Byoung Heon Jun

Strategic incentives in dynamic duopoly

Abstract We compare steady states of open loop and locally stable Markov perfect equilibria (MPE) in a general symmetric differential game duopoly model with costs of adjustment. Strategic incentives at the MPE depend on whether an increase in the state variable of a firm hurts or helps the rival and on whether at the MPE there is intertemporal strategic substitutability or complementarity. A full characterization is provided in the linear-quadratic case. Then with price competition and costly production adjustment, static strategic complementarity turns into intertemporal strategic substitutability and the MPE steady-state outcome is more competitive than static Bertrand competition.

Licensing Process Innovations when Losers’ Messages Determine Royalty Rates

We consider a licensing mechanism for process innovations that awards a limited number of unrestricted licenses to those firms that report the highest cost reductions, combined with royalty licenses to others. Firmsʼ messages are dual signals of their cost reductions: the message of those who win an unrestricted license signals their cost reduction to rival firms, while losersʼ messages influence the royalty rate set by the innovator. We explain why a sufficiently high threshold level for awarding the unrestricted license is essential to induce truth-telling, show that the innovator generally benefits from the proposed mechanism, and derive conditions for implementability by a modified second-price auction.

Licensing a common value innovation when signaling strength may backfire

This paper reconsiders the licensing of a common value innovation to a downstream duopoly, assuming firms observe imperfect signals of the cost reduction induced by the innovation. The innovator adopts a direct revelation mechanism and awards an unrestricted license to the firm that reports the highest signal and a royalty contract to the other. Firms may signal strength to their rivals through exaggerated messages, which may however backfire, and give rise to higher royalty payments. We provide sufficient conditions for truthful implementation, and for the profitability of adding royalty contracts to what is otherwise a first-price license auction.

Learning and Convergence to a Full-Information Equilibrium are not Equivalent

Convergence to a full-information equilibrium (FIE) in the presence of persistent shocks and asymmetric information about an unknown payoff-relevant parameter θ is established in a classical infinite-horizon partial equilibrium linear model. It is found that, under the usual stability assumptions on the autoregressive process of shocks, convergence occurs at the rate n−1/2, where n is the number of rounds of trade, and that the asymptotic variance of the discrepancy of the full-information price and the market price is independent of the degree of autocorrelation of the shocks. This is so even though the speed of learning θ from prices becomes arbitrarily slow as autocorrelation approaches a unit root level. It follows then that learning the unknown parameter θ and convergence of the equilibrium process to the FIE are not equivalent. Moreover, allowing for non-stationary processes of shocks, the distinction takes a more stark form. Learning θ is neither necessary nor sufficient for convergence to the FIE. When the process of shocks has a unit root, convergence to the FIE occurs but θ can not be learned. When the process is sufficiently explosive and there is a positive mass of perfectly informed agents, θ is learned quickly but convergence to the FIE does not occur.

Anti-Limit Pricing

Extending Milgrom and Roberts (1982), we analyze an infinite horizon entry model where an incumbent may use its current price to signal its strength, in order to deter entry. In contrast with conventional limit pricing, we show the entry of weaker firms. We also provide necessary and sufficient conditions for this phenomenon to arise in equilibrium, in the benchmark cases that no second entry is profitable.

Optimal Licensing of Technology in the Face of (Asymmetric) Competition

We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we consider the standard case of one license and show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We also consider alternative mechanisms such as standard and more sophisticated menu license auctions, and design a dynamic mechanism that is more profitable. In a second step we allow the licensor to issue more than one license and introduce a globally optimal dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees’ payoff to the minimum level that they can assure themselves. That mechanism awards licenses to all firms and prescribes maximum permitted royalty rates together with positive fixed fees.

To Spy or Not to (Fire the) Spy: Impact and Stability of Spying Out Rivals' Play in Bertrand Competition

We analyze the effect of espionage on pricing in a Bertrand market with substitutes. We explain why incomplete information is essential for a robust espionage equilibrium. Yet, under incomplete information espionage is not always profitable (the second-mover advantage may vanish) and we provide sufficient conditions for profitable espionage. Moreover, while the spied at firm suffers from espionage if its cost is low, firing the spy, which is an option if the spy has been exposed, adversely affects beliefs and never pays. Unlike the literature on espionage in entry games that relies on mixed strategies and complete information, the introduction of incomplete information allows us to focus on pure strategies.

Auctions with imperfect commitment when the reserve may serve as a signal

If bidders are uncertain whether the auctioneer sticks to the announced reserve, some bidders respond by strategic non-participation, speculating that the auctioneer may revoke the reserve. However, the reserve inadvertently signals the auctioneer’s type, which drives a unique separating and a multitude of pooling equilibria. If one eliminates belief systems that violate the “intuitive criterion”, one obtains a unique equilibrium reserve price equal to the seller’s own valuation. Paradoxically, even if bidders initially believe that the auctioneer is bound by his reserve almost with certainty, commitment has no value.

The Role of Switching Hubs in Global Internet Traffic

In the recent decade, global backbone providers have emerged to link dispersed networks. Local networks obtain global connectivity through transit contracts with switching hubs. Using the Shapley value, the paper shows that the bargaining position of the local network depends upon the quality adjusted volume of net traffic, and that the rent to the hub depends on the volume of traffic between local networks. When there are two competing switching hubs, the larger hub can appropriate most of the rent. Anticipating this, the hubs tend to expand their capacity to preempt the market like in the prisonersi¯ dilemma.