Latest Theoretical Economics

Efficiency in Repeated Two-Action GameswithLocal Monitoring

Francesco Nava, Michele Piccione

TE/2012/560. September 2011.
The paper discusses community enforcement in infinitely repeated two-action games with local monitoring. Each player interacts with and observes only a fixed set of partners, of whom he is privately informed. The main result shows that for generic beliefs efficiency can be sustained in a sequential equilibrium in which strategies are independent of theplayers’ beliefs about the monitoring structure. Stronger results are obtained when players are arbitrarily patient and payoffs are evaluated according to Banach-Mazur limits, and when players are impatient and only acyclic monitoring structures are allowed.

Full article: http://sticerd.lse.ac.uk/dps/te/te560.pdf

Does Competition Solvethe Hold-up Problem?

Leonardo Felli, Kevin Roberts

TE/2011/561. September 2011.
In an environment in which heterogenous buyers and sellers undertake ex-anteinvestments, the presence of market competition for matches provides incentives forinvestment but may leave inefficiencies that take the form of hold-up and coordinationproblems. This paper shows, using an explicitly non-cooperative model, that, whenmatching is assortative and investments precede market competition, buyers' investmentsare constrained efficient while sellers marginally underinvest with respect to what wouldbe constrained efficient. However, the overall extent of this inefficiency may be large.Multiple equilibria may arise; one equilibrium is characterized by efficient matches butthere can be additional equilibria with coordination failures.

Full article: http://sticerd.lse.ac.uk/dps/te/te561.pdf

Sales and Collusion in a Market withStorage

Francesco Nava, Pasquale Schiraldi

TE/2011/549. July 2011.
Sales are a widespread and well-known phenomenon that has been documented in several product markets. Regularities in such periodic price reductions appear to suggest that the phenomenon cannot be entirely attributed to random variations in supply, demand, or the aggregate price level. Certain sales are traditional and so well publicized that it is difficult to justify them as devices to separate informed from uninformed consumers. This paper presents a model in which sellers want to reduce prices periodically in order to improve their ability to collude over time. In particular, the study shows that if buyers have heterogeneous storage technologies, periodic sales may facilitate collusion by magnifying intertemporal linking in consumers' decisions. The stability and the profitability of different sale strategies is then explored. The optimal sales discount and timing of sales are characterized. A trade-off between cartel size and aggregate profits arises.

Full article: http://sticerd.lse.ac.uk/dps/te/te549.pdf