This paper compares real and monetary business cycle models with and without endogenous technical change. If technology is endogenous, the properties of these models change significantly. In particular, both real and monetary models yield very similar output processes if growth is endogenous, and changes in aggregate demand can result in permanent changes in productivity, employment, and output. The effect of depreciation of technology is examined, and the pattern of real wage movements over the cycle when money wages are fixed, but technology is changing, is briefly considered.
There is now widespread recognition that an airline's operation at a given airport greatly affects its competitive position on routes flown out of that airport (see M. Levine, 1987; S. Borenstein, 1989; S. Morrison and C. Winston, 1989; and myself, 1989, among many others.) Airlines typically defend any competitive advantage as stemming from the lower costs and better service that are said to be generated by hub-and-spoke route systems. Airline critics typically respond that airlines gain by dominating individual airports. Both views are at least plausible. Huband-spoke transportation networks reduce the number of round-trips necessary to carry a given number of passengers on a given set of itineraries, while increasing the number of passenger miles flown. If there are sufficient economies of scale in plane size, then the advantages of hubbing can overcome the disadvantage in passenger miles, resulting in lower total costs. By pooling passengers with different ultimate destinations, a hubbed system can also offer more frequent flights than would be economically feasible under a nonstop system. It also appears, however, that airlines gain other advantages from a large presence at an airport. Incumbent airlines are the major source of financing for many airports and therefore gain a large degree of bureaucratic control over airport operations. This control may enable them to block the entry or expansion of rivals. Airlines with a large presence in a given city also gain advantages from frequent flyer plans and nonlinear travel agent commission schedules (see, again, Levine and others). If the bureaucratic and marketing advantages of airport presence are sufficient to prevent most attempts at entry, then incumbents may gain the ability to exercise traditional market power by restricting output and driving up prices. This paper argues that both simple costreducing and naive stories are inappropriate for the airline industry. I present a model in which consumers are willing to pay a premium for the services of the dominant airline; this premium may be related to a number of factors, including flight frequency, frequent flier miles, and travel agent commission overrides. This model has the advantage of treating oligopoly product differentiation in an explicit way, of treating price as an endogenous variable, and of allowing for airport presence to affect both costs and demand.
Recent contribution emphasize that the presence of exchange rate target zones has important effects on the within-band behaviour of exchange rates. We show that the implications of available models are strikingly inconsistent with European Monetary System data, and we propose a model of recurring realignments the predictions of which are consistent with the evidence.
The authors study natural selection of preferences using a golden-age model with endogenous population. In equilibrium, all agents have preferences with maximum biological fitness, given resource constraints, and total population is the maximum the environment can sustain. Naturally selected agents follow the golden rule, acting as if they maximize the undiscounted sum of per-capita felicities of current and future generations. Selected preferences and, hence, work, saving, consumption, and population density vary predictably with environmental differences.
To develop a positive, economic theory of military spending, this analysis focuses on a game-theoretic, general equilibrium model of international conflict, in which consumption, peaceful investment, and military spending are endogenously determined. The analysis illustrates that when there is repeated interaction between nations, a game of threats and punishments generally will not support a disarmament outcome and that fluctuations in military spending can be an endogenous result of fluctuations in aggregate economic activity. Furthermore, the analysis shows how the relation between aggregate economic activity and military spending qualitatively depends on whether governments are acting opportunistically or cooperatively.
Recent concerns over the effects of the Robinson-Patman Act' and so-called priceprotection policies such as most-favoredcustomer clauses (MFC's)2 on market performance have given economists new reasons to examine the welfare effects of third-degree price discrimination. In order to assess these effects correctly, it is imperative that one understand how price discrimination influences market behavior. Joan Robinson's (1933) work launched the formal inquiry into the welfare effects of third-degree price discrimination. Building on the intuition presented by Arthur Pigou (1932), she showed that, if a monopolist faces two independent linear demand curves, the use of price discrimination will not affect industry output but will reduce welfare. Richard Schmalensee (1981) extends these results to nonlinear demand curves and shows that an increase in total industry output is a necessary condition for price discrimination to be welfare improving. Hal Varian (1985) broadens these results by deriving upper and lower bounds on the welfare change due to the use of price discrimination. He shows that these results can be applied to markets in which there are nonzero cross price effects. All of this work examines how the ability of a monopolist to price-discriminate will affect the market outcome when all other characteristics of the market are treated as exogenous. Recently, two lines of research have extended this inquiry beyond the case of a monopolist in a market with exogenously fixed parameters. The first line considers the case of oligopoly. The work of Charles Holt and David Scheffman (1985) and Thomas Cooper (1986) has shown that restrictions on price discrimination imposed by the use of MFC's can facilitate collusion between oligopolists attempting to restrict output. This implies that third-degree price discrimination can be welfare-improving. The second line of research shows that price discrimination by a firm can affect nonprice decisions made by other market participants, thus affecting the market outcome. Michael Katz (1987) presents a model in which a large firm's ability to vertically integrate backward into the production of an input allows it to obtain a lower per-unit price from the supplier of the input than can be obtained by smaller firms without this ability. He shows that third-degree price discrimination reduces welfare unless it prevents inefficient backward integration. DeGraba (1987) shows that the use or nonuse of price discrimination by a national firm can affect nonprice decisions made by local firms that compete with the national firm. In this situation, third-degree price discrimination is welfare-reducing, because it induces local firms to produce a product that is overly differentiated from the product of the national firm. In all of the work cited above, price discrimination is important when sellers set prices in separate markets or charge different prices to different customers in the same market. The following analysis (which can be considered a contribution to the second line of research) suggests that price discrimination can be important even when a seller faces a single market in which all customers are identical. The intuition behind this result is that nonprice decisions made by downstream producers (such as the choice of technology) can be affected by the use or *Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853. I thank Robert Frank, Robert Smiley, Richard Thaler, and the participants of the JGSM applied microeconomics workshop for their helpful comments. 'See William Baldwin (1987 pp. 438-40) for a good summary of the debate. 2See John Kwoka and Lawrence White (1989 pp. 196-7).
This paper argues that default plays an important positive role in the economy. If markets are incomplete and traders are only able to enter into contracts that they will be able to execute regardless of future events, contingent contracting may be severely restricted. Moreover, opening new markets may not relieve these restrictions. Default promotes efficiency in a way that opening new markets does not by making it possible for traders to enter into contracts that they will be able to execute with high probability but not with certainty.