In this paper, we study the optimization problem of an unregulated air carrier which is given the exclusive right to satisfy demand for air travel between any pair of cities. It chooses a network of connections and a set of prices to maximize profits. Thus, both network design and prices are endogenous. We characterize the solution to this optimization problem when demands and costs are symmetric. Our main result is that, if there are economies of density in the number of individuals travelling between two directly connected cities, the optimal network is either a hub of size n − 1 or one in which every pair of cities is connected directly.

We study a model in which two carriers choose networks to connect cities and compete for customers. We show that if carriers compete aggressively (e.g., Bertrand-like behavior), one carrier operating a single hub-spoke network is an equilibrium outcome. Competing hub-spoke networks are not an equilibrium outcome, although duopoly equilibria in nonhub networks can exist. If carriers do not compete aggressively, an equilibrium with competing hub-spoke networks exists as long as the number of cities is not too small. We provide conditions under which all equilibria consist of hub-spoke networks.

We study price competition and entry of platforms in multi-sided markets. Utilizing the simplicity of the equilibrium pricing formula in our setting with heterogeneity of customers’ membership benefits, we demonstrate that in the presence of externalities, the standard effects of competition can be reversed: as platform competition increases, prices, and platform profits can go up and consumer surplus can go down. We identify economic forces that jointly determine the social inefficiency of the free-entry equilibrium and provide conditions under which free entry is socially excessive as well as an example in which free entry is socially insufficient.

We study the monotonicity of the equilibrium bid with respect to the number of bidders n in affiliated private-value models of first-price sealed-bid auctions and prove the existence of a large class of such models in which the equilibrium bid function is not increasing in n. We moreover decompose the effect of a change in n on the bid level into a competition effect and an affiliation effect. The latter suggests to the winner of the auction that competition is less intense than she had thought before the auction. Since the affiliation effect can occur in both private- and common-value models, a negative relationship between the bid level and n does not allow one to distinguish between the two models and is also not necessarily (only) due to bidders taking account of the winner's curse.

This paper studies the market for monopolistically supplied sweepstakes. We derive equilibrium demands for fixed-prize and variable-prize sweepstakes and determine the profit-maximizing prize level and pay-out ratio respectively. It can be profitable to offer each type of sweepstake when there is a large enough number of weighted utility consumers who have constant absolute risk attitudes, are strictly averse to small as well as symmetric risks, and display longshot preference behaviour. Moreover, for the variable-prize sweepstake, the supplier will generally find it profitable to combine sweepstakes targeting two smaller populations, and offer a single sweepstake to the combined population. This implication is corroborated by the recent spate of mergers of smaller state lotteries into larger ones.

In a socialist economy, when a state-owned enterprise (SOE) incurs losses, the government often provides it with additional funding, cuts its taxes, and offers other compensations. Coincidentally, the managers of an SOE also expect to receive financial assistance from the state. Such a phenomenon is called the soft budget constraint (SBC), a term coined by Janos Kornai (1986). Kornai attributes many problems in a socialist economy to the existence of the SBC. To achieve successful reform of both the SOE's and socialist economies, it is imperative to eliminate the SBC. However, the SBC phenomenon continues to exist in transitional economies, even after SOE's are privatized (World Bank, 1996 p. 45). There is a large literature on the SBC. Mathias Dewatripont et al. (1996) and Eric Maskin (1996) provide surveys on the recent literature. According to Kornai (1998), there are two types of explanations for the existence of the SBC: the exogenous and endogenous. Explanations of the first type attribute the existence of the SBC to various exogenous reasons, including the paternalism of a socialist state and the government's aims for job creation or for gaining political support (Kornai, 1986). Explanations of the second type view the SBC as an endogenous phenomenon, arising from a time-inconsistency problem (Dewatripont and Maskin, 1995). For an inefficient, uncompleted investment project, the state or creditor may have incentives to refinance the investment because the marginal benefit of refinancing exceeds the marginal cost of abandoning it. Yingyi Qian (1994) attributed the shortage of goods in socialist economies to the SBC based on such a timeinconsistency argument. In this paper, we provide another explanation for the prevalence of the SBC in socialist and transitional economies. We will argue that the SBC is rooted in the state's accountability problem. The traditional Stalinist system was designed to facilitate the establishment of certain strategic SOE's, which were not viable in a market system. To establish the nonviable SOE's, a socialist government distorted the prices of all kinds of inputs and of outputs and used administrative measures to allocate these inputs and outputs according to plans. However, due to information and coordination problems, the state could make wrong decisions regarding investment/production and fail to deliver necessary materials and inputs in time. Consequently, the state, instead of SOE's, was accountable for the failures and needed to allocate additional credits and other assistance to the SOE's in order to complete the investment and production. As such, the SBC arose. After the transition to a market economy, many strategic firms still remain nonviable in a market economy. For strategic purposes, the state needs to support these finns. Moreover, most firms in a transitional economy carry many types of policy burdens, inherited from the pretransition system (Lin et al., 1998). Because the state is accountable for the losses arising from policy burdens, the SBC phenomenon persists. In a market economy, the state's attempts to build nonviable industry and the state's policy burdens on enterprises will also lead to SBC.

A study is presented on whether the US Government can increase its revenues from the sale of drainage leases by using a different allocation mechanism. The optimal mechanism is characterized for selling a lease when there is a single informed buyer and a fixed number of uniformed buyers. Implementation and the magnitude of potential revenue gains, if any, are discussed.