In bilateral trading problems, the parties may be hesitant to make relationship-specific investments without adequate contractual protection. We postulate that the parties can sign noncontingent contracts prior to investing, and can freely renegotiate them after information about the desirability of trade is revealed. We find that such contracts can induce one party to invest efficiently when courts impose either a breach remedy of specific performance or expectation damages. Moreover, specific performance can induce both parties to invest efficiently if a separability condition holds. Expectation damages, on the other hand, is poorly suited to solve bilateral investment problems.

Analyzes a system of negotiated transfer pricing in which divisions can agree on a simple fixed-price contract and renegotiate this contract on arrival of better information. Provision of effective protection for their specific investments.

[In our model of negotiated transfer pricing, divisional managers can make specific investments that enhance the value of intrafirm trade. However, these investments are irreversible and must be made before divisional managers have enough information to determine the desired intrafirm transfer. We find that a system of negotiated transfer pricing will lead to efficient outcomes provided the divisions can sign fixed-price contracts prior to making their investment decisions. While these contracts are likely to be renegotiated after the relevant information becomes known, they nonetheless provide the divisions with effective protection for their specific investments.]

Aaron S. Edlin, Mario Ephemerella, Walter P. Keller, Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium, Econometrica, Vol. 66, No. 4 (Jul., 1998), pp. 897-922

MILGROM AND SHANNON (1994) clarify the relationship between order-theoretic methods for comparative statics and more traditional differential techniques by developing relationships between the differential Spence-Mirrlees single crossing property and the order-theoretic single crossing property. Both conditions are central for monotone comparative statics analysis in a number of settings. In particular, Milgrom and Shannon show that the order-theoretic single crossing property is necessary and sufficient for the set of optimal choices to be nondecreasing in certain choice problems, and that a strict form of the single crossing property guarantees the stronger conclusion that every selection from the set of maximizers is nondecreasing in such problems. Milgrom and Shannon assert that under appropriate conditions the Spence-Mirrlees condition is equivalent to their single crossing property, and that the strict versions are also equivalent. In this note, however, we give counterexamples which show that their strict single crossing property may hold even though the strict Spence-Mirrlees condition fails. In fact, we show that the strict single crossing property may hold even though the strict Spence-Mirrlees condition holds only on a set of arbitrarily small measure. We also give a correct statement of the relationship between the Spence-Mirrlees condition and the single crossing property. These counterexamples explain the discrepancy between the monotonicity conclusions that Milgrom and Shannon (1994) derive from the strict single crossing property and the strict monotonicity conclusions that Edlin and Shannon (1998) derive from the strict Spence-Mirrlees condition. In Section 3 we also use these counterexamples to illustrate the fact that the strict single crossing property can allow both pooling and separating equilibria while the strict Spence-Mirrlees condition eliminates the possibility of pooling equilibria. The elimination of pooling equilibria in signalling and screening models is more subtle than Edlin and Shannon's (1998) strict monotonicity conclusions because agents need not face a differentiable constraint.

Academic journal publishing has evolved rapidly in the past two decades. Prices, ownership concentration, the number of journals, and the means of distribution have all changed dramatically. Substantial price increases have been the norm. Average prices have risen severalfold over this period, with prices climbing the most at forprofit journals, where these prices are now as much as 500 percent higher than nonprofits (Gail Yokote, 2003). The price difference between forprofit and nonprofit academic journals is particularly striking, given that these journals are generally similar in format and editorial processes, and that for-profit journals do not appear to be of higher quality (Theodore C. Bergstrom, 2001 p. 183). Increased concentration provides one possible explanation for why prices of for-profit journals are so high. To take one example, measured by revenue, in 2001 Elsevier Science had a 22.9percent share of the Science, Technology, and Medicine (STM) industry, with Kluwer at 11.7 percent, and Thomson at 10.7 percent. But concentration offers at best only a partial answer. Bundling offers another, potentially more significant explanation, particularly for recent increases. The prices of for-profit journals could not be high and increasing without significant structural barriers to entry. Recently, however, a new strategic barrier has emerged. Major publishers have been offering libraries packages of journals that are bundled across journals and across print and electronic versions. The exact terms have varied from publisher to publisher, but a contract (sometimes called a “Big Deal” by librarians) typically involves a library entering into a long-term arrangement to get access to a large electronic library of journals at a substantial discount, in exchange for a promise not to cut print subscriptions (whose prices will increase over time); in this sense print and electronic are bundled. Since the electronic library becomes much less expensive when ordered in quantity, there is likewise bundling across electronic journals. Bundling can be seen as a device that erects a strategic barrier to entry. At a simple level of analysis, the Big Deal contracts leave libraries few budgetary dollars with which to purchase journals from new entrants. Looking one level deeper, we see that bundling entails average prices that exceed marginal prices, and this creates a barrier to entry if entrants compete with the marginal journal. Other things equal, bundling practices are likely to be anticompetitive to the extent that they allow for the maintenance of supracompetitive average prices that limit usage of academic journals by scholars and/or distort library choices between journals and monographs and books. There are, however, pro-competitive benefits associated with bundling. Recent deals have provided scholars with extra access to journals; moreover, when electronic databases contain journals not included in the libraries’ print collections, the collections expand. Finding an economic approach that analyzes a range of bundling practices and evaluates them by appropriately balancing benefits and costs † Discussants: V. Kerry Smith, North Carolina State University; Robert Hall, Stanford University.

We estimate auto accident externalities (more specifically insurance externalities) using panel data on state‐average insurance premiums and loss costs. Externalities appear to be substantial in traffic‐dense states: in California, for example, we find that the increase in traffic density from a typical additional driver increases total statewide insurance costs of other drivers by 1,725–3,239 per year, depending on the model. High–traffic density states have large economically and statistically significant externalities in all specifications we check. In contrast, the accident externality per driver in low‐traffic states appears quite small. On balance, accident externalities are so large that a correcting Pigouvian tax could raise $66 billion annually in California alone, more than all existing California state taxes during our study period, and over $220 billion per year nationally.