A large importer who places relatively greater weight on future than current oil consumption will import less oil in the future than if it were able to commit itself in advance to future tariffs, and may find itself worse off than if it were unable to impose tariffs at all. Futures markets and storage modify these adverse effects and may avoid the problem of dynamic inconsistency. Copyright 1990 by American Economic Association.
This paper develops a model of product patents in which the patent changes the nature of market entry behavior rather than preventing entry entirely. The model incorporates three levels of action, namely, the innovator's patenting decision, the potential entrant's location decision, and possible court action. The analysis demonstrates how the characteristics of the patents system and the enforcement framework can influence rivals' variety choices and, thus, the market equilibrium. It also considers how the system can, in principle, be adjusted to improve social welfare. Copyright 1990 by American Economic Association.
Historically, English and Dutch auctions have been used for the exchange of single objects such as works of art or single lots of a good such as produce, fish, or cut flowers. Where these institutions have been used for the exchange of multiple units, such as the Australian wool auction (using English rules), successive lots of the good are sometimes sold sequentially at auction. In some, but not all, instances this is because the goods are not identical, even though the various lots may be close substitutes (see Penny Burns, 1985). Where the goods are accepted universally as being homogeneous, as in the securities markets, multiple units are often commonly auctioned simultaneously. In the securities industry, orders are batched for simultaneous execution in multiple-unit auctions in what are referred to as markets; that is, the security is for auction at a particular point in time. This type of market is used on the stock exchanges of Austria, Belgium, France, Germany, and Israel. Some of these are verbal, and some are sealed bid auctions. Although the U.S. organized exchanges are predominantly continuous rather than call markets (except that call markets are used each day to open trading in each listed security), there is a growing number of exceptions such as the proliferation, since 1984, of Auction Preferred Stock (Goldman, Sachs and Co., October 1984) and Money Market Preferred Stock (Lehman Brothers, July 1984). We now have Dutch Auction Rate Transferable Securities, called DARTS, Stated Rate Auction Preferred Stock, or STRAPS, and many more. After the initial subscription offering of this type of security, the market is called every 49 days to reset the preferred dividend rate using a multiple-unit auction. The exchange of shares and the dividend determination is based on the array of stated dividend rates at which existing holders and potential new holders are willing to sell and/or buy corresponding quantities. The dividend rate and exchange of shares every 49 days is executed using the uniform price or competitive sealed bid mechanism (Vernon L. Smith et al., 1980). The discussion to follow will be confined to this sealed bid form of the call market. Call markets provide temporal consolidation of trade orders or other forms of expressing the desire to buy and sell. By comparison with continuous trading, call markets offer both advantages and disadvantages (Robert A. Schwartz, 1988 pp. 442-6). The cited advantages include low cost of operating the exchange; information aggregation and presumed pricing efficiency; price stability; individual trades, which are thought to have a small impact on price; reduced price uncertainty; and, finally, nondiscriminatory pricing. However, there are offsetting disadvantages: (1) the market is inaccessible except at the time of call; (2) no bid, offer, contract, or price information is available until the results of the call are announced; and (3) there is transaction uncertainty because a submitted bid (offer) may be too low (high) to execute inside the supply-demand cross. These conditions are only partially alleviated if there is a secondary market between calls. These disadvantages may be significant. In September 1988, the Wall Street Journal published an article on the failure of a call market for the auction rate preferred stock *Economic Science Laboratory, University of Arizona, Tucson, Arizona. This material is based upon work supported by the National Science Foundation under grant no. SES-8320121.
It is now widely accepted that rent-seeking (Anne Krueger, 1974) or directly unproductive profit seeking (Jagdish Bhagwati, 1982) may cause inefficiencies in the context of public sector decisions. The possibility that government decisions (for example, about taxes, quotas, franchises, or standards) may create or redistribute rents induces private parties to spend valuable resources to influence that distribution, even when such expenditures carry no social benefit. Moreover, the social cost of rent seeking can exceed the value of the resources spent trying to gain and protect rents, for example, because the fear of losing wealth through redistribution reduces the incentives for wealth creation. Treating rent-seeking activities as characteristic of public sector decision processes ignores the fact that similar phenomena are to be found in firms, unions, and other private sector organizations. Our recent work (Milgrom, 1988; our 1988, 1990 papers) attempts to identify the advantages of decision processes (private or public) that permit rent seeking, and to incorporate these into a cost-benefit analysis of optimal decision processes. Our work begins with an analysis of why rents and quasi rents arise in organizations and of the forms that the rent seeking they engender may take. Some measures to insulate the decision process from rent seeking, such as limits on the provision of by interested parties or restrictions on the range of options considered, may degrade the quality of decisions, especially by blocking the flow of valuable information. Optimal decision processes balance the costs of rent seeking against the value of obtained. Several aspects of the rules affect the opportunities that members have to spend resources trying to alter the distribution of rents. To ascertain the possibilities for rent seeking, the analyst must ask questions like: Can the parties propose new initiatives at any time? Can they give volumes of testimony in a form of their own choosing? Can they appeal adverse decisions? Are decision makers obliged to respond to the parties' initiatives? Is the range of actions that they can take in response relatively broad, rather than being tightly constrained by property rights or other formal rules? More affirmative answers to these questions lead to opportunities or greater incentives for costly rent seeking. As a kind of shorthand, we call decision processes that have of these elements more processes. The very elements that make a process open to rent seeking may also add flexibility and responsiveness, helping to ensure that important ideas and proposals are fully considered. From this perspective, the benefits of openness can (in principle) be measured by a value of information calculation, in the usual manner of statistical decision theory. Weighing the costs and benefits, it follows that a open process is desirable when the rents available for redistribution are low, and the value of the that might be acquired is high. Conversely, when the potential for redistribution is high and the value of is low, the optimal decision process is less open. This kind of reasoning helps to illuminate the variations in the decision processes that are found in many organizations. We have discussed a number of examples in our earlier work, including the characteristics of personnel departments, the contrasting patterns of decision making, employment and compensation in U.S. and Japanese firms, *Professor of Economics, Stanford University, and Jonathan B. Lovelace Professor of Economics, Graduate School of Business, Stanford University, Stanford, CA 94305, respectively. This work was supported by the National Science Foundation.
This paper relates firm location choice and consumer search. Firms that cluster together attract consumers by facilitating price comparison, but clustering increases the intensity of local competition. The author constructs a simple model which shows that firms may choose head-on competition by locating together. Under reasonable conditions, this is the only equilibrium outcome. Copyright 1990 by American Economic Association.