This paper describes how process and product innovations respond to cost and demand changes. In the present model firms simultaneously choose process and product innovations within a model of ...vertical differentiation and uncovered market. We show that the outcome is unique both in monopoly and in the duopoly. In these outcomes, a demand increase (decrease) enhances (depresses) both process and product innovation, while an increase (decrease) in production costs stimulates (depresses) process innovation but lowers (increases) product one. The insight for these results relies on the scale effect of innovation. Our result can be placed in the ongoing debate on complementarity and substitutability of process and product innovation.
The economics models of reputation and quality in markets can be classified in three categories. (i) Pure hidden action, where only one type of seller is present who can provide goods of different ...quality. (ii) Pure hidden information, where sellers of different types have no control over product quality. (iii) Mixed frameworks, which include both hidden action and hidden information. In this paper we develop a pure hidden action model of reputation and Bertrand competition, where consumers and firms interact repeatedly in a market with free entry. The price of the good produced by the firms is contractible, whilst the quality is noncontractible, hence it is promised by the firms when a contract is signed. Consumers infer future quality from all available information, i.e., both from what they know about past quality and from current prices. According to early contributions, competition should make reputation unable to induce the production of high-quality goods. We provide a simple solution to this problem by showing that high quality levels are sustained as an outcome of a stationary symmetric equilibrium.
On the credibility of ethical banking Barigozzi, Francesca; Tedeschi, Piero
Journal of economic behavior & organization,
10/2019, Letnik:
166
Journal Article
Recenzirano
•We study borrowing decisions of socially responsible and standard entrepreneurs.•Standard entrepreneurs can pretend to be socially responsible by investing in ethical projects.•Overstatement of ...corporate social responsibility negatively affects ethical lenders.•Credit deals allow entrepreneurs to signal their corporate social responsibility.•Overstatement of corporate social responsibility does not emerge in equilibrium.
Motivated entrepreneurs investing in ethical projects financed by ethical banks seems a virtuous albeit rather fragile outcome of the credit market. The credibility of ethical banking is in fact the result of a subtle balance of delicate ingredients supporting each other. To obtain the better credit deals that could be offered when (truly) motivated entrepreneurs and ethical lenders match, non-motivated entrepreneurs may easily pretend to be socially responsible by investing in ethical projects. In a model with moral-hazard (in the credit relationship) and adverse-selection (for the types of entrepreneurs, motivated or not), we show that the market for ethical projects thrives. Market segmentation occurs as a virtuous and unique equilibrium that features standard entrepreneurs and lenders trading in the market for standard projects only, while motivated entrepreneurs deal with ethical banks in the market for ethical projects. In line with the empirical evidence on ethical banking, the model predicts that ethical lenders require lower collateral than commercial banks.
We study a simple game in which two sellers supply goods whose quality cannot be assessed by consumers even after consumption but can be verified with some probability by a public authority. Sellers ...may induce a prospective buyer into a bad purchase through comparative deceptive advertising. The central contribution of this paper is the characterization of a class of pooling equilibria in which low-quality sellers deceive a buyer who is Bayes-rational and makes a purchase decision on the basis of the available information. The analysis of these equilibria suggests that high-quality firms should pursue more intensive advertising campaigns than their low-quality competitors. Surprisingly, we find conditions under which sellers’ expected profit is higher in pooling equilibria than in the separating equilibrium in which quality is reflected by prices and there is no need to waste resources in advertising. Hence, we show that there are plausible cases in which firms should be ex ante willing to tolerate some degree of deceptive advertising by low-quality competitors. In addition, although in these equilibria the buyer purchases low-quality goods with positive probability, the expected utility can be higher than in a separating equilibrium in which the buyer purchases the high-quality good for sure. In this sense, the model also offers an argument in favor of a lenient regulatory approach to deceptive advertising.
The online appendix is available at
https://doi.org/10.1287/mnsc.2016.2665
.
This paper was accepted by J. Miguel Villas-Boas, marketing.
There are two competing sellers of an experience good, one offers high quality, one low. The low-quality seller can engage in deceptive advertising, potentially fooling a buyer into thinking the ...product is better than it is. Although deceptive advertising might seem to harm the buyer, we show that he could be better off when the low-quality seller can engage in deceptive advertising than not. We characterize the optimal deterrence rule that a regulatory agency seeking to punish deceptive practices should adopt. We show that greater protection against deceptive practices does not necessarily improve the buyer welfare.
The business model of low-cost carriers is now well established and accounts for a large share of Western civil aviation, particularly in Europe. To understand why it has proven so successful, we ...develop a theoretical model that exploits the two-sided nature of flights as connectors of supply and demand for goods and services other than traveling itself across physical space. Carriers offer flights of different quality and may sign agreements with suppliers of goods and services at the destination so as to subsidize and foster demand from the carriers’ travelers as in standard two-sided markets. Customers/travelers care about home and destination consumption and about the flight’s quality. Hence, beyond the thickness of the connected sides of the market, the quality of the airline platform has an intrinsic value to travelers. We show that only low-income travelers fly with low-cost airlines, while no-frills carriers are more likely to act as a platform than legacy airlines. We study how the degree of substitution between home and destination consumption affects the equilibrium market structure of the airline industry.
This paper was accepted by Bruno Cassiman, business strategy
.
We investigate the corporate social responsibility of banks. Lenders offer loans to standard and motivated borrowers who undertake either standard or ethical projects. Standard banks have no ...restriction on the types of projects for which they can provide a loan. Ethical banks, instead, commit to financing only ethical projects, which have social profitability but lower expected revenues. Motivated borrowers are keen to invest in ethical projects and to deal with ethical banks. When they are active, ethical banks increase social welfare because the matching of ethical lenders with motivated borrowers reduces the frictions caused by the agency issue.
This paper tackles the issue of unverifiable quality of after-sales insurance services, such as a prompt reimbursement of damages. A dynamic model is introduced in order to allow reputation to emerge ...as a means of disciplining insurance firms to deliver high quality. The equilibrium of a repeated Bertrand game among the insurers is analysed and conditions are derived under which more concentration in the insurance industry can lead to greater equilibrium consumer welfare.
In this paper two simple oligopoly models are considered: the first with homogeneous and the second with differentiated products. Differently from previous contributions this paper shows that with ...imperfect monitoring, there exists a sequence of symmetric strategy profiles (with stochastic punishment) which are Bayesian perfect equilibria and whose expected present value approaches the optimal cartel one, with the desired level of approximation, as the discount factor converges to one. The strategy is similar to that proposed in 1984 by Green and Porter, but has a smooth structure and in general it allows for higher profits.
Termination clauses in partnerships Comino, Stefano; Nicolò, Antonio; Tedeschi, Piero
European economic review,
07/2010, Letnik:
54, Številka:
5
Journal Article
Recenzirano
We show that when designing a partnership agreement partner firms may prefer not to specify how to allocate the commonly owned assets should there be an early termination of the contract. By not ...including such a clause, firms induce litigation before a Court with positive probability. Firms create this ex-post inefficiency in order to increase the levels of non-contractible investments, i.e. increase the ex-ante efficiency. The absence of an asset allocation clause works as a “discipline device” that mitigates the hold-up problem within the partnership. In our set-up, no other contract but that without an asset allocation clause can credibly create an ex-post inefficiency.
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