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Abstract:
In this paper, we look at the case for bundling in an oligopolistic environment. We show that bundling is a particularly effective entry-deterrent strategy. A company that has market power in two goods, A and B, can, by bundling them together, make it harder for a rival with only one of these goods to enter the market. Bundling allows an incumbent to defend both products without having to price low in each. The traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist. Although price discrimination provides a reason to bundle, the gains are small compared to the gains from the entry-deterrent effect.

Abstract:
The economic theory of bundling has moved from the classroom and academic journals to the public policy arena. Its debut was dramatic. On July 3, 2001, the European Commission blocked the $42 billion merger between GE and Honeywell. A primary reason for their objection to this combination was a concern over bundling.

This paper uses the context of the proposed GE-Honeywell merger to address the concerns raised by bundling. We set out the theory as put forth by the Commission and try to reconcile this theory with both the economic theory of bundling and the facts of the case. We discuss what is meant by bundling and explain when it is a potential problem and when it is not. Based on this understanding, we propose anti-trust policy recommendations to deal with the novel issues raised by bundling.

Bundling, Antitrust, EU, GE, Honeywell

Abstract:
In this paper, we show that a firm that sells a bundle of complementary products will have a substantial advantage over rivals who sell the component products individually. Furthermore, this advantage increases with the size of the bundle. Once there are four or more items, the bundle seller does better than when it sells each component individually. This model helps explain one factor in how Microsoft achieved dominance in the Office software suite against pre-existing and well-established rivals in each component.

This paper is a sequel to Bundling [Nalebuff (1999) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=185193].

Abstract:
Home equity is the single largest component of household wealth for the majority of American households. Yet, there is virtually no way for the average family to insure itself against drops in home value and the ensuing destructive financial loss. Much of U.S. housing policy has focused on helping them against the risk that home ownership entails.

In this paper, we document the development and implementation of a home equity insurance program launched in 2002 in Syracuse, New York. The range of issues arising from the practical implementation of a home equity insurance program, as well as the institutional challenges offer useful data for further extensions of the program.

Highlights of the outcome, to date, of the pilot program include the finding that implementation of the program was feasible on the local level, that customers understand and wanted to take part, and that clean data on housing transactions is a vital component of the future success and expansion of the project.

Abstract:
This paper shows how a monopolist generally can increase its profits by offering a discount on its monopolized product if the customer agrees to buy a competitively supplied good from it at a price premium. The use of bundling to leverage market power has a long (and checkered) history in law and economics. The Chicago School seemed to end the debate with their result that there is only one monopoly profit and thus there is no gain from bundling. This folk theorem relies on some special assumptions, most importantly that the goods are consumed in fixed proportions. Once we allow for continuous consumption levels, then it is generally the case that a firm can extend a monopoly from A into a competitive B market. While it is well understood how a monopolist can use tying to extract more consumer surplus or to engage in price discrimination, this paper pursues a different motivation. The emphasis of this paper is on optional, as opposed to forced, tied sales. The firm offers to scale back its monopoly price in return for getting a price premium in a second market. The reduction in monopoly price causes no first-order loss to the firm, while providing a first-order incentive for customers to voluntarily accept the deal. The ability of a monopolist to extend its influence to adjacent markets is a challenge both to the competitors in those markets and to economists looking to understand the antitrust implications of bundling.

bundling, tying, leverage monopoly, Chicago School, pricing

Abstract:
When we disclose information, we may also communicate information about information. The listener learns not only X but also that the speaker knows X. And the speaker also learns by speaking (for example, the speaker knows that the listener knows X). In this paper we present a series of examples where negotiators want to communciate X, but do not want to comunicate higher-order information about X.

While it may be efficient for one negotiator to tell another the true consequences of failing to reach agreement, when such information is threatening or insulting it may be useful to prevent the threat or insult from becoming common knowledge. Game-theorists often model private information as the but-for cause of inefficient distributive bargaining. In these simple bargaining models, if each side's BATNA were common knowledge, the parties would instantaneously (and costlessly) reach agreement. But we show that while the lack of first-order information can impede trade, the presence of higher-order information (information about information) might be a barrier to negotiation, a transaction cost that might be avoided by ambiguous or indirect communication or by caucus mediation.

Abstract:
When we disclose information, we may also communicate information about information. The listener learns not only X but also that the speaker knows X. And the speaker also learns by speaking (for example, the speaker knows that the listener knows X). In this paper we present a series of examples where negotiators want to communciate X, but do not want to comunicate higher-order information about X.

While it may be efficient for one negotiator to tell another the true consequences of failing to reach agreement, when such information is threatening or insulting it may be useful to prevent the threat or insult from becoming common knowledge. Game-theorists often model private information as the but-for cause of inefficient distributive bargaining. In these simple bargaining models, if each side's BATNA were common knowledge, the parties would instantaneously (and costlessly) reach agreement. But we show that while the lack of first-order information can impede trade, the presence of higher-order information (information about information) might be a barrier to negotiation, a transaction cost that might be avoided by ambiguous or indirect communication or by caucus mediation.

