Anti-Limit Pricing

In this chapter we develop a competitive model for a small open economy with a restricted public good to show how income distribution and political-economic considerations have implications for the optimal provision of a restricted public good. The chapter also examines the effect of a change in the international terms of trade on the optimal provision of the public good. We characterise the optimal level of the public good under different scenarios. In the benchmark scenario there is no lobbying and no distributional considerations in the government’s objective function. Here the optimal level of public good provision is given by the Samuelsonian golden rule. We then allow for lobbying by skilled workers and the capitalists for public good provision but do not allow for distributional considerations by the government. Here we derive a necessary and sufficient condition for the optimal level of public good provision to be bigger than the one in the benchmark case. The (necessary and sufficient) condition depends on the sign of the elasticity of the unit cost of production for the public good with respect to the endowment of unskilled labour. In the third scenario, we rule out lobbying but allow for income distributional considerations in the government’s objective function. Here we find sufficient conditions (but not necessary condition) for the optimal level of public good provision to be higher or lower than that under the benchmark case. We also examine how the optimal provision of public good reacts when there is an appreciation of the country’s international terms of trade and derive a sufficient condition for an appreciation of the terms of trade to increase the optimal level of public good provision.

Cross-shareholdings and competition in a rent-seeking contest

Entry and price dynamics in a perfect foresight model

This dissertation involves measuring and testing the empirical performances of equity pricing models. The first paper extends the constant discount factor model with intrinsic bubbles developed in Froot and Obstfeld (1991) to account for autocorrelation in dividend growth rates. We derive an analytical expression for both the present value stock price and an intrinsic bubble component when dividend growth rates evolve as a Gaussian AR(1) process. Hypotheses tests favor an AR(1) process for dividend growth rates and an AR(1)-based model developed here for price-dividends ratios over a benchmark case. Hypotheses tests also reject the absence of a bubble component in stock prices. Incorporating the bubble component into our model provides a significant improvement in fit to observed P/D ratios and stock prices. The second paper assesses the empirical implications of the residual income model developed in Ohlson (1995). A key assumption stipulates that next period t+1 residual income is a linear function of current period residual income and a latent variable referred to as ‘other information’. This ‘other information’ is posited to contain information on next period t+1 residual income and reflected in current stock prices. We propose to estimate this latent ‘other information’ variable using a state space framework. We estimate the valuation model, within the embedded state space framework, using the Kalman filter. Performance yardsticks indicate that our state space estimation approach shows promise in valuing stocks. The third paper attempts to estimate and study the role of ‘other information’ vt, as theorized in the Ohlson (1995), for tracking contemporaneous returns and predicting future returns of the S&P 500. vt is unobserved and is defined as a summary of value-relevant information about future profitability. This suggests a potential to predict subsequent returns. We apply a factor augmented vector autoregression (FAVAR) to estimate vt and evaluate its predictive performance. The FAVAR model enables us to estimate unobserved factors that are broadly captured by big data. We use principal components estimation to extract the unobserved factors from a rich set of data. Our analysis shows that the estimated vt has statistically reliable power to predict future returns.

Discounting, inequality and economic convergence

This paper is concerned with the fault detection issue for a class of discrete-time switched systems via the data-driven approach. For the fault detection of switched systems, it is inevitable to consider the mode matching problem between the activated subsystem and the executed residual generator since the mode mismatching may cause a false fault alarm in all probability. Frequently, studies assume that the switching laws are available to the residual generator, by which the residual generator keeps the same mode as the system plant and then the mode mismatching is excluded. However, this assumption is conservative and impractical because many switching laws are hard to acquire in practical applications. This work focuses on the case of switched systems with unavailable switching laws. In view of the unavailability of switching information, the mode recognition is considered for the fault detection process and meanwhile, sufficient conditions are presented for the mode distinguishability. Moreover, a novel decision logic for the fault detection is proposed, based on which new algorithms are established for the data-driven realization. Finally, a benchmark case on a three-tank system is used to illustrate the feasibility and usefulness of the obtained results.

Estimates of limit pricing values are useful to researchers studying princing strategies and oligopolistic behavior. Previous studies have demonstrated that limit prices (profits) can be estimated with the use of data on the entry of new firms. Unfortunately, entry data are scarce. The current study presents a methodology based on a property of dynamic‐stochastic theories of limit pricing wherein limit prices can be estimated without entry data. This methodology requires the use of price elasticity of demand values which are more readily available than entry data. Following the methodology section, an application of this method is presented with a cross‐section sample of consumer goods industries.

