Guillermo Caruana

Search, Design and Market Structure

The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.

A Theory of Endogenous Commitment

Commitment is typically modelled by assigning to one of the players the ability to take an initial binding action. The weakness of this approach is that the fundamental question of who has the opportunity to commit cannot be addressed, as it is assumed. This paper presents a framework in which commitment power arises endogenously from the fundamentals of the model. We construct a finite dynamic game in which players are given the option to change their minds as often as they wish, but pay a switching cost if they do so. We show that for games with two players and two actions there is a unique subgame-perfect equilibrium with a simple structure. This equilibrium is independent of the order and timing of moves and is robust to other protocol specifications. Moreover, despite the perfect information nature of the model and the costly switches, strategic delays may arise in equilibrium. The flexibility of the model allows us to apply it to various environments. In particular, we study an entry deterrence situation. Its equilibrium is intuitive and illustrative of how commitment power is endogenously determined. Copyright 2008, Wiley-Blackwell.

Multilateral Bargaining with Concession Costs

This paper presents a new non-cooperative approach to multilateral bargaining. We consider a demand game with the following additional ingredients: (i) There is an exogenous deadline, by which bargaining has to end; (ii) Prior to the deadline, players may sequentially change their demands as often as they like; (iii) Changing ones demand is costly, and this cost increases as the deadline gets closer. The game has a unique subgame perfect equilibrium prediction in which agreement is reached immediately and switching costs are avoided. Moreover, this equilibrium is invariant to the particular order and timing in which players make demands. This is important, as multilateral bargaining models are sometimes too sensitive to these particular details. In our context, players with higher concession costs obtain higher shares of the pie; their increased bargaining power stems from their ability to credibly commit to a demand earlier. We discuss how the setup and assumptions are a reasonable description for certain real bargaining situations.

Information Gathering Externalities in Product Markets

Goods and services vary along a number of dimensions independently. Customers can choose to acquire information to assess the quality of some dimensions and not others. Their choices affect firms incentives to invest in quality and so lead to indirect externalities in consumers choices. We illustrate these ideas in a simple model with a monopolist selling a product with two characteristics, investment in quality with stochastic realizations, and heterogeneousconsumers. Consumers in choosing which information to acquire do not consider the effects on firm investment incentives and so there are indirect externalities in information gathering. Therefore, a fall in the cost of acquiring information, by changing the pattern of consumers information gathering and thereby firm investment, can paradoxically reduce consumer surplus, profits, and welfare. We briefly consider a number of potential extensions and in particular, highlight a benefit of diversity in tastes.