Helmut Bester

Contracting with Imperfect Commitment and the Revelation Principle: The Single Agent Case

This paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism. We show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent. In contrast with the conventional revelation principle, however, the agent may not use this strategy with probability one. Our results apply to contracting problems between a principal and a single agent. By reducing such problems to well-defined programming problems they provide a basic tool for studying imperfect commitment.

The incentives for cost reduction in a differentiated industry

Abstract This paper investigates how the incentives for cost reduction in a differentiated industry depend upon the degree of product substitutability. When goods are imperfect substitutes, both Cournot and Bertrand competition result in underinvestment in the sense that a social planner would be willing to pay more for a given cost reduction than a profit-maximizing firm. Overinvestment may occur when the goods are sufficiently close substitutes. Similarly, Cournot competition provides a stronger incentive to innovate than Bertrand competition if the degree of substitutability is low, and a weaker incentive if this degree is high.

Easy Targets and the Timing of Conflict

Contestants have to choose whether to initiate a contest or war, or whether to remain peaceful for another period. We find that agents wait and initiate the contest once their rival is sufficiently weak to be an easy target.

Coupons and oligopolistic price discrimination

Abstract This paper studies sales promotion through coupons in a duopolistic market. Sending out coupons allows the sellers to separate market segments with different degrees of consumer brand loyalty. This kind of price discrimination is profitable for the individual seller when the cost of couponing is sufficiently low. In equilibrium, however, couponing increases competition and reduces profits. An increase in the cost of couponing decreases consumer surplus while the impact on profits and social surplus is ambiguous.

Moral Hazard and Equilibrium Credit Rationing: An Overview of the Issues

One of the more intriguing puzzles in microeconomics is presented by the phenomenon of credit rationing. If funds are so scarce as to require rationing, why do lenders not raise the interest that they demand? We survey recent developments that seek to explain this phenomenon by appealing to incentive problems in the relation between the borrower and the lender. A simple example, due to Stiglitz and Weiss, shows that under certain circumstances, lenders will not use their bargaining power to raise interest rates because the adverse incentive effects of such a move outweigh any direct effect on the lender’s payoffs. To examine the robustness of this argument, we discuss how the analysis is affected by the use of collateral, variations in loan size and investment, or alternative forms of the finance contract. Finally, we analyse the relation between the credit-rationing problem and the general theory of optimal incentive schemes under imperfect information.

Price competition and advertising in oligopoly

Abstract This paper studies price advertising in an oligopoly market where consumers have only local price information. Sellers may attract consumers from other locations by advertising their price. With positive probability they advertise a low price to attract customers from distant locations; with the remaining probability they post a high price and serve only local customers. The random advertising equilibrium approaches the equilibrium under perfect price information when the cost of advertising becomes small.

Price commitment in search markets

Abstract This paper studies the formation of pricing rules in search markets. At a cost, each seller can commit himself to a fixed price. If he takes no actions to preclude haggling, his sales price is determined through bilateral negotiations with the buyer. The selection of pricing rules exhibits strategic complementarities that may give rise to multiple equilibria. Differences in trading practices across countries and cultures may thus be consistent with equilibrium behavior. In bazaar markets, where the buyers cost of switching sellers is relatively low, most of the trade is conducted via bargaining and prices are close to the perfectly competitive outcome.

Contracting with imperfect commitment and noisy communication

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004This paper provides an analytical framework for studying principal-agent problems with adverse selection and limited commitment. By allowing the principal to use noisy communication we solve two fundamental problems of contracting with imperfect commitment: First, we identify the relevant incentive constraints by showing that only ‘local’ constraints are binding if the agent’s preferences satisfy a single–crossing property. Second, we show that one can restrict the dimensionality of the message spaces of the communication device to the number of the agent’s types. As we illustrate in an example, these findings allow us to derive the optimal contract by a similar procedure as in contracting problems with full commitment.

Imperfect commitment and the revelation principle: the multi-agent case

Abstract We consider mechanism design problems with n agents when the mechanism designer cannot fully commit to an allocation function. With a single agent (n=1) optimal mechanisms can always be represented by direct mechanisms, under which each agent’s message set is the set of his possible types [Bester, H., Strausz, R., 2000. Contracting with imperfect commitment and the revelation principle: the single agent case. Free University of Berlin, mimeo]. We show that this result does not hold if n≥2. That is, in mechanism design problems with multiple agents the use of direct mechanisms may be suboptimal.

Noncooperative Bargaining and Spatial Competition

The article develops a bargaining model of spatial competition. Sellers compete by choosing locations in a market region. Consumers face a cost to moving from one place to another. The price of the good is determined as the perfect equilibrium of a bargaining game between seller and buyer. In this game, the buyer has the outside option to move to another seller and so the prices at all stores are interdependent. Existence of a location-price equilibrium is established. The outcome approaches the perfectly-competitive one if the consumers cost of traveling becomes negligible or if the number of sellers tends to infinity. Copyright 1989 by The Econometric Society.