Nikolaos Vettas

Entry auctions and strategic behavior under cross-market price constraints

Abstract We examine how universal service provisions and price restrictions across markets impact strategic entry and pricing. We develop a simple multi-market model with an oligopolistic (profitable) urban market and entry auctions for (unprofitable) rural service. Cross-market price restrictions induce a firm operating in both markets to become a ‘softer’ competitor, thus placing the firm at a strategic disadvantage. When we account for entry incentives and strategic bidding, the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits. Price restrictions may also put outside firms, even relatively inefficient ones, at a strategic advantage.

Investment Dynamics in Markets with Endogenous Demand

In several interesting markets, demand is an increasing function of past sales because of learning, network externalities or fashion. This paper examines entry into such markets. The two key elements of the model are that firms are uncertain about the demand (and learn in a Bayesian fashion) and that demand grows endogenously over time. The capacity expansion path of the competitive market is compared with the planning/monopoly solution. These paths differ not only with respect to levels (the markets investment is too low), but also with respect to their time patterns (externalities may lead to S-shaped diffusion). This framework provides some justification for industrial or trade policy arguments for subsidizing entry into new markets, especially for infant-export industries. The markets examined also exhibit path-dependence: small initial differences in demand conditions may lead either to an established market or a non-existing one.

Demand and Supply in New Markets: Diffusion with Bilateral Learning

I explore the endogenous joint evolution of demand and supply in new markets. Firms and consumers learn, in a Bayesian fashion, by observing the behavior of other firms and consumers, respectively. As a result, endogenous information diffusion takes place on both sides of the market. In equilibrium, entry occurs in waves and its level depends on two distinct informational effects. The model identifies an externality that provides a natural explanation for S-shaped diffusion paths: entry reveals information to the consumers about the value of the new product, and thus early waves of entry affect the expected profitability of subsequent entry.

Optimal dynamic pricing with inventories

Abstract We characterize optimal dynamic pricing by a monopolist with a finite stock of goods to sell. We show that the monopolist finds it optimal to charge a price that increases monotonically as his stock depletes.

Dynamic Price Competition with Capacity Constraints and a Strategic Buyer

We analyze a simple dynamic durable good model. Two incumbent sellers and potential entrants choose their capacities at the start of the game. We solve for equilibrium capacity choices and the (necessarily mixed) pricing strategies. In equilibrium, the buyer splits the order with positive probability to preserve competition, making it possible that a high and low price seller both have sales. Sellers command a rent above the value of unmet demand by the other seller. A buyer benefits from either a commitment not to make future purchases or by hiring an agent to always buy from the lowest priced seller.

On intrabrand and interbrand competition: The strategic role of fees and royalties

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. The main result is that, when we endogenize the number of downstream firms, each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss how allowing for contracts that involve both fees and per-unit payments dramatically alters the strategic incentives.

On entry, exit, and coordination with mixed strategies

A dynamic entry and exit game is studied, where, following Dixit and Shapiro (1986), firms play symmetric mixed strategies. Due to coordination considerations, the value of incumbency is increasing in the number of incumbent firms (up to the point where there is excess capacity). This feature of the problem complicates the study of a mixed strategy equilibrium, because the relevant payoffs are not monotonic functions of the randomization probabilities, as they are often implicitly assumed to be. It is shown that the payoff functions have an interesting dynamic structure, which allows the complete characterization of the equilibrium.

Location Choices under Quality Uncertainty

We examine a linear city duopoly where firms choose their locations to maximize expected profits, uncertain about how consumers will assess the relative quality of their products. Equilibrium locations depend on the ratio of the expected quality superiority to the strength of horizontal differentiation. When it is small, firms locate at opposite endpoints. As it becomes larger, agglomeration around the centre also emerges as an equilibrium and, eventually, agglomeration becomes the only equilibrium.

Leasing versus Selling and Firm Efficiency in Oligopoly

We examine sales and leasing of a durable good in an asymmetric duopoly. We find that inefficient firms tend to lease more. While the low cost firm sells more than the high cost firm, the high cost firm leases more. Further, an increase in unit costs implies a higher ratio of leased units to sales. This pattern is reversed when the unit cost decreases significantly over time.

Entry and Exit Under Demand Uncertainty

This paper presents a dynamic model of entry and exit in competitive markets with demand uncertainty and Bayesian learning. There is a unique equilibrium path characterized by a pair of simple zero-expected profit equations.