Total Surplus Research Articles

Endogenous information acquisition and disclosure of private information in a duopoly

This study examines duopolies' incentives to acquire and disclose information about their unknown private costs of production in a Cournot model under three different information disclosure regimes: full disclosure, full concealment, and strategic disclosure regimes. We decompose the value of information into three parts: the value of a firm learning its own type, the value of knowing the rival's type, and the value of disclosing its information to the rival. We show that firms are more incentivized to acquire information in the strategic disclosure regime than in the full disclosure and full concealment regimes. The direct effect of information disclosure decreases consumer surplus for a given information structure, and the indirect effect may increase consumer surplus by providing firms with stronger incentives to acquire information. Furthermore, information acquisition and disclosure always increase the total surplus. Our findings shed light on how regulatory arrangements affect firms' information environment and help evaluate the effectiveness of information disclosure regulation.

The International Trade of Non-Euro CEE Countries During the Period 2014-2021. A Multiparameter Analysis

On their development path the Central and Eastern European (CEE) countries partially overcame the gap to the developed countries by means of the external trade, acquiring the needed goods and services and satisfying the foreign demand for their products which otherwise was lacking on their territory or seizing an opportunity. In the current paper the authors aim at analysing the evolution of the trade flows of the countries they thought to be the most similar in this aspect, which are the ones belonging to the non-euro area of the European Union (EU) during the period 2014-2021. The research used the Eurostat database, the products being classified after the Standard International Trade Classification (SITC) main categories in order to find out the sectors with the largest contribution to the total surplus or deficit. Moreover, there were identified the main partners of every analysed country and calculated the evolution of respective trade balances at the start and the end of the selected period of time. The authors findings reveal an increasing dependency on exports to Germany, imports from China, decreasing imports of mineral fuels from Russia and also important similarities and differences in the group. The novelty of the manuscript resides in comparing the most profitable sectors during the analysed period and identifying the partners’ contribution to the surplus or the deficit. The current research might be extended with a more in-depth level of multinational enterprises and also in the case of services.

Public–Private Collusion

We study collusion between a public firm and a private firm facing linear demand and quadratic costs. We characterize the collusive outcome that results from Nash bargaining and compare it to the non-cooperative outcome. If the public firm’s taste for consumer surplus is mild, both firms reduce output (as in a private duopoly). If it is intermediate, while the public firm reduces output, the private firm expands output to such an extent that total output increases. If it is strong, the private firm’s output expansion does not compensate for the public firm’s output contraction, and thus total output decreases. We also characterize collusion sustainability, and assess the impact of relative bargaining power, degree of cost convexity, public firm’s taste for total surplus, and cost asymmetry. We conclude that, by reducing the productive inefficiency that is caused by the public firm being more expansionary, collusion may lead to higher profits and consumer surplus.

Load-Following Forward Contracts

Suppliers and large buyers of electricity often sign load-following forward contracts (LFFCs). A LFFC obligates an electricity supplier to deliver at a pre-specified unit price a fraction of the buyer’s ultimate demand for electricity. We show that relative to more standard (“swap”) forward contracts, LFFCs can reduce the variation in the wholesale price of electricity. However, LFFCs also can increase the expected wholesale price and thereby reduce expected consumer surplus and total surplus.

How damaging are environmental policy targets in terms of welfare?

International environmental agreements can lead to the design of environmental policy targets for individual countries. One of the most timely examples are targets aiming at increasing the share of renewable energy production in the overall energy mix. To reach these targets, corresponding governments must stimulate the private sector to undertake sufficient investments in time. This paper studies the effect of a subsidy on the probability of reaching a policy target and on the resulting welfare. The subsidy in the form of a fixed price support accelerates investment and increases the investment size. As such it helps to reach a policy target in time, but also has its own effects on the total surplus, the latter being the sum of producer and consumer surplus. The paper defines a new measure, “the expected Total Surplus corresponding to the Policy Target” abbreviated by TSPT, which takes all these effects into account, including the penalty that is incurred upon not reaching the policy target. Based on the TSPT we determine the optimal subsidy size. We find that a policy target increases the optimal subsidy size. An international policy target can cause a tradeoff in the sense that a large investment is required to achieve the target, while at the same time such a large investment is bad in terms of total surplus. We also find that targets designed with earlier deadlines and intermediate levels of target sizes are more effective in motivating governments to reach the target with a high likelihood. A larger penalty can induce more subsidy support from the government, but always harms total surplus.

