148 research outputs found
A simple status quo that ensures participation (with application to efficient bargaining)
We consider Bayesian incentive-compatible mechanisms with independent types and either private values or interdependent values that satisfy a form of "congruence." We show that in these settings, interim participation constraints are satisfied when the status quo is the randomized allocation that has the same distribution as the equilibrium allocation in the mechanism. Moreover, when utilities are convex in the allocation, we can instead satisfy participation constraints with the deterministic status quo equal to the expected equilibrium allocation in the mechanism. For quasilinear settings, these observations imply the possibility of efficient bargaining when the status quo specifies the expected efficient decision provided that the total surplus is convex in the decision.Efficient property rights, asymmetric information bargaining, transaction costs
Entry, Contestability, and Deregulated Airline Markets: An Event Study Analysis of People Express
A number of recent papers have studied the relationship between price and market structure in the deregulated airline industry through a cross-sectional analysis of city-pair markets. Yet, while interesting, several potential difficulties underlie the inferences drawn in these analyses. In this paper, we consider an alternative approach that uses stock price reactions to entry announcements to shed light on the nature of competitive behavior in this industry. The analysis sheds light on three issues. First, it offers a clean test of contestable market theory. Second, it provides evidence on the level of profits or sunk costs present in these markets. Third, it sheds light on the degree of competitive "localization" existing in the industry. The particular entry events that we focus on are those involving People Express Airline in 1984 and 1985. To provide a more complete picture of the effects of these entry events, we also examine the price and quantity changes that occurred following entry.
Exclusive Dealing
In this paper, we provide a conceptual framework for understanding the phenomenon of exclusive dealing, and we explore the motivations for and effects of its use. For a broad class of models, we characterize the outcome of a contracting game in which manufacturers may employ exclusive dealing provisions in their contracts. We then apply this characterization to a sequence of specialized settings. We demonstrate that exclusionary contractual provisions may be irrelevant, anticompetitive, or efficiency-enhancing, depending upon the setting. More specifically, we exhibit the potential for anticompetitive effects in non-coincident markets (that is, markets other than the ones in which exclusive dealing is practiced), and we explore the potential for the enhancement of efficiency in a setting where common representation gives rise to incentive conflicts. In each instance, we describe the manner in which equilibrium outcomes would be altered by a ban on exclusive dealing. We demonstrate that a ban may have surprisingly subtle and unintended effects.
Dynamic Merger Review
We analyze the optimal dynamic policy of an antitrust authority towards horizontal mergers when merger proposals are endogenous and occur over time. Approving a currently proposed merger will affect the profitability and welfare effects of potential future mergers, the characteristics of which may not yet be known to the antitrust authority. We show that, in many cases, this apparently difficult problem has a simple resolution: an antitrust authority can maximize discounted consumer surplus by using a completely myopic merger review policy that approves a merger today if and only if it does not lower consumer surplus given the current market structure.
The Welfare Effects of Long-Term Health Insurance Contracts
Reclassiļ¬cation risk is a major concern in health insurance where contracts are typically one year in length but health shocks often persist for much longer. We use rich individual-level medical information from the Utah all-payer claims database to empirically study one possible solution: long-term insurance contracts. We characterize optimal long-term contracts with one-sided commitment theoretically, derive the contracts that are optimal for consumers in Utah, and assess the welfare level that a full implementation of these contracts could achieve relative to several key benchmarks. We ļ¬nd that dynamic contracts perform very well for the majority of the population, for example, eliminating over 94% of the welfare loss from reclassiļ¬cation risk for individuals who arrive on the market at age 25 in good health. However, dynamic contracts instead provide very little beneļ¬t to the worst pre-age-25 health risks. Their value is also substantially lower for consumers whose income growth with age is relatively high. With pre-age-25 insurance in place, consumers with flat net income prefer dynamic contracts to an ACA-like environment, but consumers with steeper income proļ¬les prefer the ACA-like environment. Overall, we show that there are scenarios in which dynamic contracts can provide substantial welfare beneļ¬ts, but that complementary policies are crucial for unlocking these beneļ¬ts
Optimal Long-Term Health Insurance Contracts: Characterization, Computation, and Welfare Effects
Reclassiļ¬cation risk is a major concern in health insurance where contracts are typically one year in length but health shocks often persist for much longer. We theoretically characterize optimal long-term insurance contracts with one-sided commitment, and use our characterization to provide a simple computation algorithm for computing optimal contracts from primitives. We apply this method to derive empirically-based optimal long-term health insurance contracts using all-payers claims data from Utah, and then evaluate the potential welfare performance of these contracts. We ļ¬nd that optimal long-term health insurance contracts that start at age 25 can eliminate over 94% of the welfare loss from reclassiļ¬cation risk for individuals who arrive on the market in good health, but are of little beneļ¬t to the worst age-25 health risks. As a result, their ex ante value depends signiļ¬cantly on whether pre-age-25 health risk is otherwise insured. Their value also depends on individualsā expected income growth
Internal versus external growth in industries with scale economies: A computational model of optimal merger policy
We study optimal merger policy in a dynamic model in which the presence of scale
economies implies that firms can reduce costs through either internal investment in build-
ing capital or through mergers. The model, which we solve computationally, allows firms
to invest or propose mergers according to the relative profitability of these strategies. An
antitrust authority is able to block mergers at some cost. We examine the optimal policy
when the antitrust authority can commit to a policy rule and when it cannot commit, and
consider both consumer value and aggregate value as possible objectives of the antitrust
authority. We find that optimal policy can differ substantially from what would be best
considering only welfare in the period the merger is proposed. We also find that the abil-
ity to commit can lead to a significant welfare improvement. In general, antitrust policy
can greatly affect firms` optimal investment behavior, and firms` investment behavior can
in turn greatly affect the antitrust authority`s optimal policy
An Economist's Guide to U.S. v. Microsoft
W hile most antitrust cases proceed in obscurity, the case brought againstMicrosoft by federal and state antitrust authorities was front-page news.Much of the drama and media hype centered on the struggle between the titan of high technology, personified in Bill Gates, and the titan of government, personified in U.S. Assistant Attorney General Joel Klein. For economists and policymakers, however, the case was about the appropriate role of competition policy in the new economy. Antitrust critics claim that the nineteenth century Sherman Act is ill-suited for the high-technology markets of the twenty-first century. Others argue that the Sherman Act provides a broad constitution for antitrust enforcement that is flexible enough to protect both the interests of consumers and the ability of firms to compete in high-technology markets. In the Microsoft case, the government (by which we mean the U.S. Department of Justice, 19 state attorneys general, and the Attorney General of the District of Columbia that brought the case) asserted that Microsoft engaged in anticompeti-tive conduct designed to maintain its operating system monopoly to the detriment of consumers. According to the government, antitrust enforcement would rein in the Microsoft monopoly and result in more competition and innovation in the software industry. In its defense, Microsoft contended that the company is a vigorous competitor that benefited consumers by supplying high quality, innovative products. According to Microsoft, antitrust action against it would dampen incen-tives for competition and slow software innovation. In this paper, we analyze the central economic issues raised by the Microsof
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