Monopolistic Intermediation in the Gehrig (1993) Search Model Revisited

We modify the basic Gehrig (1993) model. In this model, individual agents are either buyers or sellers. They can choose between joining the search market, joining the monopolistic intermediary or remaining inactive. In the search market, agents are randomly matched and the price at which exchange takes place is set bilaterally. If agents join the intermediary, buyers have to pay an ask price set in advance by the intermediary. Likewise, if sellers decide to deal through the intermediary, they get the bid price set by the intermediary. As Gehrig shows, this model has an equilibrium in which the search market and the market of the monopolistic intermediary are simultaneously open. The intermediary makes positive profits because he trades at a positive ask-bid spread, and the set of individual agents is tripartite: High valuation buyers and low cost sellers deal through the intermediary, buyers and sellers with average valuations and average costs are active in the search market, and low valuation buyers and high cost sellers remain inactive. We modify this basic model by imposing a sequential structure. We assume that the monopolistic intermediary first has to buy the good from sellers on the input market before he can sell it to buyers on the output market. As a consequence of the sequential structure, the subgame following capacity setting has a unique subgame perfect equilibrium with an active search market. On the equilibrium path, the equilibrium analyzed by Gehrig is replicated.market-making; market microstructure; competing exchange mechanisms

Information and Barometric Prices: An Explanation for Price Stickiness

Price stickiness plays a decisive role in many macroeconomic models, yet why prices are sticky remains a puzzle. We develop a microeconomic model in which two competing firms are free to set prices, but face uncertainty about the state of demand. With some probability, there is a positive demand shock, which is observed but by one firm. In equilibrium, only the informed firm adjusts its price after the shock, while the uninformed firm raises its price only with a delay, after observing the price of its competitor. Hence, prices are sticky in the sense that one firm's price does not adjust immediately. Further, if getting information is costly, the model implies that the larger firm tends to be better informed and to adjust its price first.Price Setting; Sticky Prices; Asymmetric Information; Barometic Price Leadership

On Cheating and Whistle-Blowing

We study the role of whistle-blowing in the following inspection game. Two agents who compete for a valuable prize can either behave legally or illegally. After the competition, a controller investigates the agents' behavior. This control game has a unique equilibrium in mixed strategies. We then add a whistle-blowing stage, where the controller asks the loser to blow the whistle. This extended game has a unique perfect Bayesian equilibrium in which only a cheating loser accuses the winner of cheating and the controller tests the winner if and only if the winner is accused of cheating. Whistle-blowing reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are sufficiently large.Principal-two-Agents; Inspection Games; Asymmetric Information; Signalling

Monopolistic Intermediation in the Gehrig (1993) Search Model Revisited

We modify the basic Gehrig (1993) model. In this model, individual agents are either buyers or sellers. They can choose between joining the search market, joining the monopolistic intermediary or remaining inactive. In the search market, agents are randomly matched and the price at which exchange takes place is set bilaterally. If agents join the intermediary, buyers have to pay an ask price set in advance by the intermediary. Likewise, if sellers decide to deal through the intermediary, they get the bid price set by the intermediary. As Gehrig shows, this model has an equilibrium in which the search market and the market of the monopolistic intermediary are simultaneously open. The intermediary makes positive profits because he trades at a positive ask-bid spread, and the set of individual agents is tripartite: High valuation buyers and low cost sellers deal through the intermediary, buyers and sellers with average valuations and average costs are active in the search market, and low valuation buyers and high cost sellers remain inactive. We modify this basic model by imposing a sequential structure. We assume that the monopolistic intermediary first has to buy the good from sellers on the input market before he can sell it to buyers on the output market. As a consequence of the sequential structure, the subgame following capacity setting has a unique subgame perfect equilibrium with an active search market. On the equilibrium path, the equilibrium analyzed by Gehrig is replicated

Information and Barometric Prices: An Explanation for Price Stickiness

Price stickiness plays a decisive role in many macroeconomic models, yet why prices are sticky remains a puzzle. We develop a microeconomic model in which two competing firms are free to set prices, but face uncertainty about the state of demand. With some probability, there is a positive demand shock, which is observed but by one firm. In equilibrium, only the informed firm adjusts its price after the shock, while the uninformed firm raises its price only with a delay, after observing the price of its competitor. Hence, prices are sticky in the sense that one firmís price does not adjust immediately. Further, if getting information is costly, the model implies that the larger firm tends to be better informed and to adjust its price first

On Cheating and Whistle-Blowing

We study the role of whistleblowing in the following inspection game. Two agents who compete for a prize can either behave legally or illegally. After the competition, a controller investigates the agents’ behavior. This inspection game has a unique (Bayesian) equilibrium in mixed strategies. We then add a whistleblowing stage, where the controller asks the loser to blow the whistle. This extended game has a unique perfect Bayesian equilibrium in which only a cheating loser accuses the winner of cheating and the controller tests the winner if and only if the winner is accused of cheating. Whistleblowing reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are suffciently large.Whistleblowing, leniency, inspection games, signalling

Heterogeneity, Local Information, and Global Interaction

"Consider a society where all agents initially play fair"" and one agentninvents a cheating"" strategy such as doping in sports. Which factorsndetermine the success of the new cheating strategy? In order to studynthis question we consider an evolutionary game with heterogenous agentsnwho can either play fair or cheat. We model heterogeneity by assumingnthat the players are either high or low types. Three factors determinenthe imitation dynamics of the model: the location and the type of theninnovator, the distribution of types, and the information available to thenagents. In particular we *nd that the economy is more likely to end up inna state where all agents cheat if the innovator is of low type or when thenagents are maximally segregated.

On Cheating and Whistle-Blowing

We study the role of whistleblowing in the following inspection game. Two agents who compete for a prize can either behave legally or illegally. After the competition, a controller investigates the agents’ behavior. This inspection game has a unique (Bayesian) equilibrium in mixed strategies. We then add a whistleblowing stage, where the controller asks the loser to blow the whistle. This extended game has a unique perfect Bayesian equilibrium in which only a cheating loser accuses the winner of cheating and the controller tests the winner if and only if the winner is accused of cheating. Whistleblowing reduces the frequencies of cheating, is less costly in terms of test frequencies, and leads to a strict Pareto-improvement if punishments for cheating are suffciently large