Cycles and Multiple Equilibria in the Market for Durable Lemons

We investigate the nature of market failure in a dynamic version of Akerlof (1970) where identical cohorts of a durable good enter the market over time. In the dynamic model, equilibria with qualitatively different properties emerge. Typically, in equilibria of the dynamic model, sellers with higher quality wait in order to sell and wait more than sellers of lower quality. Among other things, we show for any distribution of quality that there exist an infinite number of cyclical equilibria where all goods are traded within a certain number of periods after entering the market.

On Bundling in Insurance Markets

This paper analyzes the welfare consequences of bundling different risks in one insurance contract in markets where adverse selection is important. This question is addressed in the context of a competitive insurance model a la Rothschild and Stiglitz (1976) with two sources of risk. Accordingly, there are four possible types of individuals and many incentive compatibility constraints to be considered. We show that the effect of bundling on these incentive compatibility constraints is such that bundling always yields a welfare improvement, and this result only holds when all four types have strictly positive shares in the population. Due to the competition between insurance companies, these benefits accrue to consumers who potentially have fewer contracts to choose from, but benefit from the better sorting possibilities due to bundling.

Multi-store Competition: Market Segmentation or Interlacing

This paper develops a model for multi-store competition between firms. Using the fact that different firms have different outlets and produce horizontally differentiated goods, we obtain a pure strategy equilibrium where firms choose a different location for each outlet and firms' locations are interlaced. The location decisions of multi-store firms are completely independent of each other. Firms choose locations that minimize transportation costs of consumers. Moreover, generically, the subgame perfect equilibrium is unique and when the firms have an equal number of outlets, prices are independent of the number of outlets

A Monopolist in Public Transport: Undersupply or Oversupply?

A monopolist in public transport may oversupply frequency relative to the social optimum, as van Reeven (2008) demonstrates with homogeneous consumers. This result generalizes for heterogeneous consumers who know the timetable. Whether a monopolist oversupplies or undersupplies frequency depends on the degree of consumers’ heterogeneity as reflected in the distribution of consumers’ reservation prices. Oversupply is likely to occur when this distribution is peaked, and undersupply is likely to occur when this distribution is rather flat. In particular, monopoly production results in the oversupply of frequency when consumers’ reservation prices are concentrated around the entry costs of the private car, being the main alternative to public transport.Frequency oversupply, Mohring effect, transportation monopolist

Information Overload in Multi-Stage Selection Procedures

The paper studies information processing imperfections in a fully rational decision-making network. It is shown that imperfect information transmission and imperfect information acquisition in a multi-stage selection game yield information overload. The paper analyses the mechanisms responsible for a seeming bounded rational behavior of the network and shows their similarities and distinctions. Two special cases of filtering selection procedures are investigated, where the overload takes its most limiting forms. The model developed in the paper can be applied both to organizations and to individuals. It can serve as a rational foundation for bounded rationality.Screening; Multistage Selection; Information Overload; Bounded Rationality

Do Auctions select Efficient Firms?

This discussion paper led to a publication in 'The Economic Journal' , 120(549) 1319-44. This paper considers a government auctioning off multiple licenses to firms who compete in a market after the auction. Firms have different costs, and cost efficiency is private information at the auction stage and the market competition stage. If only one license is auctioned, standard results say that the most efficient firm wins the auction (license) as it will get the highest profit in the aftermarket, i.e., it has the highest valuation for the license. This paper argues that this result does not generalize to the case of multiple licenses and aftermarket competition. In particular, we determine conditions under which auctions may select inefficient firms and therefore lead to an inefficient allocation of resources. Strategic interactions in the aftermarket, in particular firms’ preferences to compete with the least cost-efficient firms rather than with the most efficient firms, are responsible for our result.Auctions; cost-efficiency; aftermarkets

Auctions, aftermarket competition, and risk attitudes

With the experience of the sequence of UMTS auctions held worldwide in mind, we consider a situation where firms participate in license auctions to compete in an aftermarket. It is known that when a monopoly right is auctioned, auctions select the bidder that is least risk-averse. This firm will choose a higher value of the aftermarket strategic variable than any other firm will do, thereby implying a higher market price under price setting behavior and a lower price due to higher quantity under quantity-setting behavior. This paper extends the analysis to oligopoly aftermarkets and analyzes whether the monopoly result carries over to oligopoly settings. We argue that with multiple licenses and demand uncertainty auctions actually perform even worse from a welfare point of view than the monopoly case would suggest. A strategic effect strengthens the monopoly result with respect to prices, but weakens the result with respect to quantities.Auctions Aftermarkets Risk attitudes Selection