Anthony J. Creane
Department of Economics - Marshall Hall
Michigan State University
East Lansing, MI 48824-1038 USA
(1-517) 355-4667; (1-517) 432-1068 (fax)
creane
"at" msu.edu
Working papers (PDF files)
Abstract: We examine the standard assumption in the strategic trade policy literature that governments possess complete information. Assuming instead that firms have better information, we explore the long-term incentives for firms to consistently disclose information to their governments in the standard setting. We find that with quantity competition firms disclose both demand and cost information to the governments, thereby giving some justification to the literature’s omniscient-government assumption. Further, the equilibrium exhibits an informational prisoner’s dilemma with demand uncertainty, but not with cost uncertainty. With price competition, however, firms have no incentives to disclose information.
Abstract: Large firms often negotiate wage rates with labor unions. When they do so, an ex-ante agreement to share information about parameters should make it more likely that they will be able to reach an agreement and capture the gains from trade. However, if the firm refuses to share information, the union may shade down its wage demand in order to increase the probability of acceptance. We show that this reduction in the wage can increase the joint surplus to be shared by the agents and increase social welfare. As a result, there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information. We also show that many other outcomes are possible and that social welfare and expected profits are highly non-linear with respect to key parameters.
"Productivity
information in vertical sharing agreements" November 2005
a revised version of this paper appears in International Journal of
Industrial Organization 2007
Abstract: Recent work has introduced an insight into information sharing literature: firms not only share information with their rivals but also with their suppliers. However, by considering the traditional variables of the literature (cost or demand information), this work does not fully take advantage of the richness of such an environment. This paper analyzes instead the sharing of productivity information, which, unlike cost or demand information, affects the supplier’s profits non-linearly. As a result, a firm by sharing information raises its expected input price. Moreover, there is a new strategic effect: by sharing information the firm raises the rival’s expected wage. Through this price effect the sharing information can increase producer surplus in price competition, where previously it reduced producer surplus.
"A note on welfare-improving ignorance about quality,"
a revised version of this paper appears in Economic Theory 2008
Abstract: When product quality is unknown, a natural supposition is that having more “informed consumers” will increase consumer surplus and welfare. However, when a monopolist is selling a product of unknown quality, welfare can decrease in the fraction of informed consumers.
"A note on uncertainty and socially excessive entry" (revised) January 2006,
a revised version of this paper appears in International Journal of Economic Theory 2007
Abstract: It is well known that under general conditions entry into imperfectly competitive markets usually is excessive (e.g., Weizsäcker 1980, Mankiw and Whinston 1986). This note explores the effects of uncertainty on this result. That is, randomly some entrants who incur investment/entry costs fail to enter a market. It is found the previous conditions sometimes do not hold when there is uncertainty. That is, with uncertainty entry may be socially insufficient by more than one firm. For example, in equilibrium four firms may attempt to enter, when it is socially optimal for seven firms to attempt to enter the market.
"Input suppliers, differential pricing and information sharing agreements" October 2005,
a revised version of this paper is forthcoming in Journal of Economics & Management Strategy.
Abstract: It
is common for firms to systematically share financial and productivity data
with their input suppliers, as well as their rivals. However, there has been a
systematic change in the
revision requested
Abstract: AT&T was known for both funding a world-class research lab and delaying deployment of useful innovations from the lab. To explain this behavior we consider a model with an incumbent facing a potential entrant. The incumbent can choose from two technologies for production: old and new. The entrant’s choice is limited to the old. We show that, under correlated production uncertainty, use of the common technology exposes the entrant to a greater risk. Therefore, the incumbent may suppress a newer, more efficient technology in favor of the old as a means to deter entry.
Abstract: When FDI lowers foreign firms’ costs, domestic firms are harmed but consumers benefit, and vice versa. However, the welfare effects depend on the proportion of production from domestic firms. If domestic firms roughly equal foreign firms in number, FDI reduces domestic welfare, whether FDI lowers or raises costs.
