Sjaak Hurkens

Endogenous Price Leadership

We consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which will follow. While the follower role is most attractive for each firm, we show that waiting is more risky for the low cost firm so that, consequently, risk dominance considerations, as in Harsanyi and Selten (1988), allow the conclusion that only the high cost firm will choose to wait. Hence, the low cost firm will emerge as the endogenous price leader.

On forward induction and evolutionary and strategic stability

We analyze which normal form solution concepts capture the notion of forward induction, as defined by van Damme (JET, 1989) in the class of generic two player normal form games preceded by an outside option. We find that none of the known strategic stability concepts (including Mertens stable sets and hyperstable sets) captures this form of forward induction. On the other hand, we show that the evolutionary concept of EES set (Swinkels, JET, 1992) is always consistent with forward induction.

Mobile termination, network externalities, and consumer expectations

We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers? expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.

A Retail Benchmarking Approach to Efficient Two-Way Access Pricing

We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator (or the competition authority) can choose one among the rules to pursue additional objectives such as consumer surplus, network coverage or investment: for instance, we show that both static and dynamic efficiency can be achieved at the same time.

Optimal Crowdfunding Design

This paper investigates the optimal design of crowdfunding where crowdfunders are potential consumers with standard motivations and entrepreneurs are profit-maximizing agents. We characterize the typical crowdfunding mechanism where the entrepreneur commits to produce only if aggregate funding exceeds a defined threshold. We study how the entrepreneur uses this threshold, in conjunction with a minimal price, for rent extraction. Compared to a standard posted-price mechanism, total welfare may rise because the entrepreneur can adapt the production decision to demand conditions, but may fall because rent-seeking can worsen. Crowdfunding platforms can raise threshold credibility. So we also compare outcomes when the entrepreneur commits to a threshold against those where the entrepreneur simply decides on production after observing crowdfunder bids. Finally, we contrast crowdfunding with the optimal mechanism where production is contingent on a general function of all bids, rather than the simple sum of bids obliged by the aggregate threshold rule. Crowdfunding is very different, for instance, never committing to produce the good when aggregate bids fall short of the fixed cost (even absent credit constraints).

Interbank Competition with Costly Screening

We analyze credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broeckers (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loans are largely independent of marginal costs, a feature consistent with the extant empirical evidence. In equilibrium, banks make positive profits in our model in spite of the threat of entry by inactive banks. Moreover, an increase in the number of active banks increases credit risk and so does not improve credit market efficiency: this point has important regulatory implications. Finally, we extend our analysis to the case where banks have differing screening abilities.

(When) Would I Lie to You? Comment on Deception: The Role of Consequences

This paper reconsiders the evidence on lying or deception presented in Gneezy (2005,American Economic Review). We argue that Gneezy?s data cannot reject the hip?esis that people are one of two kinds: either a person will never lie, or a person will lie whenever she prefers the outcome obtained by lying over the outcome obtained by telling the truth. This implies that so long as lying induces a preferred outcome over truth-telling, a person?s decisi? of whether to lie may be completely insensitive to other changes in the induced outcomes, such as exactly how much she monetarily gains relative to how much she hurts an anonymous partner. We run new but similar experiments to those of Gneezy in order to test this hypothesis. We find that our data cannot reject this hypothesis either, but we also discover substantial differences in behavior between our sub jects and Gneezy?s sub jects.

Communication, Coordination, and Efficiency in Evolutionary One-Population Models

We analyze the role of commitment in pre-play communication for ensuring efficient evolutionarily stable outcomes in coordination games. All players are a priori identical as they are drawn from the same population. In games where efficient outcomes can be reached by players coordinating on the same action we find commitment to be necessary to enforce efficiency. In games where efficienct outcomes only result from play of different actions, communication without commitment is most effective although efficiency can no longer be guaranteed. Only when there are many messages then inefficient outcomes are negligible as their basins of attraction become very small.

Mobile Termination and Consumer Expectations Under the Receiver-Pays Regime

We analyze how termination charges affect retail prices when taking into account that receivers derive some utility from a call and when firms may charge consumers for receiving calls. A novel feature of our paper is that we consider passive self-fulfilling expectations and do not allow for negative reception charges. We reconfirm the finding of profit neutrality when firms cannot use termination-based price discrimination and show that connectivity is prone to breakdown.

Dynamic matching and bargaining with heterogeneous deadlines

This paper analyzes bargaining outcomes when agents do not have stationary time preferences (as represented by a constant discount factor) but are pressed by firm deadlines. We consider a dynamic model where traders with heterogeneous deadlines are matched randomly into pairs who then bargain about the division of a fixed surplus. A trader leaves the market when an agreement has been reached or when his deadline expires. Our analysis encompasses both the case of perfect and imperfect information about the partner’s deadline. We define, characterize and show the existence of a stationary equilibrium configuration. We characterize when delay occurs and when deadlines are missed in equilibrium and show that the payoffs of traders are strictly increasing and concave in own deadline, unless bargaining takes place under imperfect information and no delay occurs, in which case all pairs immediately agree on an almost even split. We provide comparative statics exercises and illustrate our results by some examples.