53 research outputs found
Unravelling in Two-Sided Matching Markets and Similarity of Preferences
This paper investigates the causes and welfare consequences of unravelling in two-sided matching markets. It shows that similarity of preferences is an important factor driving unravelling. In particular, it shows that under the ex-post stable mechanism (the mechanism that the literature focuses on), unravelling is more likely to occur when participants have more similar preferences. It also shows that any Pareto-optimal mechanism must prevent unravelling, and that the ex-post stable mechanism is Pareto-optimal if and only if it prevents unravelling.two-sided matching, unravelling, similarity of preferences
Understanding smart contracts as a new option in transaction cost economics
Among different concepts associated with the term blockchain, smart contracts have been a prominent one, especially popularized by the Ethereum platform. In this study, we unpack this concept within the framework of Transaction Cost Economics (TCE). This institutional economics theory emphasizes the role of distinctive (private and public) contract law regimes in shaping firm boundaries. We propose that widespread adoption of the smart contract concept creates a new option in public contracting, which may give rise to a smart-contract-augmented contract law regime. We discuss tradeoffs involved in the attractiveness of the smart contract concept for firms and the resulting potential for change in firm boundaries. Based on our new conceptualization, we discuss potential roles the three branches of government – judicial, executive, and legislative – in enabling and using this new contract law regime. We conclude the paper by pointing out limitations of the TCE perspective and suggesting future research directions
Platform Competition under Asymmetric Information
In the context of platform competition in a two-sided market, we study
how exante uncertainty and ex-post asymmetric information concerning the
value of a new technology aects the strategies of the platforms and the
market outcome. We nd that the incumbent dominates the market by setting
the welfare-maximizing quantity when the dierence in the degree of
asymmetric information between buyers and sellers is signicant. However,
if this dierence is below a certain threshold, then even the incumbent
platform will distort its quantity downward. Since a monopoly incumbent
would set the welfare-maximizing quantity, this result indicates that
platform competition may lead to a market failure: Competition results
in a lower quantity and lower welfare than a monopoly. We consider two
applications of the model. First, we consider multi-homing. We nd that
multi-homing solves the market failure resulting from asymmetric
information. However, if platforms can impose exclusive dealing, then
they will do so, which result in market ineciency. Second, the model
provides a new argument for why it is usually entrants, not incumbents,
that bring major technological innovations to the market
"Zero Cost'' Majority Attacks on Permissionless Blockchains
The core premise of permissionless blockchains is their reliable and secure
operation without the need to trust any individual agent. At the heart of
blockchain consensus mechanisms is an explicit cost (whether work or stake) for
participation in the network and the opportunity to add blocks to the
blockchain. A key rationale for that cost is to make attacks on the network,
which could be theoretically carried out if a majority of nodes were controlled
by a single entity, too expensive to be worthwhile. We demonstrate that a
majority attacker can successfully attack with a {\em negative cost}, which
shows that the protocol mechanisms are insufficient to create a secure network,
and emphasizes the importance of socially driven mechanisms external to the
protocol. At the same time, negative cost enables a new type of majority attack
that is more likely to elude external scrutiny
Understanding Smart Contracts as a New Option in Transaction Cost Economics
Among different concepts associated with the term blockchain, smart contracts have been a prominent one, especially popularized by the Ethereum platform. In this study, we unpack this concept within the framework of Transaction Cost Economics (TCE). This institutional economics theory emphasizes the role of distinctive (private and public) contract law regimes in shaping firm boundaries. We propose that widespread adoption of the smart contract concept creates a new option in public contracting, which may give rise to a smart-contract-augmented contract law regime. We discuss tradeoffs involved in the attractiveness of the smart contract concept for firms and the resulting potential for change in firm boundaries. Based on our new conceptualization, we discuss potential roles the three branches of government – judicial, executive, and legislative – in enabling and using this new contract law regime. We conclude the paper by pointing out limitations of the TCE perspective and suggesting future research directions
Competing by Restricting Choice: The Case of Search Platforms
We show that a two-sided matching platform can successfully compete by limiting the number of choices it offers to its customers, while charging higher prices than platforms with unrestricted choice. We develop a stylized model of online dating where agents with different outside options match based on how much they like each other. Starting from these microfoundations, we derive the strength and direction of indirect network effects and show that increasing the number of potential matches has a positive effect due to larger choice, but also a negative effect due to competition between agents on the same side. Agents resolve the trade-off between these competing effects differently, depending on their outside options. For agents with high outside options, the choice effect is stronger than the competition effect, leading them to prefer an unrestricted-choice platform. The opposite is the case for agents with low outside options, who then have higher willingness to pay for a platform restricting choice, as it also restricts the choice set of their potential matches. Moreover, since only agents with low outside options self-select into the restricted choice platform, the competition effect is mitigated further. This allows multiple platforms offering different number of choices to coexist without the market tipping
Dynamic competition with network externalities: why history matters
We consider dynamic competition among platforms in a market with network
externalities. A platform that dominated the market in the previous period be-
comes \focal" in the current period, in that agents play the equilibrium in which
they join the focal platform whenever such equilibrium exists. Yet when faced
with higher-quality competition, can a low-quality platform remain focal? In the
nite-horizon case, the unique equilibrium is ecient for \patient" platforms;
with an innite time horizon, however, there are multiple equilibria where ei-
ther the low- or high-quality platform dominates. If qualities are stochastic,
the platform with a better average quality wins with a higher probability, even
when its realized quality is lower, and this probability increases as platforms
become more patient. Hence social welfare may decline as platforms become
more forward looking
Dynamic competition with network externalities: why history matters
We consider dynamic competition among platforms in a market with network
externalities. A platform that dominated the market in the previous period be-
comes \focal" in the current period, in that agents play the equilibrium in which
they join the focal platform whenever such equilibrium exists. Yet when faced
with higher-quality competition, can a low-quality platform remain focal? In the
nite-horizon case, the unique equilibrium is ecient for \patient" platforms;
with an innite time horizon, however, there are multiple equilibria where ei-
ther the low- or high-quality platform dominates. If qualities are stochastic,
the platform with a better average quality wins with a higher probability, even
when its realized quality is lower, and this probability increases as platforms
become more patient. Hence social welfare may decline as platforms become
more forward looking
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