The weight of the crowd, social information credibility, and firm strategy

When considering a purchase, consumers often augment their private information about a product with anonymous online social information (reviews, etc.). We examine the impact on firm strategy of how consumers weight these two information sources—private and social—in their purchase decisions. An increase in weight on private information always results in higher prices at the interior equilibrium. However, the effects on profits, consumer, and total surplus are nonmonotonic: all increasing with the weight on private information when weight is high but decreasing when weight is low. Profit and surplus decrease with weight when weight is low because a marginal increase in a low weighting leads to a contraction of demand. The dynamic reverses when weight is high. Besides weighting of information sources, our model incorporates the questionable credibility of social information. A firm's optimal investment to improve social information credibility depends on whether consumers process information in a Bayesian or non‐Bayesian manner. We show that, compared to Bayesian consumers, non‐Bayesian consumers endogenously trust (distrust) social information from firms with high(low)‐positivity ratings. This distinction in information processing results in a stark contrast in how firms manage social information credibility: when facing Bayesian consumers, with an increase in the positivity of its social information, a firm with high(low) positivity spends less (more) to improve credibility. On the contrary, when facing non‐Bayesian consumers, a firm with high(low) positivity spends more (less) to improve credibility. Product quality also affects optimal credibility investment, following an inverted U‐shape.

Softening Competition Through Unilateral Sharing of Customer Data

We study how a data-rich firm can benefit by unilaterally sharing its customer data with a data-poor competitor when the data can be used for price discrimination. By sharing data on the segment of market that is more loyal to the competitor and keeping the data on the competitor’s most loyal segment to itself, the firm can induce the competitor to raise its price for consumers on which it does not have data. Such data sharing is an example of a fat-cat strategy as it softens price competition that follows data sharing. Although consumer surplus decreases as a result of data sharing, total surplus can increase when the sharing firm concedes its market share to the competitor, which improves the quality of consumer–firm matching. This paper was accepted by Joshua Gans, business strategy. Funding: C. Choe and C. Wang gratefully acknowledge financial support from the Australian Research Council [Grant DP210102015]. J. Cong would like to acknowledge the financial support from the National Natural Science Foundation of China [Grants 72003035, 72192845] and Shanghai Pujiang Program [Grant 2019PJC007]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4689 .

The Allocation of the Economic Value of Second-Generation Antipsychotics Over the Product Life Cycle: The Case of Risperidone in Sweden and the United Kingdom

ObjectiveThis article estimates the life-cycle value of risperidone as representative of second-generation antipsychotics (SGA) relative to haloperidol (first-generation antipsychotics). MethodsWe estimated the number of patients treated with risperidone in Sweden and the United Kingdom, from 1994 to 2017, using data of usage and volume sales. We collected data from the literature on the effectiveness (quality-adjusted life-years per patient per year), direct costs (health services), and indirect costs (productivity) of risperidone and haloperidol. We proxied the incremental value added by the new class (SGA) using a comparator from the inferior class. Next, we modeled the life-cycle uptake of risperidone to estimate the life-cycle incremental cost (ie, direct, indirect, and medicine costs), incremental quality-adjusted life-years, and net monetary benefit of risperidone. We also assessed the life-cycle distribution of the social surplus between the payer (consumer surplus) and the innovator (producer surplus). ResultsFor the United Kingdom, consumer surplus represents around 72% of the total surplus before patent expiration and around 95% after patent expiration. For Sweden, the consumer surplus represents around 94% of the total surplus before patent expiration and around 99% after generic competition. ConclusionThese results suggest that the value added by SGAs to the system is higher than the expected value estimated using cost-effectiveness analysis at launch.Pricing and reimbursement decisions could recognize the full life cycle of value of innovative medicines. This not only presents a challenge of estimation but also of assessing the appropriate division of shares of social value.

