Knowledge that Transforms

We investigate the ability of the price system to aggregate private information in a market of uncertain size and where set-up costs are incurred by entrants. It is shown that the equilibrium is random even when the totality of private information is so large that aggregate uncertainty is virtually non-existent. In particular, the limiting equilibrium does not approach the full-information, Walrasian outcome. Hence, the model identifies a technological factor (increasing returns) which gives rise to informational losses.

Previous authors who have considered the issue of noncooperative entry deterrence have not found the free rider problem to be a significant factor. These authors, however, have only considered models in which the exact investment needed to deter entry is known with certainty. In this paper I add uncertainty to the models investigated by these previous authors, and demonstrate that the free rider problem can be significant, but is not so in all cases. That is, for certain types of entry deterring investments the introduction of uncertainty causes the oligopoly to underinvest in entry deterrence; however, for other types no underinvestment result arises.

The effect of short-term contracting on resource extraction is studied, in a two-country model of international trade in oil. Countries' planners are assumed to be fully rational, with perfect information and perfect foresight. Contracts are assumed perfectly enforceable and complete, except that short-term contracts do not allow commitments to actions taken beyond the contract period. We show that short-term contracting limits countries' opportunities for intertemporal consumption-smoothing, reducing their collective tolerance for temporal variation in consumption. This tends to make them extract more slowly than in the efficient plan that results from long-term contracting.

This paper identifies several social choice correspondences which are or are not fully implementable in economic environments when agents are incompletely informed about the environment. We show that in contrast to results in the case of complete information, neither efficient allocations nor core allocations define implementable social choice correspondences. We also identify conditions under which the Rational Expectations Equilibrium correspondence is implementable. We extend the concepts of fair allocations and Lindahl allocations to economies with incomplete information, and show that envy-free allocations and Lindahl allocations are implementable under some conditions while fair allocations are not.

A symmetric allocation in a continuum is "multilaterally incentive compatible" if no finite coalition of privately informed agents can manipulate it by combining deception with hidden trades of exchangeable goods. Sufficient conditions for mutilateral compatibility are that all agents face the same linear prices for exchangeable goods and that indistinguishable agents face identical budget sets. The same conditions are necessary under assumptions that extend those under which the second efficiency theorem of welfare economics holds in a continuum economy. Markets for exchangeable goods emerge as binding constraints on the set of Pareto efficient allocations with private information.

The author considers a leader-follower game with output quantities as strategies, so as to demonstrate the reduced advantages of the Stackleberg leader in a stochastic environment with private information. At the equilibrium, the strategy of the leader reveals to the follower information about the demand. In an attempt to signal low demand, the leader contracts his output. Nevertheless, unless the leader's information is infinitely noisy, the follower can always correctly infer his signal. The author finds a wide range of parameter values over which the follower is better-off compared to the leader.

Within a slightly modified version of Hotelling's model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise. We show that entry deterrence, although optimal, need not be achieved through product proliferation. In some cases the incumbent monopolist resorts to an entry-deterring strategy based on location choice rather than product proliferation. We also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry.

Optimal penal codes are constructed for a class of infinity-repeated games with discounting. These games can be interpreted as Bertrand oligopoly games with capacity constraints. No particular rationing rule is adopted; weak restrictions are imposed on the firms' sales functions instead. Models adopting the commonly used rationing rules are special cases of the general framework studied here. It is found that firms can be driven to their security levels by credible punishments.

We examine a common practice used within previous studies of laboratory markets, testing equilibrium models using some data from markets that have not reached an equilibrium. We examine the effect of this practice when it is applied to some laboratory markets where an appreciable number of them eventually satisfied an operational definition of an equilibrium. Our data suggest that, for our markets, significantly different equilibrium test results would be obtained when using all data available in market periods analysed in previous studies rather than using only equilibrium data. For our markets, choices made in disequilibrium are quite different from those in equilibrium.

Imagine that one player, the “incumbent” competes with several “entrants”. Each entrant competes only with the incumbent, but observes play in all contests. Previous work shows that, as more and more entrants are added, the incumbent's reputation may dominate play of the game, if the entrants are faced in sequence. We identify conditions under which similar results obtain when the entrants are faced simultaneously, and we find specifications in which adding more simultaneous entrants has a dramatically different effect. We also show that, with either sequential or simultaneous play, incumbents need not prefer the situation in which their reputations can and do dominate play to the “informationally isolated” case in which each entrant observes only play in its own contest.