We study the existence of equilibria with endogenously complete markets in a continuous-time, heterogenous agents economy driven by a multidimensional diffusion process. Our main results show that if prices are real analytic as functions of time and the state variables of the model then a sufficient condition for market completeness is that the volatility of dividends be nondegenerate. In contrast to previous research, our formulation does not require that securities pay terminal dividends and thus allows for both finite or infinite horizon economies. We illustrate our results by providing easily applicable conditions for market completeness in two benchmark cases: that where the state variables are given by a vector autoregressive process and that where they are given by a vector of autonomous diffusion processes. We also provide counterexamples which show that real analyticity cannot be dispensed with if one is to deduce dynamic market completeness from the structure of dividends.

Chaos indicator and integrability conditions from geometrodynamics

When it examines the risk of coordinated effects, an antitrust authority will usually compare the situation where the merger is accepted with an attendant risk of collusion with the benchmark case in which competition is present ex-post. The main objective of this paper is to show that the antitrust authority must take into account the possibility for firms to collude if a merger is rejected. In fact, firms can have incitations to make collusion ex-post (after a rejection of a merger) whereas they would not make collusion ex-ante. All the papers on mergers and collusion tend to look at a minimal discount factor threshold for collusion to be sustained. This article does not only suggest necessary and sufficient conditions for collusion to be enforced but it also analyses the choice which firms have as to whether to collude. We consider an industry with cost-asymmetric firms and we study the analysis of collusion under leniency programmes.

Entry under uncertainty: Limit and most-favored-customer pricing

Governments of advanced economies are extremely concerned about the illicit acquisition of information on critical technologies employed by their industries, and countering this economic espionage is quickly becoming one of their top priorities. The present paper advances the theoretical analysis of the interaction between economic espionage and counter-espionage, and presents a first approximation to an inquiry into the rationale for the influence of market competition in its dynamics. The proposed model assumes a country with a one-market economy open to international trade whose product is supplied by domestic firms. Moreover, successful economic espionage implying market entry of foreign firms would harm domestic welfare. Considering counter-espionage policy as entry barrier and sufficient efficiency in espionage and counter-espionage efforts, the analysis of the benchmark case characterized by no foreign consumer and one foreign firm suggests that demand characteristics play an important role in the complex influence of competition in espionage. Irrespective of this, optimal counter-espionage effort is always positive although negatively affected by competition.

The 2000's rise in oil prices has reignited the interest of economists about the influence of these swings on both specific good markets and macroeconomic fluctuations. In the macroeconomic arena, the attention of policymakers and economists has been posed the effects of oil price swings on the economic domestic cycle. In this work, we explore a question under scrutiny among economists and policymakers: the use of fiscal policy as an instrument to accommodate the domestic fluctuations caused by oil price shocks. In particular, we study a floating oil-tax rate used as an instrument to reduce the pass-through of the international price of oil into the domestic economy. We develop two works in this topic. The first paper study a small open economy calibrated to Chile with perfect foresight and finite horizon. This model is applied to two types of policy: a Ramsey problem and an ad-hoc stabilization rule. For both cases, we find that the social planner finds optimal to reduce the pass-through of oil price shocks into the domestic economy. Also, we compute the welfare gains and losses that arise from both types of policy compared to a competitive equilibrium economy where the government plays a passive role. The second paper recasts the model developed in the first study. The salient features of the new model are: uncertainty; infinite horizon; the model is calibrated to two representative economies: developed and developing countries; and the optimal taxation policy is analyzed considering both complete and incomplete markets for the bonds issued by the government. We find significative differences in how the optimal oil-tax rate responds whether the economy is calibrated to a developed country or a developing economy, or if public debt is traded in complete or incomplete markets.In the microeconomic field, we study the ethanol market. Aukayanagul and Miranowski (2009) show that the price of ethanol closely follows the price of oil. Given the sharp rise of oil and ethanol prices in the last years a question has been under scrutiny in the ethanol market: When is profitable to invest in an ethanol plant? In the third paper, we develop a model using the real options approach to answer this question. We incorporate the market structure of the ethanol industry to our model, in which entry and exit of new firms affect the ethanol gross margin (price of ethanol plus co-product value minus purchases of corn). The solution of the model gives threshold values of the ethanol gross margin that indicate when is optimal to both invest in an ethanol plant and to exit the market for an active firm.

Firm entry, excess capacity and endogenous productivity

Extending Milgrom and Roberts (1982) we present an infinite horizon entry model, where the incumbent(s) may use the current price to signal its strength to deter entry. We show that, due to the importance of entrants' types on the post-entry duopoly/oligopoly profits, the incumbent(s) may want to signal its weakness to invite entry of weaker firms.