Cédric Argenton

Robustness to Strategic Uncertainty

We introduce a criterion for robustness to strategic uncertainty in games with continuum strategy sets. We model a players uncertainty about another players strategy as an atomless probability distribution over that players strategy set. We call a strategy profile robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence of strategy profiles in which every players strategy is optimal under his or her uncertainty about the others. When payoff functions are continuous we show that our criterion is a refinement of Nash equilibrium and we also give sufficient conditions for existence of a robust strategy profile. In addition, we apply the criterion to Bertrand games with convex costs, a class of games with discontinuous payoff functions and a continuum of Nash equilibria. We show that it then selects a unique Nash equilibrium, in agreement with some recent experimental findings.

EXCLUSIVE QUALITY -super-*

In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbents inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbents monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs.

Collusion in Experimental Bertrand Duopolies with Convex Costs: The Role of Information and Cost Asymmetry

We report the results of a series of experimental Bertrand duopolies where firms have convex costs. Theoretically these duopolies are characterized by a multiplicity of Nash equilibria. Using a 2x2 design, we analyze price choices in symmetric and asymmetric markets under 2 information conditions: complete versus incomplete information about profits. We find that information has no effect in symmetric markets with respect to market prices and the time it takes for markets to stabilize. However, in asymmetric markets, complete information leads to higher average market prices and quicker convergence of price choices.

Exclusivity Contracts, Insurance and Financial Market Foreclosure†

We study the trade-off between the positive effects (risk-sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton [1987] under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival into the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk-sharing without distorting product market outcomes. Thus, risk-sharing alone cannot be invoked to defend exclusivity contracts.

Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance

We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.

Robustness to strategic uncertainty in the Nash demand game

This paper studies the role of strategic uncertainty in the Nash demand game. A player’s uncertainty about another player’s strategy is modeled as an atomless probability distribution over that player’s strategy set. A strategy profile is robust to strategic uncertainty if it is the limit, as uncertainty vanishes, of some sequence of strategy profiles in which every player’s strategy is optimal under his or her uncertainty about the others (Andersson et al., 2014). In the context of the Nash demand game, we show that robustness to symmetric (asymmetric) strategic uncertainty singles out the (generalized) Nash bargaining solution. The least uncertain party obtains the bigger share.

Exclusion as Inefficient Insurance

It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts.