2016 - Working Papers: Managerial Economics

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Is common knowledge of rationality sluggish?, 9 pp. 
D. Samet
(Working Paper no. 5/2016)
Research no.: 06560100

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The iterative elimination of strongly dominated strategies can be justified by common knowledge of rationality. Rationality in this context means that players do not play strategies which are strongly dominated in a game they know they play. Each iteration of elimination of strongly dominated strategies seems to correspond to an iteration of mutual knowledge, that is, an iteration of “all know that...”. However, this correspondence disappears when we consider games in which the order of elimination goes beyond the first limit ordinal. We show that the fixed point definition of common knowledge is the right concept in this case.

Dynamic vertical collusion, 45 pp. 
D. Gilo and Y. Yehezkel
(Working Paper no. 9/2016)
Research no.: 03450100

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We show that when retailers and their supplier all care about future profits, dynamic collusion involving all of them is easier to sustain than collusion among retailers. This is so even when the supplier is as impatient as retailers are and even though vertical contracts are assumed to be secret. We also find that the more the retailers and the supplier care about future profits, retailers obtain a higher share of the monopoly profits. Furthermore, vertical collusion can enable the supplier to collect a higher wholesale price and make higher profits even when retailers have the bargaining power. Sustaining collusion requires retailers to commit to deal exclusively with the joint supplier and to charge slotting allowances.

Can collusion promote sustainable consumption and production?, 28 pp. (Forthcoming in International Journal of Industrial Organization) 
M. P. Schinkel and Y. Spiegel
(Working Paper no. 18/2016)
​Research no.: 08660100

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Several competition authorities consider the exemption of horizontal agreements among firms from antitrust liability if the agreements sufficiently promote public interest objectives such as sustainable consumption and production. We show that when consumers value sustainable products and firms choose investments in sustainability before choosing output or prices, coordination of output choices or prices boosts investments in sustainability and may even enhance consumer surplus when products are sufficiently close substitutes and the marginal cost of investment in sustainability is relatively low. By contrast, coordination of investments in sustainability leads to lower investments and harms consumers.

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