Beyond prices versus quantities

(1)

EUI

WORKING

PAPERS IN

ECONOMICS

EUI Working Paper ECO No. 93/9

Beyond Prices Versus Quantities

Stephen Martin

W E P

330 European University Institute, Florence

(2)

Please note

As from January 1990 the EUI Working Paper Series is divided into six sub-series, each sub-series is numbered

individually (e.g. EUI Working Paper LAW No. 90/1). ©

The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(3)

EUROPEAN UNIVERSITY INSTITUTE, FLORENCE

ECONOMICS DEPARTMENT

EUI Working Paper ECO No. 93/9

Beyond Prices Versus Quantities

St e p h e n Ma r t in

BADIA FIESOLANA, SAN DOMENICO (FI)

(4)

without permission of the author.

© Stephen Martin

Printed in Italy in February 1993

European University Institute

Badia Fiesolana

I - 50016 San Domenico (FI)

Italy

(5)

Beyond Prices Versus Q uantities Stephen Martin

Department of Economics European University In s titu te 50016 San Domenico di Fiesole

Florence. Ita ly November 1992 JEL Codes: D43, L I 3

I am grateful to p a rtic ip a n ts in th e Industrial O rganization W orkshop

for useful comments. R esponsibility for erro rs is my own.

A bstract: The reason stru ctu re-p erfo rm an ce relatio n sh ip s are

sen sitiv e to th e modelling of price or quan tity as a decision variable is because of the consequences of the choice of decision variable for slope of th e residual demand curve along which an individual firm

maximizes profit. When one models profit maximization along a

residual demand curve directly, im portant re s u lts of th e lite ra tu re on p ric e -s e ttin g and q u a n tity -s e ttin g firms (such as th e impact of product differentiation on m arket efficiency or th e private

p ro fitab ility of exogenous m ergers) appear as special c a se s of more general resu lts. © The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

(6)

(7)

I. Introduction

Since Bertrand (1883) reviewed Coumot (1838), it has been understood th a t structure-perform ance relatio n sh ip s in oligopoly differ fundamentally depending on a particular kind of conduct: w h eth er firms s e t price or quan tity as a decision variable. The difference is m ost sta rtlin g when th e product is homogeneous, but th a t the difference is essen tial even if products are differentiated

underlies many recent contributions to th e lite ra tu re .1

Yet it is odd th a t th is should be so. We know, for example, th a t m arket performance under monopoly is invariant to changes in th e firm's decision variable. A ccepting the fact th a t 1 is a special number, w hat is it about th e move from 1 incumbent to 2 th a t endows th e p ric e -q u a n tity d istin ctio n w ith such im portance?

In th is paper, I argue th a t it is not th e choice of the firm's decision variable th a t is of fundamental im portance to th e n ature of stru ctu re-p erfo rm an ce relationships in oligopoly. W hat is critical is not th e firm's decision variable but w hat it thinks o th er firms' decision variables are. This in turn is im portant because it determ ines th e nature of th e firm's perceived residual demand curve.

Finally, I argue th a t if w hat is critical for s tru c tu r e -

performance relatio n sh ip s is th e nature of th e firm's residual demand curve, then industrial econom ists ought to model th e residual demand

curve directly. By way of illustration, I apply a residual demand

curve model of oligopoly to tw o of th e standard questions of th is

1. For example, Vives (1984), Singh and Vives (1984), Deneckere and

Davidson (1985), Klemperer and Meyer (1988), and Majerus (1988).

(8)

literatu re: th e impact of product differentiation on market efficiency and the im pact of an exogenous m erger on firm profitability.

II. Prices, quantities, and the residual demand curve

Consider a standard duopoly model. The product

differentiated, and inverse demand curves are linear:

(la ) _{Pi *} a - (qt * 0q2)

(lb ) _{P2 =} a - (0q] _{* V}

8 is a product differentiation param eter, w ith 0 s 0 £ 1. If 8 = 0, the products of th e tw o firms are independent in demand. As 0

approaches one, th e products of th e tw o firms become b e tte r and b e tte r su b s titu te s .2 For sim plicity, assume th a t marginal c o st is co n stan t, and w ithout loss of generality assume th a t marginal c o st is zero.

By inverting th e system of inverse demand curves, one obtains the demand equations

(2a) (1 - 02)q, - Cl - 6)a - 0p2 - p,

(2b) (1 - 02)q2 = (1 - 0)a «• Spj - p2 .

(1) and (2) hold provided all prices and q u an tities are nonnegative, which is henceforth assumed.

