2011 - Working Papers: Strategy, Innovation and Entrepreneurship

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Motivating a Supplier to Test Product Quality, 29 pp.
Y. Yehezkel
(Working Paper No. 5/2011)

This paper considers a mechanism design problem in which a buyer motivates a supplier to test whether the quality of its new product is drawn from a high-quality or a low-quality distribution function. The model reveals that the equilibrium contract involves upward or downward distortion in the quantity. In particular, the model identifies conditions under which there is: 1) downward distortion; 2) downward (upward) distortion for low (high) quality; 3) upward (downward) distortion for low (high) quality.

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Platform Competition under Asymmetric Information, 50 pp.
H. Halaburda and Y. Yehezkel
(Working Paper No. 6/2011)

In the context of platform competition in a two-sided market, we study how uncertainty and asymmetric information concerning the success of a new technology affects the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant.  However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead in a market failure: Competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, the model provides a compelling argument why it is usually entrants, not incumbents, that bring major technological innovations to the market. Second, we consider multi-homing. We find that the incumbent dominates the market and earns higher profit under multi-homing than under single-homing. Multi-homing solves the market failure resulting from asymmetric information in that the incumbent can motivate the two sides to trade for the first-best quantity even if the difference in the degree of asymmetric information between the two sides is narrow.

 

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Investment and capital structure of partially private regulated firms, 37 pp.
C. Cambini and Y. Spiegel
(Working Paper No. 14/2011)

We develop a model that examines the capital structure and investment decisions of regulated firms in a setting that incorporates two key institutional features of the public utilities sector in many countries: firms are partially owned by the state and regulators are not necessarily independent. Among other things, we show that firms invest more, issue more debt, and are allowed to charge higher prices when they are more privatized and when the regulator is more independent and more pro-firm.

 

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Slotting allowances and information gathering, 35 pp.
Y. Yehezkel
(Working Paper No. 20/2011)

This paper considers a retailer that needs to motivate a manufacturer to gather information concerning the demand for its new product. The information will be of value to the retailer, in deciding whether to allocate limited shelf space for the new product. The model reveals that if the retailer cannot observe whether the manufacturer has gathered information, then to motivate the manufacturer to do so, the retailer will charge slotting allowances and distort the quantity downwards in comparison with the full information levels. Slotting allowances may increase or decrease social welfare, depending on the parameters of the model.

 

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