Firms that practice second-degree price discrimination may intentionally distort product characteristics away from their efficient levels (e.g., the small version of a product is “too small.”) This paper offers the first empirical study of this product design issue. Using data from a specialty coffee market, I estimate a structural utility model that allows for consumer screening under vertical preference heterogeneity. Comparisons of cost data and the estimated benefits from changing product characteristics suggest that some of the central predictions of nonlinear pricing theory are realized in the observed market. Product design distortions are relatively large for drinks that are not the most pro…table but over which the firms hold market power. The estimated distortions decrease toward zero for the products with the highest price-cost margins; this result provides empirical support for the “no distortion at the top” prediction from theory.

This paper presents a framework to estimate an equilibrium oligopoly model of horizontal product differentiation where firms compete in nonlinear tariffs. The estimation explicitly incorporates the information contained in the shape of the tariffs offered by competing duopolists to recover the structural parameters associated to the distribution of consumers ’ unobserved heterogeneity. The model identifies the determinants of the non–uniform equilibrium markups charged to consumers who make different usage of cellular telephone services. We then use the model to study the early U.S. Cellular Telephone Industry and evaluate, among others, the welfare effects of competition, the benefits of a reduction of the delay in awarding the second cellular license, and alternative linear and nonlinear pricing strategies. Our policy evaluations reveal that a single two–part tariff achieve 63 % of the potential welfare gains and 94 % of the profits of a more complex fully nonlinear tariff.

As illustrated by liquidity support, equity injections and asset repurchases in financial crises and by IMF credit lines to countries, authorities often intervene in order to revive markets that have dried up or to create new ones. In such situations, agents participate only if they receive from the governmental scheme more than in the marketplace, while the market outcome depends on who joins the scheme. The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. In the model, sellers in need of cash have private information about the value of their legacy asset. The absence of buyer confidence forces authorities to intervene to jump-start the market. We characterize the optimal intervention, and draw two main implications. First, the government should clean up the market, through buybacks of the weakest assets and then through some equity injections, and leave the agents with the strongest legacy assets to the market. In particular, authorities should not substitute fully for the market, even when they have no comparative disadvantage in acquiring assets or shares thereof. Second, the government creates its own competition by cleaning up the market from its most toxic pieces. At the optimal intervention the government always strictly overpays for the legacy asset. Yet, and unlike what would be suggested by Coasian profit evasion, the existence of a later market imposes no welfare cost. While it is cast in a public intervention context, the analysis of mechanismdependent reservation utilities also admits important private sector applications.

Abstract – This paper studies two-part tariffs and their welfare effects when firms are risk averse. It finds that firms charge a risk premium over expected marginal cost for each unit they sell. This pricing rule is socially optimal if and only if the market is fully covered in equilibrium. Risk-neutral monopoly tends to generate more aggregate net consumer surplus than risk-averse monopoly in partial-cover equilibrium but consumer welfare is indifferent when the market is fully covered. In oligopoly, consumer welfare increases (decreases) in the Arrow-Pratt measure of absolute risk aversion when the number of firms is relatively large (small).

This paper analyzes the effects of a ban on smoking in public places upon firms and consumers. It presents a theoretical model and tests its predictions using unique data from before and after the introduction of smoking bans in the UK. Cigarette smoke is a public bad, and smokers and non-smokers differ in their valuation of smoke-free amenities. Consumer heterogeneity implies that the market equilibrium may result in too much uniformity, whereas social optimality requires a mix of smoking and non-smoking pubs (which can be operationalized via licensing). If the market equilibrium has almost all pubs permitting smoking (as is the case in the data) then a blanket ban reduces pub sales, profits, and consumer welfare. We collect survey data from public houses and find that the Scottish smoking ban (introduced in March 2006) reduced pub sales and harmed medium run profitability. An event study analysis of the stock market performance of pub-holding companies corroborates the negative effects of the smoking ban on firm performance.

This paper investigates the equilibrium consequences of a contractual market with moral hazard where multiple principals compete each other to offer incentive contracts to agents who choose unobservable ex post actions. We show the following limit theorems: First,when the trade–off between incentive and risk sharing causes the moral hazard problem on the side of agents,the full insurance contract,which makes the payments to agents constant across all state realizations, can be a limit equilibrium as the number of competing principals becomes sufficiently large. Thus the equilibrium contract tends to be “low-powered ” in the limit. On the other hand,when agents are risk neutral but the moral hazard problem stems only from their limited wealth,the first best contract which attains maximum social welfare can be a limit equilibrium. We thus conclude that whether or not more intense competition mitigates the moral hazard problem depends on its sources.

Multi-store …rms are common in the retailing industry. Theory suggests that cross-elasticities between stores of the same …rm enhance market power. To evaluate the importance of this e¤ect in the UK supermarket industry, we estimate a model of consumer choice and expenditure using three data sources: pro…t margins for each chain, a survey of consumer choices, and a data set of store characteristics. To permit plausible substitution patterns, the utility model interacts consumer and store characteristics. We measure market power by calculating the e¤ect of merger and demerger on Nash equilibrium prices. Demerger reduces the prices of the largest …rms by between 2 % and 3.8 % depending on local concentration; mergers betwen the largest …rms lead to price increases up to 7.4%.

This paper studies the effects of principal’s risk aversion on principal-agent relationship under hidden information. It finds that the agent’s equilibrium effort increases and approaches the efficient level as the principal’s risk aversion increases and tends to infinity. Allowing for random participation by the agent, his effort can be efficient even when the principal’s risk aversion is finite. For the case of common agency with random participation, it is optimal for the principals to make the agent the residual claimant on profits and the principals ’ net profits monotonically decrease to zero when their risk aversion tends to infinity.

Using a structural model of demand for automobile engine variants, this paper finds that there is second-degree price discrimination: markups increase with engine size. Still, average markups are lower than when models have just one engine. The paper develops the first empirical demand framework suitable for markets with variants. There is an unobserved product characteristic and a consumer-specific logit term for classes of products, but both are fixed across variants. Fixed effects control for unobservables. The literature’s assumption of orthogonality between unobserved and observed product characteristics is