The usual procedure to obtain firm l ’s quantity reaction curve is to s u b s titu te (la ) in th e definition of firm l ’s profit, 7ij - p q to ex p ress firm X's profit in term s of quantity alone. This procedure makes it natural to em phasize th e role of quantity as a choice

2. In a N-firm oligopoly model p resented below, I allow 0 < 0. which implies th a t v a rie tie s are complements in demand.

(9)

variable in determ ination of th e nature of equilibrium. Suppose instead we adopt th e equivalent formulation of tre a tin g firm 1 as maximizing profit p)q( choosing b o th price and quantity, subject to (la ) as a co n strain t. This problem is analyzed by maximizing th e

Lagrangian

(3) £ = p ^ * X(a - q, - 0q2 - p^

w ith re sp e c t to p , q^ and X.

The firs t-o rd e r conditions th a t characterize an in terio r solution to (3) are

(4a) ^ - <1, - K - 0.

(4b) - p, - X - 0.

(4c) > a - q, - 0q2 - Pj = 0.

But th e s e conditions to g e th e r imply

(5) P, - a - q, - 0q2 - X - q( ,

and th is leads directly to th e usual Cournot q u a n tity -s e ttin g reactio n function when products are differentiated.

By going through th e same s o r t of exercise for firm 2, one obtains a quantity reactio n function for firm 2. The tw o reactio n functions to g e th e r imply th e usual equilibrium for q u a n tity -s e ttin g firms, w ith th e usual p ro p ertie s. But in th is form ulation of th e model, firms are n o t quantity s e tte r s . They are profit-m axim izers th a t believe th e ir rivals hold quantity co n stan t.

Now turn to w hat by abuse of term inology m ight be called th e dual problem: maximize p ^ subject to (2a) as a c o n strain t. The

corresponding Lagrangian is

(6) * - ptqj ♦ mIU - 0)a ♦ 0p2 - (1 - 02)qj - p^ ,

w ith firs t-o rd e r conditions for an in terio r solution

(10)

(7a) • 1, - M - 0

(7b) - P, * U - 02)m * 0

(7c) - Cl - 6)a ♦ 6pz - ( 1 - e 2)q, - p, - 0 .

From th e s e firs t-o rd e r conditions, we have

p, - Cl - 0)a » 0p2 - Cl - 02)qJ

(8)

- ( 1 - 0)a ♦ 0p2 - (1 - 02)p - (1 - 0)a ♦ 0p, - , and th is leads directly to th e usual equation of a price reaction curve when products are differentiated:

(9) 2p( - (1 - 0)a - 0p2 .

By going through th e same exercise for firm 2, one obtains th e equation of th e o th e r price reaction curve. The tw o equations to g e th e r imply th e usual equilibrium for p ric e -s e ttin g firms, w ith th e usual properties. But in th is form ulation of th e model, firms are not p ric e -s e tte r s . They are profit-m axim izers th a t believe th e ir rivals hold price co n stan t.

Figure 1: Firm 1 A lternative Residual Demand Curves

(11)

If it is not firm l 's decision variable th a t determ ines the nature of it s reaction curve, w hat is it? I t is firm l 's beliefs •bout th« way it s rival a c ts , which in turn determ ines th e slope of firm l 's perceived residual demand curve.

Suppose firm 1 is a t a point (q^p^ which is on th e demand surface for th e tw o v arieties. If firm 1 believes th a t firm 2 holds q2 c o n sta n t, it a c ts in th e belief th a t its residual inverse demand curve has equation (la ) and slope - 1 (figure 1). But if firm 1 believes th a t firm 2 holds p2 co n stan t, it a c ts in th e belief th a t its residual inverse demand curve has equation (2a) and slope - (1 - 82).

The residual inverse demand curve of th e duopolist th a t faces a p ric e -s e ttin g rival is fla tte r - h a s a slope th a t is sm aller in absolute v alu e-th an th e residual inverse demand curve of th e duopolist th a t faces or believes it faces a q u a n tity -s e ttin g rival. It is th is difference in slo p e -n o t w hether a firm is modelled as selecting price or q u a n tity -th a t determ ines th e nature of stru ctu re-p erfo rm an ce relationships.

III. Down th e residual demand curve w ith gun and cam era3 Models of p ric e - and q u a n tity -se ttin g behavior differ because th ey imply th a t firms move along different residual demand curves. But if it is th e n atu re of th e residual demand curve th a t determ ines th e nature of oligopoly equilibrium, why should industrial econom ists confine th e ir a tte n tio n to a choice between th e tw o altern ativ e

3. A p o lo g ie s t o S o lo w ( 1 9 7 6 ) . © The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(12)

residual demand curves implied by th e beliefs th a t rivals hold eith er

price or quantity fixed? Why n o t model th e relationship between

oligopoly equilibrium and th e residual demand curve directly?

