Multilateral adverse selection in industrial economics and general equilibrium

Project Information

MASIEGE

Grant agreement ID: 657283

DOI

10.3030/657283

Project closed

EC signature date 24 March 2015

Start date 1 September 2015

End date 28 February 2017

Funded under

• EXCELLENT SCIENCE - Marie Skłodowska-Curie Actions

Total cost

€ 138 807,00

EU contribution

€ 138 807,00

Coordinated by

FONDATION JEAN JACQUES LAFFONT,TOULOUSE SCIENCES ECONOMIQUES
France

Periodic Reporting for period 1 - MASIEGE (Multilateral adverse selection in industrial economics and general equilibrium)

Reporting period: 2015-09-01 to 2017-02-28

Summary of the context and overall objectives of the project

The aim is to understand the economic consequences of multilateral private information, and obtain corresponding policy implications. With multilateral adverse selection, a small number of firms may not be able to reach a cooperative agreement to divide the market if a firm's willingness to cooperate is interpreted as a sign of weakness by the other firms. Knowing that the other firms are willing to cooperate and are thus relatively weak, if a firm is still willing to cooperate, this reveals its weakness to an even greater extent. As a result, firms may never be able to establish a cooperative agreement. One of the main conclusions is that the ability to cooperate when there is multi-sided private information crucially depends on the possibility of using a mediator to coordinate parties. Such a mediator can collect information with the objective of designing an agreement that is favourable to all parties, and, moreover, use collected information to punish any party that does not comply with the agreement that the mediator eventually proposes. Optimal punishments typically require that the mediator deceives the parties that execute the punishment (in order to convince them that executing an extremely harsh punishment is not as costly as it is).

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

(i). General equilibrium under uncertainty.
Correia-da-Silva, J (2015): "Generic non-existence of general equilibrium with EUU preferences under extreme ambiguity", J Math Econ, 61, 185-191.
If a finite number of economic agents behave according to Gul-Pesendorfer EUU theory, general equilibrium does not exist. With a continuum of agents, equilibrium exists and a strong characterisation is obtained: prices are either constant across all states or at least constant across all states except one, in which the price is higher.
(ii). Collusion in a changing environment.
Correia-da-Silva, J, J Pinho & H Vasconcelos (2016): "Sustaining collusion in markets with entry driven by balanced growth", J Econ, 118, 1-34.
When firms collude in growing markets, since entry typically occurs later along the punishment path than along the collusive path, the possibility of delaying entry is an additional incentive for deviate. If firms set quantities and revert to Cournot equilibrium after a deviation, collusion is harder to sustain before entry than after entry. If, instead, firms set prices or use optimal penal codes, deterring entry by breaking the cartel is not profitable, and thus collusion is harder to sustain after entry than before entry.
(iii). Platform competition with vertical and horizontal product differentiation.
Ribeiro, V, J Correia-da-Silva & J Resende (2016): "Nesting vertical and horizontal differentiation in two-sided markets", Bulletin Econ Res, 68 (S1), 133-145.
The two-sided market model of Armstrong (2006) is merged with the nested vertical and horizontal differentiation model of Gabszewicz and Wauthy (2012). The high-quality platform sells at a higher price and captures a greater market share than the low-quality platform. The difference between market shares is lower than socially optimal.
(iv). Collusion when firms are asymmetric.
Correia-da-Silva, J & J Pinho (2016): "The profit-sharing rule that maximizes sustainability of cartel agreements", J Dynamics and Games, 3 (2), 143-151.
The profit-sharing rule that maximizes the sustainability of cartel agreements when firms can make side-payments is such that the critical discount factor is the same for all firms (``balanced temptation''). With this rule, contrarily to the typical finding in the literature, asymmetries among firms may increase the sustainability of the cartel.
(v). Collusion in mixed oligopolies, focusing on the impact of privatisations.
Correia-da-Silva, J & J Pinho (2016): "Collusion in mixed oligopolies and the coordinated effects of privatization".
The presence of public firms makes collusion (in the private sector) more difficult to sustain, and maybe even impossible to sustain. If privatisation renders collusion unsustainable, privatization is surely socially detrimental. Coordinated effects thus reverse the traditional result according to which privatization is socially desirable if there are many firms in the industry.
(vi). Collusion under multi-sided adverse selection with a focus on auctions and oligopolies.
Correia-da-Silva, J (2016): "A survey on the theory of collusion under adverse selection in auctions and oligopolies", submitted.
(vii). The notion of trembling mechanisms is introduced and the design of optimal trembling mechanisms is studied. This notion is useful for the design of optimal mechanisms in contexts where the outside option is a game. This is the case, for example: when a collusive mechanism is proposed to firms that compete in an oligopolistic market; when bidders at an auction decide whether or not to join a ring mechanism; or when agents that litigate are proposed a settlement mechanism.
Correia-da-Silva, J (2017): "Trembling mechanisms", submitted.
(vii). Research on dynamic pricing by a durable goods monopolist facing consumers with private information about their valuations for the good is currently in progress.
Correia-da-Silva, J (2017): "Priority pricing by a durable goods monopolist".
(viii). Research on repeated games with an informed mediator is currently in progress.
Correia-da-Silva, J & Takuro Yamashita (2017): "Dynamic BCE of infinitely repeated games".

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

Advances made on the theory of general equilibrium under ambiguity provide a stylized framework in which ambiguity-aversion either implies non-existence of equilibrium or that state-contingent prices do not reflect the scarcity of goods in the different states. This suggests a difficulty of financial markets to function effectively in the presence of ambiguity-aversion, which may be worrisome because ambiguity-aversion is well documented, and its effects are more manifest in times of crisis.
Advances made on the theory of collusion in markets where growth may trigger entry is relevant for regulators and antitrust authorities because knowledge of the environmental factors that favour or hinder collusion allows them to identify markets where collusion is most likely and to design policies that diminish the scope for collusion. In addition, understanding how incentives to collude change over time allows regulators to concentrate their efforts on the periods that are more conducive to cooperation. Building on the perception that entry is a major threat to cartel stability, our investigation has clarified the conditions in which and the extent to which potential entry can mitigate joint dominance in the long run (after entry) and also in the short run (before entry).
The advances made on the concept and design of trembling mechanisms are relevant, for example, for the design of the structure of negotiations when parties have private information. This may be relevant in the context of multilateral trade agreements, peace negotiations, agreements for the reduction of carbon-emissions and agreements among countries in the European Union.

Joao Correia da Silva