Dmitry Shapiro

Market Segmentation: The Role of Opaque Travel Agencies

This paper investigates the role of discount travel agencies such as Priceline and Hotwire in the market segmentation of the hotel and airline industries. These agencies conceal important characteristics of the offered services, such as hotel locations or flight schedules. We explicitly model this opaque feature and show that it enables service providers to price discriminate between those customers who are sensitive to service characteristics and those who are not. Service providers can profit from such discrimination despite the fact that the opaque feature virtually erases product differentiation and thus intensifies competition. The reason is that the intensified competition for less sensitive customers enables service providers to commit to a higher price for more sensitive customers, which leads to higher profits overall. This explains why airlines or hotels are willing to lose the advantage of product differentiation and offer services through discount travel agencies.

Level-k reasoning in a generalized beauty contest☆

We study how the predictive power of level-k models changes as we perturb the classical beauty contest setting along two dimensions: the strength of the coordination motive and the information symmetry. We use a variation of the Morris and Shin (2002) model as the unified framework for our study, and find that the predictive power of level-k models varies considerably along these two dimensions. Level-k models are successful in predicting subject behavior in settings with symmetric information and a strong coordination motive. Their predictive power weakens significantly when either private information is introduced or the importance of the coordination motive is decreased.

Profitability of the Name-Your-Own-Price Channel in the Case of Risk-Averse Buyers

In this paper, I study profitability of the name-your-own-price channel (NYOP) in the presence of risk-averse buyers. First, I provide conditions that guarantee that for the monopolistic seller the NYOP is more profitable than the posted price. Second, I consider a more competitive framework where buyers with rejected bids have access to an alternative option. I show that if under the posted-price scenario there are unserved customers with low valuations, then NYOP is more profitable than the posted price. Finally, I study whether adding the posted-price option to the NYOP will further increase the sellers profit and show that for the decreasing absolute risk-aversion utility and a monopolistic seller it does not. In the presence of an alternative option, the answer depends on whether buyers consider the posted-price option and the alternative option to be close substitutes or not. Adding the posted-price option will increase the profit in the former case and will not in the latter.

The Role of Utility Interdependence in Public Good Experiments

A popular approach to explain over-contribution in public good games is based on the assumption that people care (either positively or negatively) about the utility of other participants. Over-contribution then is an outcome of utility maximization where utility depends on subjects’ own payoffs as well as on the payoffs of other players. In this paper, I study to what extent this assumption of utility interdependence is responsible for over-contribution. I design three treatments where subjects’ decisions cannot affect opponents’ payoffs and thus utility interdependence cannot explain cooperative behavior. The main result is that while average contribution in these treatments is below the benchmark it nonetheless stays well above zero. Even when no one benefits from subjects’ generosity the average contributions are as high as one third of the endowment and are only 25% below those in the benchmark level. This suggests that utility interdependence is not the main factor responsible for over-contribution.

Microfinance and Dynamic Incentives

Dynamic incentives, where incentives to repay are generated by granting access to future loans, are one of the methodologies used by microfinance institutions (MFIs). In this paper, I present a model of dynamic incentives where lenders are uncertain over how much borrowers value future loans. Loan terms are determined endogenously, and loans become more favorable as the probability of default becomes lower. I show that in all equilibria but one all borrowers, including the most patient ones, eventually default. I then consider an extension where borrowers can take loans from several lenders, double-dipping. Qualitatively, properties of equilibria with and without double-dipping are similar. In absolute terms, when borrowers are credit-constrained double-dipping equilibrium loans have to be more favorable to outweigh increased gains from default.

Dividends as a signaling device and the disappearing dividend puzzle

In this paper we develop a generalization of the Baker and Wurgler (2012) signaling model where investors are loss-averse to dividend cuts. We apply our framework to study how a firms characteristics and managers incentives affect payout policy properties. In equilibrium firms with riskier earnings are less likely to pay dividends, however, those that pay, payout more. Similarly, firms whose managers have a higher share of stock options in their compensation package are less likely to pay positive dividends. There is a clientele effect. Investors’ preferences and choices affect the payout policy and two otherwise identical firms can greatly differ in how they pay dividends. Finally, we relate our models predictions to the disappearing dividend puzzle.

Evolution of heterogeneous beliefs and asset overvaluation

I analyze a model in which different agents have different non-rational expectations about the future price and cash flows of a risky asset. The beliefs in the society evolve according to a very general class of evolution functions that are monotone; that is if one type has increased its share in the population then all types with higher profit should also have increased their shares. I show that the price of the risky asset converges to the risk-neutral fundamental price even though all agents in the economy are risk-averse. The risky asset thus becomes overvalued as compared to the equilibrium with rational expectations. The overvaluation is a result of the evolution of beliefs and does not rely on such asymmetric assumptions as short-sale constraints or optimistic bias.

Natural Gas Networks Performance After Partial Deregulation:Five Quantitative Studies

This book offers the first set of quantitative analyses of the results of deregulation of the gas wellhead process coupled with partial deregulation of pipeline transportation and product storage. This complex process — which involves taking pipelines out of the field markets as product purchasers, and creating spot gas and pipeline space markets — has changed the nature and extent of services for gas at the burner tip, and the level as well as volatility of prices for these services. Using econometric tools of analysis, the authors concentrating on these changes uncover surprising findings in contrast to what regulatory reform was supposed to accomplish.