An Information Theory of Efficient Differential Treatment

When are differential treatment policies—such as preferential treatment, affirmative action, and gender equity policies—justified by efficiency concerns? I propose a nonparametric assignment model where a policymaker assigns agents to different treatments or positions to maximize total surplus, based on the agents’ characteristics and noisy information about their types. I provide necessary and sufficient conditions on the agents’ signal structures, which characterize whether surplus maximization requires differential treatment or not, and study how the bias and informativeness of signal structures determine the efficiency implications of differential treatment. I examine implications of this model for inequality, decentralization, and empirical work. (JEL D63, D82, D83, I23, I24, J71)

Research on compensation standards for cultivated land protection based on a value-added benefit model in Xinjiang, China

This study examines the content of the compensation standard measurement for cultivated land protection to effectively address the imbalance between local economic development and cultivated land protection. The empirical analysis relies on a value-added benefit model. Using the grain supply and demand balance method, 14 prefectures (cities) in Xinjiang were divided into cultivated land deficit/surplus areas, and based on the theory of value-added benefits of converting cultivated land to construction land, a compensation standard measurement system for cultivated land protection was established, and correction coefficients such as potential urban development intensity and government payment capacity were introduced to accurately determine the realistic compensation standard for cultivated land protection in areas that are paid and receive compensation. The results of the study found that the total surplus area of cultivated land in Xinjiang is 271.57 × 104 hm2, which is in surplus overall, while within Xinjiang, four states (cities) are cultivated land deficit areas, which are also the areas that need to pay compensation amounts, and 10 states (cities) are cultivated land surplus areas, which receive compensation payments. The average compensation standard for cultivated land protection in Xinjiang is 24.27 × 104 RMB/hm2, while the compensation standard for cultivated land protection in each state (city) is mainly influenced by the benchmark land price and the comprehensive value of cultivated land, of which the benchmark land price is the core factor affecting the compensation standard. In terms of the total amount of compensation, the total amount of compensation paid for cultivated land protection in Xinjiang is 5,323.93 × 108 RMB, which is paid by the provinces where cultivated land is scarce, and in terms of the provinces, by the four compensation areas to the remaining 10 reimbursement areas, for which we put forward policy suggestions such as adopting diversified forms of compensation, alleviating financial pressure, financing through multiple channels, securing sources of funding, establishing cultivated land protection compensation standards, dynamic measurement platforms, and supervision and management mechanisms to realize long-term compensation mechanisms for cultivated land. The study is conducive to clarifying the rights and responsibilities of cultivated land protection, mobilizing the motivation of the main actors in cultivated land protection, and promoting balance and harmony between regional economic development and cultivated land protection.

Optimal information disclosure and market outcomes

This paper addresses two central questions in markets with adverse selection: How does information impact the welfare of market participants (sellers and buyers)? Also, what is the optimal information disclosure policy and how is it affected by the planner's relative welfare weight on sellers' surplus versus consumers' surplus? We find that as a result of improved information, prices become more strongly associated with the true quality of sellers and, thus, more dispersed. This will result in higher total surplus. Furthermore, we find that better information has opposing welfare effects on consumers and producers that could lead to limited disclosure depending on the social objective and market characteristics.

Capital immobility and rollover risk in debt markets

This paper aims to develop a credit-risk model in which firms face rollover risk, and the markets for defaulted assets are segmented due to entry costs. The paper shows that reducing the entry costs in this economy may decrease the total surplus of the economy. This outcome can arise because when market barriers are lifted, the gap between the liquidation prices across the markets will shrink, but then the market that would experience a price drop may face more bankruptcies because the rollover risk will increase in that market. The paper describes under which condition such an intervention policy improves or hurts the total surplus.

