Abraham L. Wickelgren

A Critical Analysis of Critical Loss Analysis

Critical loss analysis is often used to argue that firms with large margins have more to lose from a reduction in sales and hence are less likely to increase prices. This argument ignores the fact that profit-maximizing competitors who do not coordinate their pricing only have large margins if their customers are not very price sensitive. In this paper, we explore the implications of critical loss analysis using an internally consistent model of oligopoly. We show that, under the assumptions made in the standard critical loss analysis, firms with larger pre-merger margins are more likely to raise prices than are firms with smaller margins, other things equal. This reinforces the traditional view that mergers are more likely to harm consumers when the merging firms have greater market power, as measured by their margins. We also derive internally consistent formulas for evaluating the profitability of price increases when defining markets and evaluating unilateral effects.

Ideological Persuasion in the Media

Media outlet owners can modify their outlets content so as to persuade audiences to adopt positions consistent with their preferred ideologies. In this paper, we assume that outlet owners value such persuasion, and therefore will engage in it at the cost of some reduction in profits. We compare the level and diversity of persuasion that occur under two regimes: one in which common ownership of media outlets is prohibited and the other in which it is permitted. We show that mergers between outlets whose owners have identical ideologies increase the level of persuasion, and mergers between outlets whose owners have different ideologies can increase or decrease the level of persuasion. We also show that unrestricted market competition does not necessarily generate diversity, that prohibiting monopoly control over the media does not guarantee diversity, and that, while rules prohibiting monopolization can sometimes promote diversity, in some circumstances these rules can also reduce diversity. This can occur because potential owners care about who will acquire an outlet if they do not.

Economic epidemiology of avian influenza on smallholder poultry farms

Highly pathogenic avian influenza (HPAI) is often controlled through culling of poultry. Compensating farmers for culled chickens or ducks facilitates effective culling and control of HPAI. However, ensuing price shifts can create incentives that alter the disease dynamics of HPAI. Farmers control certain aspects of the dynamics by setting a farm size, implementing infection control measures, and determining the age at which poultry are sent to market. Their decisions can be influenced by the market price of poultry which can, in turn, be set by policy makers during an HPAI outbreak. Here, we integrate these economic considerations into an epidemiological model in which epidemiological parameters are determined by an outside agent (the farmer) to maximize profit from poultry sales. Our model exhibits a diversity of behaviors which are sensitive to (i) the ability to identify infected poultry, (ii) the average price of infected poultry, (iii) the basic reproductive number of avian influenza, (iv) the effect of culling on the market price of poultry, (v) the effect of market price on farm size, and (vi) the effect of poultry density on disease transmission. We find that under certain market and epidemiological conditions, culling can increase farm size and the total number of HPAI infections. Our model helps to inform the optimization of public health outcomes that best weigh the balance between public health risk and beneficial economic outcomes for farmers.

Advantage Defendant: Why Sinking Litigation Costs Makes Negative‐Expected‐Value Defenses but Not Negative‐Expected‐Value Suits Credible

We revisit Lucian Bebchuk’s 1996 claim that plaintiffs can use the sequential nature of litigation to extract a positive settlement from a negative‐expected‐value suit. We make three claims. First, this result is heavily dependent on the specific bargaining game he uses. Second, in an alternating‐offer bargaining game, the outside‐option principle demonstrates that this cost‐sinking strategy will not allow a negative‐expected‐value plaintiff to extract a positive settlement offer. Third, this cost‐sinking strategy, however, can be effective for a defendant using a negative‐expected‐value defense.

The Use Of Exclusive Contracts To Deter Entry

This paper shows that an upstream monopolist that sells to competing downstream firms can profitably use exclusive contracts to deter entry even where scale economies are absent. The incumbent monopolist can often place each downstream firm in a prisoners dilemma by offering downstream firms a discount if they sign an exclusive contract covering later periods. Because a downstream firm that refuses to sign the exclusive contract loses profit in the initial period to downstream firms that sign the exclusive contract, downstream firms will sign exclusive contracts even when, over the longer-term, they would obtain the upstream good at a lower price if they all refused to sign.

Anticompetitive Market Division through Loyalty Discounts without Buyer Commitment

We show that loyalty discounts without buyer commitment create an externality among buyers because each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. This externality can enable an incumbent to use loyalty discounts to effectively divide the market with its rival and raise prices. We prove that, provided the entrants cost advantage is not too large, with enough buyers, this externality implies that in any equilibrium some buyers sign loyalty discount contracts, segmenting the market and reducing consumer welfare and total welfare. These propositions are true even if the buyers coordinate, the entrant is more efficient, the loyalty discounts cover less than half the market, and all the loyalty discounts are above cost. We also prove that these propositions hold even if we assume no economies of scale, no downstream competition, no buyer switching costs, no financial constraints, no limits on rival expandability, and no intraproduct bundle of contestable and incontestable demand.

Robust Exclusion through Loyalty Discounts with Buyer Commitment

We show that loyalty discounts with buyer commitments create anticompetitive effects beyond those possible with pure exclusive dealing. The loyalty discount adds a seller commitment to maintain a distinction between the loyal and disloyal price. This seller commitment reduces the sellers incentives to compete for free buyers because the loyalty discount means that lowering prices to free buyers requires lowering prices to committed buyers. This softened seller competition reduces the rivals incentive to lower its own prices to free buyers. The result is inflated prices to free buyers, which in turn inflates prices to committed buyers because they are priced at a loyalty discount from those free buyer prices. Because each buyer who signs a loyalty discount contract thus softens competition and raises prices for all buyers, the result is to create an externality among buyers even without economies of scale or downstream competition. If enough buyers exist and the entrants cost advantage is not too large, we prove that this externality means that: (1) in any equilibrium, enough buyers sign loyalty discount contracts to anticompetitively increase prices; and (2) there always exists a possible equilibrium in which all buyers sign, completely foreclosing a more efficient rival. As a result, the incumbent can use loyalty discounts to increase its profit and decrease both buyer and total welfare.

The effect of exit on entry deterrence strategies

Recent analyses of entry deterrence strategies have required an incumbents post-entry output or pricing strategy to be profit maximizing. However, most papers have continued to assume that either an incumbent can commit not to exit after entry or that exit is never optimal. When there are avoidable fixed costs of operating in any period, however, exit can be the optimal strategy. In this situation, entry deterrence strategies operate very differently than when exit is never optimal. In fact, the possibility of exit can make some, previously effective, strategies completely ineffective while improving the effectiveness of others.

A Model of Welfare-Reducing Settlement

Abstract While it is typically taken for granted that settlement of lawsuits increases social welfare, this paper shows that settlement can lower welfare. If the defendant has private information about the harm from his action both at the time of the action and the time of settlement bargaining, then defendants who cause different levels of harm can pay the same settlement amount in a partial pooling equilibrium. Settlement acts as a damage cap, preventing the defendants liability from increasing with the harm over the full range of possible harms, leading to under-deterrence. This result holds even though the social planner can choose the socially optimal damage rule.

Moral Hazard and Renegotiation: Multi-Period Robustness

Is the second best outcome of static agency models renegotiation proof? In models with one period of renegotiation, Fudenberg and Tirole (1990) answer no when the principal makes the offer, while Ma (1994) and Matthews (1995) answer yes when the agent makes the offer. This paper analyzes the robustness of these two claims when there are more periods of renegotiation. With a known number of periods, if the principal makes at least one offer, even if the agent makes the offer in every other period, the equilibrium is identical to Fudenberg and Tirole equilibrium. With an uncertain number of periods, the agency problem is even more severe than in the Fudenberg and Tirole model.