Peter Linhart

Equilibria of the Sealed- Bid Mechanism for Bargaining with Incomplete Information*, '

We study the Nash equilibria of the sealed-bid bargaining mechanism with incomplete information, a nonzero-sum game. For the case of uniform priors, we describe two uncountably numerous families of equilibria: the first has differentiable strategies; in the second the strategies are step-functions. The efficiencies of these equilibria range from “second best” to zero. For independent nonuniform priors, we show that a similar situation obtains. These results seem discouraging with regard to using the sealed-bid mechanism in practice. The mechanism might be salvaged, however, if bargainers turn out to confine themselves to linear-strategy equilibria.

Minimax-regret strategies for bargaining over several variables

For the sealed-bid mechanism for bilateral bargaining, we explore models in which each player bids so as to minimize his maximum regret. Here regret is defined as the difference between the profit the player could have made with the wisdom of hindsight and the profit he actually made. We study bargaining over both price and quantity, as well as over more general sets of bargaining alternatives, with complete and incomplete information. In each case there is a minimax-regret strategy that is linear in the true value or cost, and the minimax regret is not “unacceptably” large. Journal qf Economic Literature Classification Numbers: 022. 026.

The allocation of value for jointly provided services

Caller I.D. service, whereby the telephone number of the calling party is visually displayed to the called party during ringing, is now available in some areas of the U.S., but it is restricted to calls within a local calling area, and for which the calling and called party are customers of the same local telephone company. If Caller I.D. service is extended nationwide, identification of a long-distance call will, in a typical case, require the participation of three companies: the local exchange carrier originating the call, the long-distance carrier, and the local exchange carrier terminating the call. How shall the revenues from the service be divided among the participating firms? We apply cooperative game theory to address this question.

Introduction: Symposium on Noncooperative Bargaining

This Symposium includes 12 models of bargaining. Each of the following characteristics is shared by most of them: (1) bargaining is noncooperative within a set of rules governing the process of negotiation (the “Nash Program”); (2) bargaining is bilateral; (3) some or all of the traders are incompletely informed. The authors explore the existence, multiplicity, and efficiency of equilibria and the plausibility of equilibria as descriptions of observed behavior. In addition, some authors discuss the effects of nonbinding preplay communication (“cheap talk”), the effects of increasing the number of players, and alternatives to the Nash equilibrium framework.

A Sequential Mechanism for Direct Price Regulation

In this article, we describe a mathematical model of price-cap regulation, in a simplified institutional setting. We show that, even in the presence of uncertainty as to the success of actions taken to improve productivity, and even in the presence of moral hazard, such a regulatory method can achieve its aim—namely, decreasing output prices and increasing productivity.1 Thus we consider the problem faced by a regulator who wants to provide incentives for a firm to effect cost reductions—and hence price reductions—through technological change or by other means. We model the manager of the firm as facing constraints imposed by the shareholders and other providers of capital, by the customers, and by the regulator. The regulator’s ultimate objective is a secular real decrease in the firm’s prices. However, the manager’s private utility may not be maximized by activities that are maximally cost-reducing. Moreover, the regulator cannot directly observe all of the manager’s actions, the outcomes of which are also influenced by random exogenous events. Hence a problem of moral hazard arises.

Alternative market arrangements for technology transfer

With the rapid expansion of markets for telecommunications services and equipment, both national and international, one sees an increasing frequency of alliances in which each of two firms seeks to use the other to complete its portfolio strengths. Often this combination enables firms to achieve the product differentiation that seems to be the key to competitive advantage in modern telecommunications markets. This alliance may take the form of a « joint venture », which in the paper includes as limiting cases a subsidiary wholly owned by one firm, a technology licensing arrangement, and direct exporting. The model of such a venture presented here, although simple, is rich enough to illustrate the influence of four types of factors on the negotiations that set up the venture: demand, costs, risk, and regulatory constraints. We characterize the sets of acceptable and efficient arrangements, under various assumptions about exogeneous factors. The partners must choose among these by some form of bargaining.RésuméAvec l’expansion rapide des marchés des services et des équipements de télécommunications, sur le plan national ou international, on assiste au développement d’alliances dans lesquelles chaque firme essaie de compléter son portefeuille de compétences. Ces alliances permettent de mieux réaliser la différenciation des produits qui devient le critère central d’avantage concurrentiel dans les marchés modernes. Une alliance peut prendre la forme d’une entreprise à risques partagés qui, dans l’article, inclut comme cas limites la filiale, les contrats de licence technologique, et l’exportation directe. Le modèle présenté ici, quoique simple, est assez riche pour illustrer l’influence de quatre types de facteurs: la demande, les coûts, le risque et les contraintes réglementaires. Les auteurs caractérisent les ensembles des arrangements acceptables et efficaces avec des hypothèses diverses sur les facteurs exogènes. Les partenaires doivent choisir parmi ceux-ci selon un processus de négociation.