A. A residual demand curve duopoly model

I model firm i as maximizing profit along a a residual inverse demand curve w ith slope - a,

(10) P, * A, - a q ( ,

for a > 0 and for i - 1, 2.4 For a given residual demand curve, it makes no difference w hether firm i is th o u g h t of as picking price or quantity: it s profit-m axim izing price, o u tp u t pair will be th e same under e ith e r specification.

Solution concept

W hat conditions should we require of equilibrium p rice-o u tp u t pairs Cq^Pj) and (q2,p2)?

In standard oligopoly models, a firm's noncooperative equilibrium play maximizes it s payoff, given the actio n s of all o th er firms. In addition, and independently of w h eth er firms s e t prices or quantities, equilibrium prices and qu an tities clear th e market. If firms se t quantities, equilibrium prices are th e prices firms expect to see for th o se quantities. If firms s e t price, equilibrium o u tp u ts are th e qu an tities firms ex p ect to sell a t th o se prices.

For a residual demand curve oligopoly model, th e corresponding requirem ents are th a t q ( are maximize

(11) 71, =■ (A, - « q ()qi

for i - 1, 2 and th a t (<!,.[>,) and (<i2.P2) and be on the true demand

4. In a more general model, th e slope param eter a would be allowed to differ from firm to firm.

(13)

surface, given by (1) or (2).

In th e co n te x t of th e model developed here, th is is n eith er more nor le s s th an th e familiar concept of noncooperative equilibrium, of w hich it sh ares th e stre n g th s and w eaknesses (for a discussion, see Johansen (1982)). If th e s e conditions are satisfied , each firm is maximizing i t s expected payoff, and equilibrium values of price and o u tp u t are c o n siste n t w ith th e each firm's beliefs about p ric e -o u tp u t relationships. This Justifies thinking of p ric e -o u tp u t combinations th a t s a tisfy th e s e conditions as a noncooperative equilibrium.

Duopoly equilibrium

If q ( is to maximize (11), it m ust be th a t q ( - A |/2 a , or th a t A, - 2 a q ). Thus if (q(,p^ is to be optimal for firm i,

th e equation of firm i's perceived residua! demand curve can be w ritte n

(12) p, - 2 a q t - a q t ,

from which

for i - 1. 2.

The o th e r requirement of equilibrium is th a t th e combinations (8 ,p ) and (q2.P2) lie on th e tru e demand surface,

which requires

(13)

(14b)

(14a) _{p, - “q, - a - q, - 0q2}

p2 - “ q2 - a - eq, - q2 • Solving (14a) and (14b) gives equilibrium ou tp u ts: (15) _{% - %}_{- 1 ♦ a •* 8} w ith implied equilibrium prices

(14)

P, - P2 - 1 ♦ a . 0 ■

If a - 1, th e s e reduce to th e Coumot equilibrium values. If a - (1 - 0* 2 *), th ey become th e Bertrand equilibrium values.5

B. Produce differentiation and m arket performance

Singh and Vives (1984) show th a t th e relative efficiency of q u a n tity -s e ttin g and p ric e -s e ttin g com petition depends on w hether different v arieties are s u b s titu te s or complements. I t is instructive to examine th e impact of demand relationships on m arket performance in the co n tex t of th e p resen t model.

In an N-firm version of th e previous model, equilibrium firm output and price

(17a) ---(17b) 1 ♦ a * (N - 1)8 aa (18) P 1 - a - (N - 1)0 A single firm's profit is therefore

l2 ' [1 ♦ a » (N - 1)0]

New social welfare, th e sum of consum ers' surplus and firm s’ profit, is

(19) NSW - £j-(a ♦ p)q Na2 1 * 2a ♦ (N - 1)0

[1 (n - n o r

Taking th e derivative of NSW w ith resp ect to a gives

(2 0) 1 3NSW

Na2 3“

a

**(i * o + (**

n

- n er

From equation (17), if 0 > 0, th e denom inator on th e rig h t is positive and th e entire expression on th e rig h t is negative. In th is model, increases in th e slope of th e residual demand curve worsen

5. If firm 2 maximizes profit along a residual demand curve of form

(10), and firm 1 knows th is and a c ts as a leader w ith re s p e c t to firm 2, th en firm 1 produces monopoly output. This is th e usual

Stackelberg quantity leader result.

(15)

m arket performance. In th is model, market performance is b e tte r, the fla tte r firms' perceived residual demand curves. (Recall th a t an increase in a from 1 - 02 to 1 corresponds to a move from Bertrand to Cournot oligopoly.)

