Anthony Creane

Experimentation with heteroskedastic noise

ConclusionThe direction of information with respect to the choice variable can easily change under a general class of distributions. The implication is that, when information is a function of the choice variable, the result of a model may be an outcome of the structure of the uncertainty and not of the existence of uncertainty. Thus, incomplete information does not always have such a clear effect on an agents decision as previous models have suggested. If such results are key to the conclusions, then the structure of the model should be examined.The model presented here can be used to determine the relationship between information and the choice variable and to derive basic insights into the particular model being examined. It can also be used to eliminate the informational aspect of decisions so as to examine other aspects of a model, e.g., the incentive for information transmission (jamming) and other dynamic aspects (e.g., capital accumulation). Finally, the functional form of the unknown function as well as the error function are inportant in determining the direction of increased information, as the direction of increased noise can be the direction of experimentation.

Risk and Revelation: Changing the Value of Information

A different approach is introduced to determine the value of an information-sharing agreement: the measure of risk aversion/loving. This approach reveals the relationship between information-sharing models and the risk literature. It also allows uncertainty regarding the slope of a firms own demand function to be examined which previous work eschews. The results suggest that the incentive to reveal information is more prevalent than previously thought: firms prefer to commit to reveal private valued information in both quantity and price competition. This differs from previous work where the incentive to commit depended on the type of competition.

An informational externality in a competitive market

Abstract Consider a (new) competitive market with unknown demand. The market price generated by incumbents conveys information that firms, including potential entrants, use for future decisions. Yet the incumbents are not rewarded for their assistance, suggesting that an inefficiency can exist. It has been argued that greater entry generates more information about a new market and should be subsidized. A simple model of partial information and learning is developed, finding that an informational externality can exist in competitive markets, but there may be excessive entry. Free entry and a public price, conditions for competitive market efficiency, are conditions for inefficiency.

Endogenous Learning, Learning by Doing and Information Sharing

Using the work in experimentation, the author endogenizes the, until now, exogenous information in information sharing models. He finds that agreements to exchange information affect the value and production of information. With unknown cost, a learning-by-doing like effect also arises. These effects affect consumer welfare, the incentive to receive information, and the incentive to enter information sharing agreements. Information sharing contracts may have negative future effects on firms through decreased information production. However, the decreased information production has the current benefit of softening competition, which induces information sharing agreements under conditions contrary to previous results and vice versa. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Ignorance Is Bliss as Trade Policy

Consider domestic consumers that purchase from foreign firms. A presumption would be that consumers prefer being informed when quality is uncertain and exogenous. However, in a multifirm framework based on previous models, consumers can be worse off if they are informed of the quality. Further, in the Salop-circle model, consumers may prefer not learning even though expected high-quality output is greater with learning. Moreover, the possibility that consumers prefer uncertainty increases with the probability that products are of low quality. Essentially, the benefit of screening quality (better matching) can be less than its cost (higher prices from market segmentation). Copyright 1998 by Blackwell Publishing Ltd.

Choosing a Licensee from Heterogeneous Rivals

We examine a firm that can license its production technology to a rival when firms are heterogeneous in production costs. We show that a complete technology transfer from one firm to another always increases joint profit under weakly concave demand when at least three firms remain in the industry. A jointly profitable transfer may reduce social welfare, although a jointly profitable transfer from the most efficient firm always increases welfare. We also consider two auction games under complete information: a standard first-price auction and a menu auction by Bernheim and Whinston (1986). With natural refinement of equilibria, we show that the resulting licensees are ordered by degree of efficiency: menu auction, simple auction, and joint-profit-maximizing licensees, in (weakly) descending order.

INFORMATION SHARING IN UNION–FIRM RELATIONSHIPS*

Large firms often negotiate wage rates with labor unions. When they do, an ex ante agreement to share information should make it more likely that they will reach an agreement and capture the gains from trade. However, if the firm refuses to share information, the union may shade down its wage demand to increase the probability of acceptance. This reduction in the wage can increase the joint surplus of the agents and increase social welfare. As a result, there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information. Copyright

Endogenous Entry in Markets with Unobserved Quality

In markets for experience or credence goods adverse selection can drive out higher quality products and services. This negative implication of asymmetric information about product quality for trading and welfare, poses the question of how such markets first originate. We consider a market in which sellers make observable investment decisions to enter a market in which each sellers quality becomes private information. Entry has the tendency to lower prices, which may lead to adverse selection. The implied price collapse limits the amount of entry so that high prices are sustained in equilibrium, which results in above normal profits. The analysis suggests that rather than observing the canonical market collapse, markets with asymmetric information about product quality may instead be characterized by above normal profits even in markets with low measures of concentration and less entry than would be expected. (This abstract was borrowed from another version of this item.)

Foreign Direct Investment and Cost Uncertainty: Correlation and Learning Effects

We examine a foreign firms choice between exporting and foreign direct investment (FDI) under country-specific cost uncertainty. Unlike exporting, FDI exposes foreign and home firms to common shocks. This results in a correlation of strategies, harming the firms. However, the exposure to common shocks also benefits the firms by enabling them to learn each others cost realization. The net effect is negative, implying that country-specific cost uncertainty forms a barrier to FDI. The foreign firm, then, chooses exporting unless FDI gives it a substantial cost advantage. Therefore, when FDI actually occurs, the home firm is hurt but consumers always benefit.

The Unilateral Incentives for Technology Transfers: Predation By Proxy

Joint production between rival firms often entails knowledge transfers without direct compensation, leaving the question as to why more efficient firms would give their rivals such an advantage. We find that such transfers are credible mechanisms to make the market more competitive so as to deter entry or force exit. We determine that with free entry such transfers are profitable and further it is optimal to predate or deter every firm possible so that a market with many firms can become a duopoly. While consumers are harmed by such action, production efficiency increases sufficient to cause welfare to increase.