Abstract: We examine the role of cost uncertainty in a firm’s choice between exporting and foreign investment in oligopolistic industry. We consider both foreign direct investment and an international joint venture, and allow country-specific and firm-specific cost uncertainty. Unlike exporting, either form of foreign investment exposes home and foreign firms to common country-specific cost shocks, implying a better knowledge of each other’s country-specific shocks. Further, a joint venture allows the firms to learn each other’s firm-specific cost. A firm’s plant location decision depends on the interaction of these two effects, which depend on the type of competition and the substitutability of the firm’s products.
"Pattern Bargaining as an Equilibrium Outcome" with Carl Davidson, June 2007
Abstract: Pattern bargaining is a negotiating strategy that is often employed by industry-wide unions in oligopolistic industries to set wages. However, formal explanations for its existence in equilibrium are rare. The conventional wisdom is that pattern bargaining “takes labor out of competition” and therefore softens bargaining between the union and firms, resulting in higher industry wide wages. However, this does not explain why firms agree to pattern bargaining. In this paper, we argue that the bargaining mechanism cannot be imposed upon the firms and that for pattern bargaining to survive over time as a negotiating strategy it must be agreed upon by all agents involved in the wage setting process. Thus, we analyze a model in which the agents negotiate over the bargaining mechanism, the order of the negotiations and the wages. We show that when side-payments are possible, pattern bargaining may be adopted in equilibrium, but this often occurs when pattern bargaining is the firms’ most preferred mechanism, not the union’s. We also show that when side-payments are not possible, there are cases in which all agents prefer pattern to sequential bargaining, but the union and the firms always disagree over the target firm and so pattern bargaining does not arise in equilibrium. Next, we show that the manner in which firms differ is critical, as when firms differ in non-labor costs, pattern bargaining can arise in equilibrium with the agents agreeing about the identity of the target firm and without the use of side payments. Finally, we show that when equilibrium is characterized by pattern bargaining, it may harm consumers and society. This provides an explanation as to how pattern bargaining can arise in equilibrium and why there is often strong political opposition to it.
"Socially Excessive Dissemination," (Revised) December 2005
Abstract: Assigning monopoly power to an inventor is usually viewed as a static efficiency cost required so as to obtain the dynamic benefit of increased research and development; public dissemination is considered to be the optimal static policy. As Ordover argues (1991), “static efficiency considerations mandate that the knowledge asset, resulting from R&D…be made widely available to those who are willing to pay the low marginal cost of dissemination.” Katz and Shapiro (1986) find that when a monopolist licenses an innovation to competing downstream firms, “[its] incentives to disseminate the innovation typically are [socially] too low.” In contrast, I find that for cost-reducing innovations, not only can dissemination be excessive if this knowledge asset was made widely available, but even if there is monopoly dissemination. For example, it can be profit maximizing for the lab to issue several license while it is socially optimal that no licenses are issued. Further, rather than being a static efficiency cost, assigning monopoly power could raise welfare.
revision requested
Abstract:In
1984 GM and
"Competing MNC’s and Strategic
FDI "
with Kaz Miyagiwa, September 2007
Abstract:We
examine a Northern multinational firm’s choice between exporting and foreign
direct investment into a Southern market when it competes with other Northern
multinationals. When the MNCs compete strategically,
plant location then has strategic effects because there are country (location)
specific shocks to production costs – different economies face different
shocks. The more correlated the shocks between plants, the more strategic
choices are inadvertently correlated, which harms firms purely through the
strategic effect (e.g., risk aversion does not play a role). As a result we may
observe risk-neutral firms “diversifying” their plant locations through FDI
even if the costs of production are greater in the FDI country. For example,
Japanese auto manufacturers had very different strategies regarding FDI or
exporting to the
"Latent Adverse Selection," (Revised) February 2006
Abstract: With products of unobservable quality, the lemons problem can lead to a market failure; but how did such a market arise? Previous work has intimated that they arise from observable investment-entry that generates products of random quality. This intimation is explicitly model finding that when adverse selection could arise with an exogenous number of firms, it does not with investment-entry. The reason is that fewer competitors (less entry) results in higher prices which induces high quality producers to produce. Thus, the potential for adverse selection acts as an entry barrier; there are profits in equilibrium and entry is socially inefficient.
"Uncertain product quality, optimal pricing and product development," 2002