X. Henry Wang

Fixed and Sunk Costs Revisited

Abstract The authors attempt to clarify the concepts of, and the link between, fixed costs and sunk costs. They argue that the root for possible confusion between fixed costs and sunk costs is the inconsistency in defining the term fixed costs. They define fixed costs uniformly as the costs that are independent of the level of output and suggest that instructors refer to the part of fixed costs that are irrevocably committed as sunk costs. Under these definitions, the statement “there are no long-run fixed costs” is incorrect. Instructors should teach students that in the long run there are no sunk costs, although there may easily be fixed costs.

Mixed-strategy equilibria in a quality differentiation model

Abstract This paper shows that the standard quality-differentiation duopoly model has, in addition to the two well-known pure-strategy equilibria of maximum quality differentiation, an infinity of mixed-strategy equilibria in which firms choose mixed strategies in the first-stage quality game. In these equilibria, maximum quality differentiation does not occur due to coordination failure. Total expected consumer surplus is the same at all mixed-strategy equilibria and is higher than that under either pure-strategy equilibrium. Total expected industry profit is the same at all mixed-strategy equilibria and is lower than that under either pure-strategy equilibrium.

Incentive Schemes in Peer-to-Peer Networks

In this paper we study the optimal file-sharing mechanism in a peer-to-peer network with a mechanism design perspective. This mechanism improves upon existing incentive schemes. In particular, we show that peer-approved scheme is never optimal and service-quality scheme is optimal only under certain circumstances. Moreover, we find that the optimal mechanism can be implemented by a mixture of peer-approved and service-quality schemes.

On Hotelling's Location Model with a Restricted Reservation Price

This paper studies Hotellings location model with a restricted consumer reservation price. It establishes that firms will locate closer to the middle of the market when price competition becomes more intense caused by a low reservation price. Copyright 1999 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Customization with Vertically Differentiated Products

We analyze a duopoly game in which products are initially differentiated in variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. We show that in equilibrium either both firms customize, only the higher quality firm customizes, or no firm customizes. Even if customization is costless, the firms might not customize. This happens when the quality difference between the firms is small. We explore how the total welfare changes with the fixed cost of customization. Interestingly, the relationship is not always monotonic. Contrasting with the situation when customization is not feasible, both consumer surplus and total welfare are higher when one or both firms customize.

Learning in Advance Selling with Heterogeneous Consumers

The advance selling strategy is implemented when a firm offers consumers the opportunity to order its product in advance of the regular selling season. Advance selling reduces uncertainty for both the firm and the buyer and enables the firm to update its forecast of future demand. The distinctive feature of the present study of advance selling is that we divide consumers into two groups, experienced and inexperienced. Experienced consumers know their valuations of the product in advance. The presence of experienced consumers yields new insights. Specifically, pre-orders from experienced consumers lead to a more precise forecast of future demand by the firm. We show that the firm will always adopt advance selling and that the optimal pre-order price may be at a discount or a premium relative to the regular selling price.

A Note on Technology Transfer by a Monopoly

This paper studies the incentive for a monopoly to license its technology. It shows that a patent–holding monopoly may be willing to license its proprietary technology to a potential competitor when such a technology transfer has a market–expanding effect.

Horizontal Mergers in a Differentiated Cournot Oligopoly

Using a standard differentiated goods quantity competition setting, we show three facts about horizontal two-firm mergers that are not true for a homogeneous goods Cournot market. First, merger of two firms is profitable for the merging firms provided that goods are sufficiently distant substitutes. Second, merging of two firms can lead to more two-firm mergers. Third, an initially non-profitable two-firm merger can occur in anticipation of subsequent mergers. These facts imply that mergers are more likely to occur in differentiated goods markets than in homogeneous goods markets.

Classification of 2X2 Games and Strategic Business Behavior

This note discusses the classifications of general symmetric and anti-diagonally symmetric 2×2 games, illustrated with business-related examples. It also shows how 2×2 games can be used to explain and interpret business strategies such as “top dog,” “puppy dog,” “fat cat” and “lean-and-hungry look” (Fudenberg and Tirole, 1984). A strategic move basically changes a prisoners dilemma game, coordination game or chicken game into one with a unique Nash equilibrium that favors the strategic player.

Optimal Decisions with Linear Random Payoff

This paper provides a unified analysis of decision under uncertainty with payoffs that are linear in the random variable. This class involves additive as well as multiplicative risks and is widely used in the literature. The total effect of an increase in risk on choice is decomposed into an income effect and a substitution effect. Properties of preferences that control the sign of these effects are identified.