Environmental sustainability or equity in welfare? Analysing passenger flows of a mass rapid transit system with heterogeneous demand

Comfort could be one of the major factors influencing demand for public transit systems across income groups. Those in the high-income group, typically car owners, value comfort more than those in the traditionally captive low-income group. This paper examines the heterogenous effect of crowding on mode choice and the subsequent demand for mass rapid transit (MRT) system across income groups using stated-preference data collected from Dhaka, Bangladesh. The crowding variable was incorporated into mixed logit models as a Bureau of Public Roads (BPR)-type function, establishing non-linear sensitivity of different income groups to the effect of crowding on mode choice. We then estimate equilibrium passenger flows for different income groups for multiple scenarios based on varying levels of fares and capacity under the stochastic user equilibrium (SUE) condition. The consumer surplus, revenue, and total surplus associated with each scenario were calculated. The findings show that fares that maximize social welfare are not equitable as they result in very low MRT demand among the low-income group. Meanwhile, higher fares result in greater demand for MRT among the high-income group, improved social welfare, and less total car use. These results highlight the trade-off between an equitable public transport system and environmental sustainability.

Collusion with capacity constraints under a sales maximization rationing rule

In the repeated Bertrand duopoly with capacity constraints, we introduce a sales maximization rationing rule, instead of a standard rationing rule, Efficient rule (E rule). Under our new rule, when the demand of a firm with a lower price exceeds its capacity, the consumers who are willing to buy at that price are rationed to that firm according to their unwillingness to buy. We find that the maximum one-shot total payoff under our rule is not less than that under E rule at any capacities; it is achieved by an asymmetric price pair rather than a symmetric monopoly price pair and it is strictly greater than that under E rule unless each firm’s capacity is too large. Under the one-shot total payoff maximization, total surplus under our rule is also equal to or greater than that under E rule at any capacities. Hence, our rule is also appealing to the social planner, and it is implementable due to information technology which collects information about the consumers’ willingness to pay. In the repeated game, patient firms can achieve the total payoff maximization by an equilibrium under our rule. Moreover, a range of discount factors within which the total payoff maximization can be sustained under our rule is wider than that under E rule at some capacities.

Should antitrust regulators be wary of inter-firm coordination agreements through a tourism destination card?

Inter-firm coordination agreements through a destination card (DC) are a widespread profit-increasing strategy in tourism destinations. Literature on tourism economics argues that this type of coordination increases social efficiency. However, industrial organization studies consider heterogeneous consumers and warn that a DC-type agreement can be welfare impairing. Conflicting views have become an issue for tourism destinations, as collusion is in the crosshairs of antitrust regulators. This paper aims to clarify these contradictory results by developing a duopoly model with heterogeneous tourists. A sensible demand structure is assumed which, unlike previous literature, includes loyal demand segments. A policy prescription is obtained, namely, a DC alliance is welfare enhancing if DC price is equal to or lower than the cost of joint consumption under no coordination. However, a greater total surplus in markets may be accompanied by a reduction in consumer welfare, which differs from the conventional view in tourism economics.

Modeling Tiered Pricing Frameworks: A Simulation Approach

Drug plans take different approaches to determining reimbursement prices for generic drugs. One common approach is to set the maximum reimbursement price as a percentage of the price of the interchangeable branded drug. In many countries this percentage depends on the number of generic entrants, a model we call "tiered pricing." This paper seeks to enhance understanding of how to set the tiers. We construct a simple model of tiered pricing and set parameters to match evidence on generic drug costs and the distribution of revenues. Using simulation methods, we then assess different tier structures in terms of total surplus and average drug cost. We find when tiers are bunched tightly together welfare outcomes are poor. Moreover, there are large welfare gains from increasing the number of tiers from one to two, and only small welfare gains from increasing the number of tiers beyond four. The choice of tiers has substantial welfare and cost implications. While it is possible to refine the simulation analysis based on specific market characteristics, an optimal tier structure, such as the one we propose in the paper, should have at least two tiers.