IV. The private p ro fitab ility of exogenous m ergers

By way of illu stratin g th e in sig h ts th a t are offered by the residual demand curve oligopoly model, I use it to address th e questions of th e private p ro fitab ility of exogenous mergers.

It will be recalled th a t Salant e t al. (1983) have shown th a t exogenous m ergers in Cournot models will often be privately

unprofitable for th e merging firms, unless th e merger includes a very

high percentage of firms in th e industry. The immediate cause of the

lack of p rofitability is th e reaction of firms outside th e m erger to o u tp u t re s tric tio n by th e p o st-m e rg e r firm. At a deeper level, it has been a ttrib u te d to th e fa c t th a t in Cournot models th e p o st-m erg er firm's output re s tric tio n is unrealistically extrem e (Perry and Porter, 1985). When th e product is standardized, all firms in th e p o st-m e rg e r Cournot m arket have th e same equilibrium output.

Deneckere and Davidson (1985) have shown th a t exogenous m ergers are privately profitable if firms s e t price.6 Thus th e exogenous

merger lite ra tu re is one of th e areas where th e price s e tte r , quantity s e t t e r distinction appears to be fundamental. But even more

fundamental is th e slope of th e residual demand curve along which firms believe th ey are maximizing profit.

6. They use th e Shubik (1980) model of p ric e -s e ttin g firms w ith differentiated products. © The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(16)

(17a) and (17b) give equilibrium values for th e N-firm residual demand curve model. For sim plicity, le t 6 * 1, so th a t p roducts are homogeneous. Suppose M < N firms merge, and th a t th e p o st-m erg er firm maximizes

M M

(21) II - y (A, - a j q l q .

l-l

J-l

This specification Implies th a t th e p o st-m erg er firm understands demand relationships among th e v a rie tie s it produces, but u ses a

perceived residual demand curve w ith slope - a to summarize demand

relatio n sh ip s w ith v arieties produced by o th e r firms.

If th e v ecto r (<},(}... qM) is to maximize (21), it m ust be th a t A, » 2a(q ♦ q ♦ ... * q ). This in turn implies th a t p =

1 1 2 M 1

a(q «■ q ... + q ) and th a t in equilibrium

(22) (1 - a)MqM - FqF - a ,

where qM is equilibrium output of one division of th e p o st-m erg er firm and q^ is equilibrium output of one of th e F firms th a t s ta y outside th e merger.

For a fringe firm, in equilibrium, th e profit-m axim ization condition implies

(23) Mqw * (F - a)qr - a .

From (22) and (23), p o st-m e rg e r equilibrium o u tp u ts are

(24a) qF * F ♦ 1 ♦ a

' 24W qM ‘ '

Observe th a t th e residual demand curve model dem onstrates the same C h esh ire-cat effect of merger th a t occurs Salant e t al. (1983): th e p o st-m erg er firm has th e same equilibrium output as firms outside th e merger. Equilibrium profit of one division of th e p o st-m erg er firm is © The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(17)

( 2 5 )

M (F + 1 + a)

C o m p a rin g (2 5 ) an d t h e p r e - m e r g e r p r o f i t o f a s in g le firm , an e x e g v n e u * m e r g e r ie p r i v a t e l y p r o f i t a b l e if

(26) M a (F - a ) 2 .

Inequality (26) is more likely to be satisfied , th e sm aller is a - t h e f la tte r th e firm's perceived residual demand curve. This makes

perfect economic sense. If a firm maximizes profit along a residual

demand curve th a t is very flat, th en by merging it internalizes the im pacts of o u tp u t decisions by firms th a t are believed to be hard co m p etito rs on its own profitability. I t is precisely when rivals are th o u g h t to be hard co m p etito rs th a t m ergers ought to be expected to be profitable. T hat is w hat (26) implies.

If a - 1, which is th e Cournot residual demand case, th en (26) is th e condition for private p ro fitab ility of an exogenous m erger th a t a rises in th e Salant e t al. (1983) model. If firms s e t price th e residual demand curve is f la tte r th an if firms s e t prices, it is more likely th a t (26) will be sa tisfie d and th erefo re more likely th a t an exogenous merger will be profitable.7 This is c o n siste n t w ith the re s u lts of Deneckere and Davidson (1985).

7. This can be shown formally by allowing v a rie tie s to be less th an perfect s u b s titu te s . © The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(18)

V. Final Remarks

Industrial econom ists have focused on th e p ric e -s e tte r /q u a n tity - s e t te r d istinction as a fundamental determ inant of m arket performance. I show in th is paper th a t th e reason structu re-p erfo rm an ce

relationships are sen sitiv e to th e use of price or quan tity as a decision variable is because th e choice of decision variables determ ines the slope of th e residual demand curve along which an individual firm maximizes profit.

