Research in Economics
We consider an oligopolistic market where firms compete in price and quality and where consumers have heterogeneous information: some consumers know both the prices, and quality of the products offered, some know only the prices, and some know neither. We show that if there are sufficiently many uninformed consumers, then there exists a unique equilibrium where price is a perfect indicator of quality. This equilibrium is characterized by dispersion and Pareto-inefficiency of the price/quality offers, where better price/quality combinations are associated with lower prices.
Reduced credit supply in the years 2008-2009 should have resulted in lower growth in industries that are more dependent on external finance. This effect should have been stronger in countries with a more fragile financial system. We focus on the OECD countries and, controlling for omitted variables, find robust empirical support for both hypotheses. We further estimate that the credit crunch contributed at least a 2.9% decline to the industrial growth in the year 2008, and at least an 8.2% in the year 2009.
We study incentives of banks to reserve liquidity given that they can rely on the interbank market to mitigate their liquidity shocks. Banks can partially pledge their assets to each other, but not to the rest of the economy. Therefore liquidity provision is endogenous. Banks experience liquidity shocks when there is a crisis. We show that if the probability of a crisis is large or if assets are slightly pledgeable, then all banks reserve liquidity. However, if the probability of a crisis is small or if assets are highly pledgeable, then banks segregate ex ante: some reserve no liquidity, others reserve to the maximum and become liquidity providers. Minimum liquidity requirements improve banks' profits, but only in the symmetric equilibrium. A marginal central bank intervention aimed at lowering the interest rate causes a marginal crowding-out of private liquidity with public liquidity in the symmetric equilibrium, and a full crowding-out in the asymmetric equilibrium.
Revise and resubmit to Games and Economic Behavior.
We consider a dynamic competition game among three players, where each player can vary the extent of his competition on a per-rival basis. We call such competition targeted. We show that if the players are myopic, the weaker players eventually lose the game to their strongest rival. If instead the players are sufficiently far-sighted, then all three players converge in their power and stay in the game. We develop our model in application to drug wars, but the approach of targeted competition can be applied to competition between firms or political parties, or to warfare.
This paper focuses on industries, where patent protection is weak and innovations are commonly protected as trade secrets. It is shown that if potential innovations are major, but the chances of achieving a successful innovation are small, then Cournot duopolists prefer to keep their innovations trade secrets. Otherwise, if potential innovations are minor or the chances of success are large, the duopolists prefer to form a research joint venture.
There are two multiproduct firms that compete in prices. Each firm can assume either a functional structure, thus committing to centralized pricing, or it can assume a divisional structure, thus committing to decentralized pricing. Decentralized pricing, while suboptimal per se, is shown to be profitable if every firm produces a range of complementary products and if the products of one firm are strong substitutes to the products of the other firm. Broadly speaking, product differentiation matters for organizational choices.
If a consumer faces two products of the same kind but different in their prices and quality, which one does he choose? I show that if firms compete in both prices and quality, and if there are some consumers on the market who do not search for the best offer, then the competition is always such that it is best for a consumer to buy the cheapest product. In an equilibrium the quality will either grow with price but not sufficiently, or it will fall with price. The result holds for a wide class of consumers' preferences.
Taking the current wealth as a reference point and differentiating between gains and losses helps in explaining the choices people make (Markowitz, Kahneman and Tversky). However, this approach violates asset integration and does not explain why people tend to differentiate between gains and losses in the first place. The classical expected utility approach is theoretically more sound but fails descriptively. In this work I analyse a setting when there are extra transaction costs associated with losses. I show that expected utility with such transaction costs is equivalent to differentiation between gains and losses around a reference point without such transaction costs. Hence, depending upon whether transaction costs are accounted for or not, one or the other approach will seem suitable to explain individual choice.
In this paper I address the problem of pricing options in the presence of transaction costs. A known approach to this problem is a so-called superhedging approach. I suggest an idea of hedging sets and, based on it, a new algorithm to implement the superhedging approach. As far as I know, only European options were discussed in the literature on pricing derivatives when there are transaction costs. The proposed algorithm, however, can be applied to price American options as well. It is also more efficient compared with the previous methods. Examples of using the new algorithm to price European and American options when there are transaction costs are provided.