Does environmental uncertainty of enterprises aggravate the accrual anomaly in the stock market? Evidence from China.

Enterprises do not exist independently of the external environment, so uncertainty affects their earnings volatility and exacerbates the information asymmetry between internal and external stakeholders. As a major manifestation of capital market mispricing, the accrual anomaly is caused by investors’ functional fixation on total surplus under information asymmetry. Against this backdrop, taking A-share listed companies in China from 2007 to 2019 as our research objects, this study explores the impact of environmental uncertainty on the accrual anomaly based on the information asymmetry and investor irrationality perspective. We find that environmental uncertainty enterprises facing exacerbates the accrual anomaly in the Chinese stock market, and internal control quality, state ownership and the media coverage will affect this impact. Furthermore, this study shows that there are three factors playing the mediating role in the effect, accounting information quality, investment growth and the investor attention. The results show that environmental uncertainty exacerbates the accrual anomaly driven by information manipulation, empire building and investor irrationality. Improving investor irrationality behavior and restraining the self-interest behavior of managers can help alleviate the mispricing of accruals caused by information asymmetry in psychology.

Effects of vertical integration on internet service providers’ zero-rating choice

This study presents investigation of the effects of vertical integration between an internet service provider (ISP) and a content provider (CP) on the ISP’s zero-rating choice and social welfare. We develop a simple model in which a monopolistic ISP delivers content from two CPs to a representative consumer. The ISP can offer zero-rating contracts to one or two CPs, thereby allowing the consumer to use zero-rated content without consuming monthly data usage. We investigate how integration between the ISP and a CP affects the ISP’s zero-rating choice and social welfare. Our findings are the following. First, the vertically integrated ISP might zero-rate the unaffiliated CP exclusively when the CPs’ profitability is not so low. Second, the integration increases the total surplus and the independent CP’s profit. Our results indicate that vertical integration is welfare enhancing and beneficial to the independent CP.

Informational Hold Up and Intermediaries

Why do some incomplete information markets feature intermediaries while others do not? I study the allocation of two goods in an incomplete information setting with a single principal, multiple agents with unit demand, and interdependent valuations. I construct a novel dynamic mechanism implemented by a principal who faces a set of intermediaries, each of whom represents an ex ante identical set of agents. This mechanism has a unique (up to permutation) weak perfect Bayesian equilibrium. The dynamic mechanism is inefficient with positive probability. Nevertheless, under mild conditions the agents are ex ante better off under the dynamic mechanism relative to a Vickrey-like auction because the intermediaries are more able to exploit information asymmetries in the dynamic mechanism than agents are able to exploit information asymmetries in the Vickrey-like auction. Finally, I show that in large markets the dynamic mechanism and Vickrey-like auction have the same expected total surplus. The comparison between the two mechanisms gives a stylized intuition for the hierarchical structure of larger markets and institutions.

Externalities, entry bias, and optimal subsidy policy for cleaner environment

AbstractThis paper analyses alternative subsidy schemes and long‐run entry bias in a new industry that creates positive environmental externalities (both generation externalities and externalities associated with interindustry technology spillovers). It demonstrates that per‐unit subsidy scheme, despite attracting fewer firms, results in higher industry output and economic surplus in the equilibrium compared with the expenditure equivalent lump‐sum subsidy scheme. However, the later leads to higher total surplus, unless spillover externalities are sufficiently small. Further, the free‐entry equilibrium number of firms may be excessive or insufficient. A key finding of this paper is that the first‐best equilibrium outcome can be implemented through a unique combination of per‐unit subsidy and lump‐sum subsidy/tax, which involves positive government expenditure in the presence of positive externalities.