W hether a firm s e t s price or quantity is n o t of fundamental im portance for stru ctu re-p erfo rm an ce relationships. What is of fundamental im portance is th e slope of a firm's residual demand curve. When one models profit maximization along a residual demand curve directly, im portant re s u lts of th e lite ra tu re on p ric e -s e ttin g and q u a n tity -se ttin g firms (such as th e impact of product differentiation on market efficiency or th e private p ro fitab ility of exogenous m ergers) appear as special cases of more general resu lts.

(19)

R e fe re n c e s

Bertrand, Jo sep h "Review," Journal des Savants Volume 68, 1883. pp. 4 9 9 -5 0 8 : reprinted in English tra n sla tio n by Jam es W. Friedman in Andrew F. Daughety, Andrew F., editor, Cournot oligopoly. Cambridge: Cambridge U niversity Free», 1988, pp. 7 3 -8 1 .

Cournot, Augustin R esearches into th e M athematical Principles of th e

Theory of W ealth, original Paris: L. H achette, 1838: English

tra n sla tio n by Nathaniel T. Bacon. New York: The Macmillan Company,

1897. reprinted 1927 by The Macmillan Company, New York w ith n o te s by

Irving Fisher. Irving: reprinted 1960, 1964, 1971 by A ugustus M. Kelley, New York.

Deneckere, Raymond and Davidson, Carl "Incentives to Form Coalitions w ith Bertrand Competition," Rand Journal of Economics Volume 16, Number 4, W inter 1985, pp. 4 7 3 -8 6 .

Johansen. Leif. "On th e s t a tu s of th e Nash ty p e of noncooperative equilibrium in economic th eo ry ,” Scandinavian Journal of Economics Volume 84, Number 3. 1982, pp. 4 2 1 -4 1 .

Klemperer, Paul D. and Meyer, M argaret A. "Price Com petition vs. Q uantity Competition: th e Role of U ncertainty," Rand Journal of

Economics Volume 17, Number 4, 1986, pp. 4 0 4 -4 1 5 : reprinted in

Andrew F. Daughety, editor, Cournot oligopoly. Cambridge: Cambridge

U niversity Press, 1988, pp. 2 2 9 -6 1 .

Majerus, David W. “Price vs. Q uantity Com petition in Oligopoly

Supergames," Economics L e tte rs Volume 27, 1988, pp. 2 9 3 -7 . Perry, Martin K. and Porter, Robert H. "Oligopoly and th e Incentive for Horizontal Merger," American Economic Review Volume 75. Number 1, March 1985, pp. 2 1 9 -2 7 .

Saiant, Stephen W., Sw itzer, S., and Reynolds, Robert J. "Losses from Horizontal Merger: The E ffects of an Exogenous Change in Industry S tru ctu re on Cournot-N ash Equilibrium." Q uarterly Journal of Economics Volume 98, Number 2, May 1983, pp. 1 8 5 -2 1 3 .

Shubik, Martin Market S tru ctu re and Behavior. Cambridge,

M a s s a c h u s e t t s : H a rv a rd U n iv e r s ity P r e s s , 1 9 8 0 .

Singh, N. and Vives, Xavier "Price and Quantity Com petition in a D ifferentiated Oligopoly," Rand Journal of Economics. Volume 15. Number 4, W inter 1984, pp. 5 4 6 -5 4 .

Solow, Robert M. "Down th e Phillips Curve w ith Gun and Camera,” in Inflation, Trade and T axes. Ohio S ta te U niversity Press, 1976.

ViMfcS,

T X t

I Q 5 )

t

'£

2 - )VS

(

; r t )

(20)

Vives, Xavier "On th e Efficiency of Bertrand and Cournot Equilibria w ith Product D ifferentiation," Journal of Economic Theory Volume 36,

1984, pp. 1 6 6 -7 5 . © The Author(s). European University Institute. Digitised version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research Repository.

(21)

EUI

WORKING

PAPERS

EUI Working Papers are published and distributed by the

European University Institute, Florence

Copies can be obtained free of charge

- depending on the availability of stocks - from:

The Publications Officer

European University Institute

Badia Fiesolana

1-50016 San Domenico di Fiesole (FI)

Italy

Please use ord er form overleaf

(22)

To

The Publications Officer

European University Institute

Badia Fiesolana

1-50016 San Domenico di Fiesole (FI)

Italy

From

N am e...

Address...

□ Please send me a complete list of EUI Working Papers

□ Please send me a complete list of EUI book publications

□ Please send me the EUI brochure Academic Year 1993/94

□ Please send me the EUI Research Report

Please send me the following EUI Working Paper(s):

No, Author

...

