate, optimal trade policy, product quality

Anti-Dumping, Intra-Industry Trade and Quality Reversals

We examine an export game where two firms (home and foreign), located in two different countries, produce vertically differentiated products. The foreign firm is the most efficient in terms of R&D costs of quality development and the foreign country is relatively larger and endowed with a relatively higher income. The unique (risk-dominant) Nash equilibrium involves intra-industry trade where the foreign producer manufactures a good of higher quality than the domestic firm. This equilibrium is characterized by unilateral dumping by the foreign firm into the domestic economy. Two instruments of anti-dumping (AD) policy are examined, namely, a price undertaking (PU) and an anti-dumping duty. We show that, when firms’ cost asymmetries are low and countries differ substantially in size, a PU leads to a quality reversal in the international market, which gives a rationale for the domestic government to enact AD law. We also establish an equivalence result between the effects of an AD duty and a PU.anti-dumping duty, intra-industry trade, price undertaking, product quality, quality reversals

Polution linked to consumption: a study of policy instruments in an environmental differentiated oligopoly.

In this paper we evaluate tlle effeetiveness of alternative regulatory policies on redueing aggregate pollution in an environmental1y differentiated market. Two frrms frrst ehoose their environmental quality and then their priees in a market where eonsumers differ in their valuations of the environmental features of the produets. We frrst show that environmental standards may have an adverse impaet on aggregate pollution. Moreover, we fmd that a uniform ad-valorem tax rate unambiguously increases the level of pollution in the market. When the tax rate is set in favor of the environmentally eleaner produet, aggregate pollution deereases. Finally, direet subsidies on the abatement technology always decrease pollution.Aggregate pollution; Vertical Diferentiated Oligopoly; Environmental Consciousness; Environmental Policy;

Consumer Search and Oligopolistic Pricing: An Empirical Investigation

This paper presents an empirical examination of oligopoly pricing and consumer search. The theoretical model allows for sequential and non-sequential search and, using the theoretical restrictions firm and consumer behavior impose on the data, we study the empirical validity of the models. Two equilibria arise: one with costless search and the other with costly search. We find that the costless search equilibrium works well for products with a relatively low value, and, by implication, a small number of sellers. By contrast, the costly search equilibrium explains the observed data in a manner that is consistent with the underlying theoretical model for almost all products (for 86 out of 87!).consumer search, oligopoly, price dispersion, maximum likelihood estimation