Marco A. Haan

ADVERTISING FOR ATTENTION IN A CONSUMER SEARCH MODEL

We model the idea that when consumers search for products, they first visit the firm whose advertising is more salient. The gains a firm derives from being visited early increase in search costs, so equilibrium advertising increases as search costs rise. This may result in lower firm profits when search costs increase. We extend the basic model by allowing for firm heterogeneity in advertising costs. Firms whose advertising is more salient and therefore raise attention more easily charge lower prices in equilibrium and obtain higher profits. As advertising cost asymmetries increase, aggregate profits increase, advertising falls and welfare increases.

Vaporware as a Means of Entry Deterrence

Firms in the computer industry are often accused of vaporware, the untruthful pre-announcement of a new version of their product. By claiming they have a new product, critics argue, these firms try to deter potential entrants. The paper analyzes this phenomenon. It shows that vaporware is an equilibrium strategy in a signaling game in which the possibility to market a new product is private information. In this model, the possibility of vaporware can hurt consumers, also in the case the incumbent does have a new version of its product. The welfare effects of vaporware are ambiguous.

How majorities can lose the election - Another voting paradox

Abstract. We show that due to free riding of potential voters facing positive voting costs, the proposal with the highest number of supporters can still be the most likely to lose a binary election.

License auctions when winning bids are financed through debt

We study an auction where two licenses to operate on a new market are sold, and winning bidders finance their bids on the debt market. Higher bids imply higher debts, which affects product market competition. We compare our results to those of a beauty contest and a standard auction. For the case that debt induces firms to compete more aggressively, we find that consumer prices are lower, and expected firm profits are strictly positive although firms are a priori identical. When debt induces firms to compete less aggressively, we find that firms make zero profits, and consumer prices are higher.

The Weakest Link - A Field Experiment in Rational Decision Making

We analyze the BBC TV game show “The Weakest Link”, using data from 77 episodes, covering 13,380 questions. We focus on the banking decision, where a contestant chooses to secure an amount of money for the eventual winner, or to risk it on a general knowledge question. In the latter case, should he answer correctly, the amount at stake increases exponentially. We show that banking decisions are not rational: a crude rule of thumb performs substantially better than the contestants’ strategies. Yet, at least to some extent, contestants do take into account their own ability and the fact that questions are progressively more difficult.

The Effects of Institutional Change in European Soccer

Summary The last decades have seen two profound changes in European soccer. First, international trade in talent has increased markedly. Second, international competitions such as the Champions League have become much more important. Using a theoretical model, we study how these changes affect competitive balance within national competitions, and quality differences between national competitions. Introducing international trade in talent leads to a flow to large countries, as the returns to talent are higher there. Wages increase in small countries, but decrease in large ones. The wage increase in small countries hurts small teams more than large ones. Therefore, competitive balance decreases. The wage decrease in large countries benefits small teams more, so competitive balance increases. The introduction of a Champions League implies the possibility to win a large amount of prize money. This is relatively more important for small teams. Hence, competitive balance increases in all countries, and talent flows from large to small countries, provided international trade is possible. Wages increase. When looking at both changes combined, we find that talent flows from small to large countries. Hence, in this sense, the trade effect dominates the Champions League effect. Competitive balance increases in all but the very smallest countries.

Punching above One's Weight: The Case against Election Campaigns

Politicians differ in their ability to implement some policy. In an election, candidates make commitments regarding the plans they will try to implement if elected. These serve as a signal of true ability. In equilibrium, candidates make overambitious promises. The candidate with the highest ability wins. Yet, the electorate may be better off having a random candidate implement her best plan, rather than seeing the winner implementing an overambitious plan. This is more likely if the ability distribution is skewed toward high values, the number of candidates is high, with private benefits from being elected, or if parties select candidates.

CARTEL PROHIBITION MAY INCREASE PRICES

In this paper, we show that a policy that forbids cartels may benefit dominant firms, and hurt consumers. When cartels are prohibited, an incumbent monopolist can commit not to form a cartel should a new entrant enter the market. This reduces the entry threat, which implies that entry occurs less often, and the incumbent monopolist is less likely to set a limit price.