enterprises ; mergers ; profit ; welfare economics

Using a game-theoretic approach, we examine possible equilibrium explanations of the often-observed phenomenon that two neighboring restaurants offering similar menus nevertheless experience vastly different demands. The essential aspect of this analysis is the presence of a consumption externality that makes the popularity itself a factor in the determination of the relative attractiveness of the restaurants.

We model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic. The presence of too many potential bidders raises coordination costs that detract from welfare. We show that the seller and society can benefit from policies that reduce market thickness (i.e., the relative abundance of buyers). Our analysis extends well-known revenue-equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies (e.g., reservation prices) in ways not anticipated by models that ignore entry.

Experienced bidders show sensitivity to the strategic considerations underlying common value auctions, but not to item valuation considerations. Auctions with large numbers of bidders (6-7) produce more aggressive bidding than with small numbers (3-4), resulting in negative profits, the winner's curse. Providing public information about the value of the item increases seller revenue in the absence of a winner's curse, but produces the contrary result in its presence.

Dominant strategies seldom exist in non-cooperative games. Moulin's concept of a dominance solvable game generalizes, dominant strategy without dramatic loss in appeal. We consider a class of common-value auctions characterized by the property that the maximum of a collection of informative signals is a sufficient statistic for the entire collection. We demonstrate that this class of second-price auctions is dominance solvable.