Title: ...

No, Author

...

Title'. ...

No, Author

...

Title: ...

No, Author

...

Title: ...

Date

...

Signature

(23)

Working Papers of the Department of Economics

Published since 1990

ECO No. 90/1

Tamer BASAR and Mark SALMON Credibility and the Value of Information Transmission in a Model of Monetary Policy and Inflation

ECO No. 90/2 Horst UNGERER

The EMS - The First Ten Years Policies - Developments - Evolution ECO No. 90/3

Peter J. HAMMOND

Interpersonal Comparisons of Utility: Why and how they are and should be made

ECO No. 90/4 Peter J. HAMMOND

A Revelation Principle for (Boundedly) Bayesian Rationalizable Strategies

Independence of Irrelevant Interpersonal Comparisons

ECO No. 90/6 Hal R. VARIAN

A Solution to the Problem of Externalities and Public Goods when Agents are Well-Informed

ECO No. 90/7 Hal R. VARIAN

Sequential Provision of Public Goods ECO No. 90/8

T. BRIANZA, L. PHLIPS and J.F. RICHARD

Futures Markets, Speculation and Monopoly Pricing

ECO No. 90/9

Anthony B. ATKINSON/ John MICKLEWRIGHT

Unemployment Compensation and Labour Market Transition: A Critical Review

The Role of Information in Economics

ECO No. 90/11

Nicos M. CHRISTODOULAKIS Debt Dynamics in a Small Open Economy

ECO No. 90/12 Stephen C. SMITH

On the Economic Rationale for Codetermination Law ECO No. 90/13 Elettra AGLIARDI

Learning by Doing and Market Structures ECO No. 90/14

Peter J. HAMMOND Intertemporal Objectives ECO No. 90/15

Andrew EVANS/Stephen MARTIN Socially Acceptable Distortion of Competition: EC Policy on State Aid ECO No. 90/16

Stephen MARTIN

Fringe Size and Cartel Stability ECO No. 90/17

John MICKLEWRIGHT

Why Do Less Than a Quarter of the Unemployed in Britain Receive Unemployment Insurance? ECO No. 90/18 Mrudula A. PATEL

Optimal Life Cycle Saving With Borrowing Constraints: A Graphical Solution ECO No. 90/19 Peter J. HAMMOND

Money Metric Measures of Individual and Social Welfare Allowing for Environmental Externalities ECO No. 90/20 Louis PHLIPS/ Ronald M. HARSTAD

Oligopolistic Manipulation of Spot Markets and the Timing of Futures Market Speculation

Working Paper out of print

(24)

Migrants

ECO No. 90/22 John MICKLEWRIGHT The Reform of Unemployment Compensation:

Choices for East and West ECO No. 90/23 Joerg MAYER

U. S. Dollar and Deutschmark as Reserve Assets

ECO No. 90/24 Sheila MARNIE

Labour Market Reform in the USSR: Fact or Fiction?

ECO No. 90/25 Peter JENSEN/

Niels WESTERGARD-NIELSEN Temporary Layoffs and the Duration of Unemployment: An Empirical Analysis ECO No. 90/26

Stephan L. KALB

Market-Led Approaches to European Monetary Union in the Light of a Legal Restrictions Theory of Money ECO No. 90/27

Robert J. WALDMANN

Implausible Results or Implausible Data? Anomalies in the Construction of Value Added Data and Implications for Esti mates of Price-Cost Markups ECO No. 90/28 Stephen MARTIN

Periodic Model Changes in Oligopoly ECO No. 90/29

Nicos CHRISTODOULAKIS/ Martin WEALE

Imperfect Competition in an Open Economy

Steve ALPERN/Dennis J. SNOWER Unemployment Through ‘Learning From Experience’

ECO No. 91/31

David M. PRESCOTT/Thanasis STENGOS

Testing for Forecastible Nonlinear Dependence in Weekly Gold Rates of Return

ECO No. 91/32 Peter J. HAMMOND Harsanyi’s Utilitarian Theorem: A Simpler Proof and Some Ethical Connotations

ECO No. 91/33 Anthony B. ATKINSON/ John MICKLEWRIGHT

Economic Transformation in Eastern Europe and the Distribution of Income* ECO No. 91/34

Svend ALBAEK

On Nash and Stackelberg Equilibria when Costs are Private Information ECO No. 91/35

Stephen MARTIN

Private and Social Incentives to Form R & D Joint Ventures ECO No. 91/36

Louis PHLIPS

Manipulation of Crude Oil Futures ECO No. 91/37

Xavier CALSAMIGLIA/Alan KIRMAN A Unique Informationally Efficient and Decentralized Mechanism With Fair Outcomes

