Carl Davidson

Incentives to Form Coalitions with Bertrand Competition

In this article we investigate the incentive to merge when firms that produce differentiated products engage in price competition. We demonstrate that mergers of any size are beneficial and are so increasingly: large mergers yield higher profits than smaller ones. This is in contrast to the result that mergers tend to be disadvantageous in quantity-setting games. This qualitative difference follows from the fact that reaction functions are typically upward sloping in price games but downward sloping in quantity games. Thus, the reaction of outsiders reinforces the initial price increase that results from the merger.

Long-Run Competition in Capacity, Short-Run Competition in Price, and the Cournot Model

In this article we investigate the nature of equilibrium in markets in which firms choose the scale of operation before they make pricing decisions. We analyze a duopoly model in which firms choose their capacities before engaging in Bertrand-like price competition. We demonstrate that the Cournot outcome is unlikely to emerge in such markets and that the equilibrium tends to be more competitive than the Cournot model would predict. In addition, our results indicate a tendency toward asymmetric firm sizes and price dispersion that results from the mixed strategies firms use in equilibrium.

Trade and search generated unemployment

We argue that trade economists should begin to seriously consider environments in which unemployment is carefully modeled. We introduce such a model, derive several results, and compare them to results derived in full employment models. We argue that some traditional results are probably too narrow (the determinants of comparative advantage) and that some results do not generalize to models with unemployment (the link between trade and income distribution for employed factors). We also show that in some important cases results do generalize (there is an extended Stolper-Samuelson Theorem that links trade to the distribution of income for searching factors) and that our model allows us to address issues that traditional models cannot handle (the impact of trade on unemployment and the welfare of the unemployed).

Multiunit Bargaining in Oligopolistic Industries

A model of wage determination in unionized oligopolistic industries is developed and used to compare the outcome of collective bargaining under two different bargaining structures-one in which the workers of each firm are represented by separate and independent unions (local bargaining) and one in which a national union represents all workers in the industry. In both cases, the bargaining problem has a unique outcome with industrywide bargaining resulting in higher wages. In addition, industrywide unions are inherently stable in that there are no incentives for independent unions to attempt to cheat on the collusive agreement.

Excess Capacity and Collusion

In this paper, the authors analyze a restricted class of equilibria in the dynamic model of J. P. Benoit and V. Krishna (1987) in which firms choose their scale of operation before engaging in a repeated game of price competition. Benoit and Krishna established that all firms carry excess capacity in all collusive equilibria. As the authors are interested in the relationship between excess capacity and collusion in price, they examine equilibria in which firms tacitly collude in price, but not in investment decisions. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The Structure of Simple General Equilibrium Models with Frictional Unemployment

We develop a two-sector general equilibrium model in which equilibrium unemployment arises endogenously because of trading frictions in the labor market of one sector. Externalities inherent in the search process lead to inefficient equilibria, and this has important implication for the basic structure of the economy. In particular, the relationship between factor rewards and commodity prices is fundamentally different from the analogous relationship in a frictionless economy. One implication is that the economys relative supply curve may be downward sloping, especially when the search sector is small. We also present several applications of the analysis.

R&D Subsidies and Economic Growth

We present an endogenous growth model in which some firms devote resources to developing higher-quality products (innovative RD imitative R&D subsidies actually lead to slower economic growth. A key assumption driving these conclusions is that R&D activities are subject to decreasing returns. When R&D activities are subject to constant returns, as is commonly assumed, the only equilibrium with both innovation and imitation is unstable.

Horizontal mergers and collusive behavior

Abstract In the Industrial Organization literature, it is generally felt that mergers hurt consumers; not only because of the increased industrial concentration they effect, but also because collusion becomes more likely. In this paper we show that, at least in one important case, this intuition is misguided. If a tacitly collusive agreement enforced by trigger strategies is not initially sustainable, mergers will tend to reduce the chance that it becomes sustainable in the future. This is so because the threat point implicit in the agreement becomes more favorable for outsiders.

International trade and labor markets : theory, evidence, and policy implications

Davidson and Matusz extend the traditional analysis of international trade to allow for labor markets characterized by workers whose labor-market experiences are punctuated by spells of involuntary unemployment. They demonstrate that such extensions are easily accomplished and that they provide valuable new insights that withstand empirical scrutiny. And perhaps most importantly, argue Davidson and Matusz, such models offer the appropriate venue in which to carry out policy analysis aimed at determining the best way to compensate those who suffer economic loss as a result of changing trade patterns.

Cartel stability and tariff policy

Abstract In this paper we investigate the effect that tariff policy has on the ability of firms to collude in oligopolistic industries. We find that small tariff rates lead to an industry structure more conducive to collusive behavior, while large tariff rates weaken cartels. There exists a critical tariff rate which has no effect on the cartels stability. This critical value is found to be a decreasing function of N , the number of firms in the industry, and N D N the proportion of firms that are domestic.