Daniel F. Spulber

Menu Costs and the Neutrality of Money

A model of endogenous price adjustment under money growth is presented. Firms follow (s, S) pricing policies and price revisions are imperfectly synchronized. In the aggregate, price stickiness disappears and money is neutral. The connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated. The results contrast with those obtained in models with exogenous fixed timing of price adjustment.

Managing procurement auctions

Three mechanisms are considered that extend the standard fixed quantity auction: (I) sole sourcing with output chosen in advance by a buyer with downward-sloping demand; (II) sole sourcing with an output schedule based on revelation of cost parameters; and (III) multiple sourcing with output allocation across suppliers based on revelation of cost parameters. Procedures are characterized for the sole sourcing and multiple sourcing problems that implement the buyers optimal mechanism.

Market Making by Price-Setting Firms

A model of market making by firms with heterogeneous consumers, suppliers and price-setting intermediaries is examined. Consumers and suppliers engage in time-consuming search for the best price and discount future returns. There exists a unique symmetric equilibrium pricing strategy. In equilibrium, there are non-degenerate distributions of ask and bid prices that straddle the Walrasian price. As the discount rate goes to zero, the ranges of the bid and ask prices, and the total output approach the Walrasian equilibrium values. As the discount rate becomes large, the ask and bid prices approach the monopoly pricing policies. An increase in the discount rate leads to an increase in the equilibrium number of active firms, profit per firm, the mean spread between ask and bid prices, and the variance of ask and bid prices, while lowering the number of active consumers and suppliers. The model is extended to examine the steady-state market equilibrium with continual entry and exit of consumers and suppliers.

The Capital Structure of a Regulated Firm

We examine the equilibrium price, investment, and capital structure of a regulated firm using a sequential model of regulation. We show that the firms capital structure has a significant effect on the regulated price. Consequently, the firm chooses its equity and debt strategically to affect the outcome of the regulatory process. In equilibrium, the firm issues a positive amount of debt and the likelihood of bankruptcy is positive. Debt raises the regulated price, thus mitigating regulatory opportunism. However, underinvestment due to lack of regulatory commitment to prices persists in equilibrium.

Antitrust Enforcement under Asymmetric Information

Optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting. The antitrust authority does not know cartel costs and so cannot distinguish between a high-cost competitive industry and a low-cost cartel. The problem differs from principal-agent models since firms can choose competitive or collusive behavior. With costly enforcement, the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price. Collusive firms moderate markups to reduce the risk of being prosecuted. Copyright 1989 by Royal Economic Society.

The Fable of Fisher Body

General Motorss (GMs) acquisition of Fisher Body is the classic example of market failure in the literature on contracts and the theory of the firm. According to the standard account, in 1926 GM merged vertically with Fisher Body, a maker of auto bodies, because of concerns over transaction‐specific investment and contractual holdup. That account exhibits errors of historical fact and interpretation. General Motors acquired a 60 percent interest in Fisher Body in 1919. Moreover, the contractual arrangements and working relationship prior to the 1926 merger exhibited trust rather than opportunism. Fisher Bodys production technology did not exhibit asset specificity. The merger reflected economic considerations specific to that time, not some immutable market failure. We demonstrate that vertical integration was directed at improving coordination of production and inventories, assuring GM of adequate supplies of auto bodies, and providing GM with access to the executive talents of the Fisher brothers.

Optimal environmental regulation under asymmetric information

Abstract A market model of environmental regulation with interdependent production and pollution abatement costs and heterogeneous firms is developed. Firms have private information about costs which have a quadratic form. Firms pursue Bayes–Nash strategies in communication with the regulator. The full information optimum cannot be attained unless gains from trade in the product market net of external damages exceed the information rents earned by firms. Aggregate output and externality levels are lower at the regulated equilibrium than at the full information social optimum.

Open Access and the Evolution of the U.S. Spot Market for Natural Gas

Federal regulations promoting open-access transportation dramatically altered the organizational structure of the U.S. market for natural gas in the 1980s, generally unbundling the merchant and transport functions of interstate pipelines. An empirical analysis of wellhead spot prices is undertaken to examine the effect of open access on the geographic scope of the spot market. Using monthly spot price data from 1984-91, three statistical tests are applied and compared: price correlations, Granger causality, and cointegration. We find that open access integrated the regional wellhead markets into a national competitive market for natural gas. The effects of unbundling on contracts for natural gas are then investigated. Incentives for long-term contracts between pipelines and producers are shown to be effectively removed by the introduction of competitive buying and selling of gas at the wellhead through open access.

Capital Structure with Countervailing Incentives

The regulated firms choice of capital structure is affected by countervailing incentives: the firm wishes to signal high value to capital markets to boost its market value while also signalling high cost to regulators to induce rate increases. When the firms investment is large, countervailing incentives lead both high- and low-cost firms to choose the same capital structure in equilibrium, thus decoupling capital structure from private information. When investment is small or medium-sized, the model may admit separating equilibria in which high-cost firms issue greater equity and low-cost firms rely more on debt financing.

Sequential-equilibrium investment by regulated firms

We examine the investment decisions of regulated firms in a sequential-equilibrium model under asymmetric information. The regulator is unable to commit to a pricing policy, unlike mechanism-design models, but sets rates after observing the firms investment. The information conveyed by the firms investment level alleviates the underinvestment observed under full information with limited regulatory commitment. The equilibrium regulatory strategy can be characterized by a nonlinear rate-of-return schedule. A regulator announcing such a schedule would be able to make a credible commitment.