ECO No. 91/38

George S. ALOGOSKOUFIS/ Thanasis STENGOS

Testing for Nonlinear Dynamics in Historical Unemployment Series ECO No. 91/39

Peter J. HAMMOND

The Moral Status of Profits and Other Rewards:

A Perspective From Modem Welfare Economics

(25)

Vincent BROUSSEAU/Alan KIRMAN The Dynamics of Learning in Mis- Specified Models

ECO No. 91/41

Robert James WALDMANN

Assessing the Relative Sizes of Industry- and Nation Specific Shocks to Output ECO No. 91/42

Thorsten HENS/Alan KIRMAN/Louis PHLIPS

Exchange Rates and Oligopoly ECO No. 91/43

Peter J. HAMMOND

Consequentialist Decision Theory and Utilitarian Ethics

ECO No. 91/44 Stephen MARTIN

Endogenous Firm Efficiency in a Cournot Principal-Agent Model

ECO No. 91/45 Svend ALBAEK

Upstream or Downstream Information Sharing?

ECO No. 91/46 Thomas H. McCURDY/ Thanasis STENGOS

A Comparison of Risk-Premium Forecasts Implied by Parametric Versus Nonparametric Conditional Mean Estimators

ECO No. 91/47 Christian DUSTMANN

Temporary Migration and the Investment into Human Capital

ECO No. 91/48 Jean-Daniel GUIGOU

Should Bankruptcy Proceedings be Initiated by a Mixed

Creditor/ Shareholder? ECO No. 91/49 Nick VRIEND

Market-Making and Decentralized Trade ECO No. 91/50

Jeffrey L. COLES/Peter J. HAMMOND Walrasian Equilibrium without Survival: Existence, Efficiency, and Remedial Policy

Frank CRITCHLEY/Paul MARRIOTT/ Mark SALMON

Preferred Point Geometry and Statistical Manifolds

ECO No. 91/52 Costanza TORRICELLI

The Influence of Futures on Spot Price Volatility in a Model for a Storable Commodity

ECO No. 91/53

Frank CRITCHLEY/Paul MARRIOTT/ Mark SALMON

Preferred Point Geometry and the Local Differential Geometry of the Kullback- Leibler Divergence

ECO No. 91/54 Peter M0LLGAARD/ Louis PHLIPS Oil Futures and Strategic Stocks at Sea

ECO No. 91/55 Christian DUSTMANN/ John MICKLEWRIGHT

Benefits, Incentives and Uncertainty ECO No. 91/56

John MICKLEWRIGHT/ Gianna GIANNELLI

Why do Women Married to Unemployed Men have Low Participation Rates? ECO No. 91/57

John MICKLEWRIGHT

Income Support for the Unemployed in Hungary

ECO No. 91/58 Fabio CANOVA

Detrending and Business Cycle Facts ECO No. 91/59

Fabio CANOVA/ Jane MARRINAN

Reconciling the Term Structure of Interest Rates with the Consumption Based ICAP Model

ECO No. 91/60 John FINGLETON

Inventory Holdings by a Monopolist Middleman

(26)

ECO No. 92/61 Sara CONNOLLY/John

MICKLEWRIGHT/Stephen NICKELL The Occupational Success of Young Men Who Left School at Sixteen

ECO No. 92/62 Pier Luigi SACCO

Noise Traders Permanence in Stock Markets: A Tâtonnement Approach. I: Informational Dynamics for the Two- Dimensional Case

ECO No. 92/63 Robert J. WALDMANN Asymmetric Oligopolies ECO No. 92/64

Robert J. WALDMANN /Stephen C. SMITH

A Partial Solution to the Financial Risk and Perverse Response Problems of Labour-Managed Firms: Industry- Average Performance Bonds ECO No. 92/65

Agusn'n MARAVALL/Vi'ctor GÔMEZ Signal Extraction in ARIMA Time Series Program SEATS

ECO No. 92/66 Luigi BRIGHI

A Note on the Demand Theory of the Weak Axioms

ECO No. 92/67 Nikolaos GEORGANTZIS The Effect of Mergers on Potential Competition under Economies or Diseconomies of Joint Production ECO No. 92/68

Robert J. WALDMANN/ J. Bradford DE LONG

Interpreting Procyclical Productivity: Evidence from a Cross-Nation Cross- Industry Panel

ECO No. 92/69

Christian DUSTMANN/John MICKLEWRIGHT

Means-Tested Unemployment Benefit and Family Labour Supply: A Dynamic Analysis

Time? A Test for Seasonal Stability ECO No. 92/71

Alessandra PELLONI

Long-Run Consequences of Finite Exchange Rate Bubbles

ECO No. 92/72 Jane MARRINAN

The Effects of Government Spending on Saving and Investment in an Open Economy

ECO No. 92/73

Fabio CANOVA and Jane MARRINAN Profits, Risk and Uncertainty in Foreign Exchange Markets

