Roger Ware

A Theory of Market Structure with Sequential Entry

This article sets out a theory of market structure with sequential entry. We characterize the perfect Nash equilibrium to the entry game in several propositions. First, equilibria never involve excess capacity. Second, a sufficient statistic for the entry of any firm is that its profits are positive when computed myopically, i.e., with no further entry. Third, the equilibrium number of firms is the smallest number that can deter entry. Fourth, aggregate output in equilibrium is no smaller than the limit output. We calculate some explicit solutions to the model and examine comparative static properties.

Evolutionary stability in the repeated prisoner's dilemma

Abstract Recently, biologists have explored evolutionary explanations of apparently altruistic behavior in situations of conflict, often modeled as the “Prisoners Dilemma.” Certain simple cooperative strategies, notably TIT-FOR-TAT, have been successful in computer simulations of the evolution of populations of individuals who interact according to the Prisoners Dilemma. Some attempts to formalize this have used the concept of “evolutionary stability.” But Boyd and Lorberbaum (1987 , Nature (London) 327 , 58–59) recently showed that no single pure strategy (such as TIT-FOR-TAT) can be evolutionarily stable. We extend their argument to derive a more powerful result, which implies, first, that no finite mixture of pure strategies can be evolutionarily stable, and, second, that no mixture of TIT-FOR- n -TATS can be evolutionarily stable. We interpret our negative results to suggest that evolutionary stability is too demanding a criterion.

Forward markets, currency options and the hedging of foreign exchange risk

Abstract Although transactions exposure to foreign exchange risk can be completely hedged in the forward market, the same is not true for economic exposure. We show that in some cases a portfolio of currency options can be constructed which hedges economic exposure, when the firm has ex post production flexibility. In the more general case of uncertainty in multiple exchange rates, however, more elaborate options than those currently available are required to hedge economic risk completely.

Eliminating price supports: A political economy perspective

Abstract This paper characterizes information and politically constrained government programs for eliminating price supports. The issues which we examine in this model include: (i) To what extent is it possible to reduce the size of oversubscribed industries in light of the information and political constraints that exist? Is a complete ‘decoupling’ of a workers compensation from her output possible or desirable? (ii) Which ‘type’ of workers (as characterized by their skill levels and outside employment opportunities) remain in the industry? (iii) Which type of worker is harmed by the relocation program? Which coalitions of workers will oppose the reorganization?

Long-term bilateral monopoly: the case of an exhaustible resource

We construct a model of long-term bilateral competition between the supplier of an exhaustible resource and a consuming country capable of producing a perfect substitute for the resource. The technology for producing the substitute is known, and the strategy of the consuming country is to choose an investment program for installing the substitute. We derive equilibrium configurations of investment and extraction for the case of linear demand under three scenarios: (1) the resource supplier is a von Stackelberg leader; (2) the consuming country is a von Stackelberg leader; and (3) buyers and sellers of the resource engage each other period by period. A comparison of these cases reveals incentives for long-term commitment on the part of one or both parties and also suggests that there may be gains from strategic intervention into resource markets by governments of consuming nations.

Delegation, Market Share and the Limit Price in Sequential Entry Models

Abstract We construct a model of equilibrium market structure with sequential entry in which firms have U-shaped average cost curves. The equilibrium is characterized completely in the case of linear demand and quadratic costs. In particular, the trade-off between the incentive to delegate the costs of entry deterrence and the market share advantages of investment by early entrants is fully determined. We determine the circumstances under which delegation occurs. Whether firms delegated the task of entry deterrence find it costly or not is shown to depend in a parametric way on the limit price. We show that the strategic equilibrium is socially inefficient relative to the free-entry Cournot equilibrium.

Public firms as regulatory instruments with cost uncertainty

We re-examine the regulatory role of a public firm in an environment of private but correlated information about industry costs. We study three regimes of mixed-market interaction involving both public and private firms: a symmetric Bayesian-Nash equilibrium, an asymmetric Bayesian equilibrium in which the public firm is able to commit to production before the private firms, and a mechanism in which the regulator designs an incentive-compatible schedule for the industry. We find that a public firm plays an important strategic informational role which strengthens its role as a disciplinary regulatory instrument. Further, we find that this strategic informational role is considerably enhanced as we move from indirect regulatory schemes to direct regulation.

How do Consumers Respond to Gasoline Price Cycles

This paper empirically studies how consumers respond to retail gasoline price cycles. Our analysis uses new station-level price data from local markets in Ontario, Canada, and a unique market-level measure of consumer responsiveness based on web traffic from gasoline price reporting websites. We first document how stations use coordinated pricing strategies that give rise to large daily changes in price levels and dispersion in cycling gasoline markets. We then show consumer responsiveness exhibits cycles that move with these price fluctuations. Through a series of tests we find that forward-looking stockpiling behavior by consumers plays a central role in generating these patterns.

Public pricing under imperfect competition

Abstract Existing literature on second-best pricing assumes that regulatory control encompasses all industries subject to distortion. This paper extends the theory in a game-theoretic framework to incorporate market power outside the regulated sector. We find that in this situation, price always exceeds marginal cost in the public firm and that the profit constraint for the public firm need not be binding. In addition, the existence of pricing distortions outside the regulated sector can actually increase welfare.

Abuse of Dominance under the 1986 Canadian Competition Act

In this paper we consider competition policy in Canada towards monopoly and monopolization. While our focus is primarily on providing an introduction and examination of the abuse of dominance provisions in the Canadian Competition Act1 of 1986 (hereafter simply the Act), we also provide a brief overview of the existing law prior to the 1986 reforms. An understanding of the nature of the law under the Combines Investigation Act,2 the predecessor of the Competition Act, provides insight into the need for reform in Canada and the nature of that reform. In particular the monopoly and monopolization provisions under the Combines Investigation Act contained very high hurdles for successful prosecution. As a result prosecutions under the provisions were infrequent and successful prosecutions were virtually non-existent. The late 1970s Supreme Court ruling in the Irving case effectively rendered Canada’s antitrust laws against monopoly and merger in the Combines Investigation Act unenforceable and made reform inevitable. In response to the old law and Canada’s enforcement experience, the monopoly provisions in the new Competition Act differ substantially from those found in the Combines Investigation Act. In this paper we argue that the abuse of dominance provisions in the Competition Act can be, and in practice have (mostly) proven to be, flexible and effective in addressing socially inefficient monopolization.