ECO No. 92/74 Louis PHLIPS

Basing Point Pricing, Competition and Market Integration

Economic Efficiency and Concentration: Are Mergers a Fitting Response? ECO No. 92/76

Luisa ZANCHI

The Inter-Industry Wage Structure: Empirical Evidence for Germany and a Comparison With the U.S. and Sweden ECO NO. 92/77

Agustln MARAVALL

Stochastic Linear Trends: Models and Estimators

Three Tests for the Existence of Cycles in Time Series

ECO No. 92/79

Peter J. HAMMOND/Jaime SEMPERE Limits to the Potential Gains from Market Integration and Other Supply-Side Policies

Working Paper oui of print

(27)

Victor GOMEZ and Agusti'n MARAVALL

Estimation, Prediction and Interpolation for Nonstationary Series with the Kalman Filter

ECO No. 92/81

Victor GOMEZ and Agusti'n MARAVALL

Time Series Regression with AR1MA

Noise and Missing Observations

Program TRAM

ECO No. 92/82

J. Bradford DE LONG/ Marco BECHT “Excess Volatility” and the German Stock Market, 1876-1990 ECO No. 92/83

Alan KIRMAN/Louis PHLIPS

Exchange Rate Pass-Through and Market Structure

ECO No. 92/84 Christian DUSTMANN

Migration, Savings and Uncertainty ECO No. 92/85

J. Bradford DE LONG

Productivity Growth and Machinery Investment: A Long-Run Look, 1870- 1980

ECO NO. 92/86

Robert B. BARSKY and J. Bradford DE LONG

Why Does the Stock Market Fluctuate? ECO No. 92/87

Anthony B. ATKINSON/John MICKLEWRIGHT

The Distribution of Income in Eastern Europe

ECO No.92/88

Agustln MARAVALL/Alexandre MATHIS

Encompassing Unvariate Models in Multivariate Time Series: A Case Study ECO No. 92/89

Peter J. HAMMOND

Aspects of Rationalizable Behaviour

Alan P. KIRMAN/Robert J. WALDMANN I Quit

ECO No. 92/91 Tilman EHRBECK

Rejecting Rational Expectations in Panel Data: Some New Evidence

ECO No. 92/92 Djordje Suvakovic OLGIN Simulating Codetermination in a Cooperative Economy

ECO No. 92/93 Djordje Suvakovic OLGIN On Rational Wage Maximisers ECO No. 92/94

Christian DUSTMANN

Do We Stay or Not? Return Intentions of Temporary Migrants

ECO No. 92/95 Djordje Suvakovic OLGIN A Case for a Well-Defined Negative Marxian Exploitation

ECO No. 92/96 Sarah J. JARVIS/John MICKLEWRIGHT

The Targeting of Family Allowance in Hungary

ECO No. 92/97

Agustin MARAVALL/Daniel PENA Missing Observations and Additive Outliers in Time Series Models ECO No. 92/98

Marco BECHT

Theory and Estimation of Individual and Social Welfare Measures: A Critical Survey

ECO No. 92/99

Louis PHLIPS and Ireneo M;guel MORAS

The AKZO Decision: A Case of Predatory Pricing?

Oligopoly Limit Pricing With Firm- Specific Cost Uncertainty

(28)

Cyclical?

Price Smoothing Policies: A Welfare Analysis

ECO No. 93/1 Carlo GRILLENZONI

Forecasting Unstable and Non-Stationary Time Series

ECO No. 93/2 Carlo GRILLENZONI

Multilinear Models for Nonlinear Time Series

ECO No. 93/3

Ronald M. HARSTAD/Louis PHLIPS Futures Market Contracting When You Don’t Know Who the Optimists Are ECO No. 93/4

Alan KIRMAN/Louis PHLIPS Empirical Studies of Product Markets ECO No. 93/5

Grayham E. MIZON

Empirical Analysis of Time Series: Illustrations with Simulated Data ECO No. 93/6

Tilman EHRBECK

Optimally Combining Individual Forecasts From Panel Data ECO NO. 93/7

Victor G6MEZ/Agustlh MARAVALL Initializing the Kalman Filter with Incompletely Specified Initial Conditions ECO No. 93/8

Frederic PALOMINO

Informed Speculation: Small Markets Against Large Markets

ECO NO. 93/9 Stephen MARTIN

Beyond Prices Versus Quantities

(29)

(30)

(31)

(32)