Abstract:
By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies - both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.

Diversification, Leverage, Retirement, Investment Strategy

Abstract:
The takeaway point of Tirole's excellent primer is that tying, while potentially exclusionary, does not deserve special treatment. This commentary offers two reasons why tying should be accorded special treatment. First, unlike predatory pricing, tying offers a monopolist the ability to engage in no-cost predation. A critical component of the predatory pricing test is that the monopolist will be able to later recoup its sacrificed profits. If foreclosure can be accomplished without pricing below cost, then this makes tying a potentially more dangerous tool for anticompetitive conduct. Second, tying allows a firm to leverage its monopoly from one market to another. It can exclude an equally efficient competitor, where the rival has all of the same economies of scale and scope. To the extent that tying allows a monopolist to disrupt competition in a large number of adjacent or even unrelated markets, this vastly increases the potential harm caused by a monopoly.

Tying, Exclusion, Predation

Abstract:
In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A + B bundle is valuable only when purchased together. Good A is supplied by a monopolist (e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B.

Abstract:
While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good.

Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality.

There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good.

bundling, complements, monopoly leverage, net neutrality, price discrimination, tying, versioning

Abstract:
In Illinois Tool Works and Trident v. Independent Ink, the Supreme Court overturned its longstanding per se rule against tied sales by a firm with a patent. Henceforth, market power will have to be demonstrated, whether or not the firm has a patent. Upon such demonstration, a tied sales contract will still be a per se antitrust violation. Our review of the case raises the question of why firms engage in tied sales and what is the antitrust issue. While the courts have focused on the leverage of market power, this case suggests a different concern: with complementary goods (such as a printer and ink), tying is used to engage in price discrimination via metering. The antitrust issue is that consumers will be harmed because the firm, by metering, is able to be a more effective monopolist and thereby extract more of the consumer surplus. And while perfect price discrimination may be efficient, there is no presumption that more imperfect price discrimination improves efficiency. As for the legitimate objectives, such as risk sharing, they can be met via direct metering. This suggests the wisdom of maintaining the per se rule against tied contracts when market power has been demonstrated.

Antitrust, Bundling, Chicago School, Metering, Price Discrimination, Tying

Abstract:
We present a model of the labor market with asymmetric information in which the equilibrium of the market generates unemployment and job queues so that wages may serve as an effective screening device. This happens because more productive workers--within any group of individuals with a given set of observable characteristics--are more willing to accept the risk of being unemployed than less productive workers. The model is consistent with cyclical movements in average real wages as well as with differences in unemployment rates across different groups in the population. We also show that the market equilibrium is not, in general, constrained Pareto efficient. Moreover, we identify a new category of nonexistence problems, different in several essential ways from those earlier discussed by Rothschild-Stiglitz [1976] and Wilson [1977]. We also extend the analysis to incorporate the possibility of renegotiation, showing that a separating-renegotiation-proof-equilibrium exists for certain parameters and that a renegotiation-proof equilibrium is always constrained Pareto efficient. Finally, we present a version of the model in which firms enter sequentially, as in Guash and Weiss [1980]. But contrary to the main result in that paper, we show that there is no advantage of being late, provided workers have rational expectations.

Abstract:
Pensions influence retirement decisions. The analysis provides a framework for assessing the phenomenon. The qualitative features of most defined benefit pension plans in the United States, as the first section demonstrates, can be used to induce optimal retirement choices. Pensions are viewed as a form of forced savings; their purposeis to enable the worker to "commit himself" by making it in his own self-interest to retire at an appropriate age. The remaining sections examine the use of pensions in populations that are heterogeneous with respect to such features as disutility of work or expected lifespan.Given heterogeneity, a major policy concern is whether pensions are actuarially fair to different groups, retirement cohorts,etc. It is proven that optimal pension plans cannot be actuarially more than fair, in the sense that someone who retires later must impose a smaller cost on the pension pool than he would were he to retire earlier. However, there are differences in life expectancy among cohorts defined by retirement age: late retirees generallyl ive longer. Late retirees may thus impose a greater expected cost on the pension fund under an optimal plan; interestingly, they do impose a higher cost than those retiring earlier under most common pension funds.In a first-best world, a separate pension plan would be designed for each group of workers. But, government-mandated retirement programs and legislation regulating private pensions require common treatment of different workers. Such homogenization is shown to work to the possible detriment of workers as a whole. Pensions are a workhorse compensation mechanism. They provide an additional instrument beyond wages for attracting, motivating, sorting, and retaining workers, while facilitating appropriate retirement decisions.

Abstract:
By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies - both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.

Abstract:
This paper presents an empirical and theoretical investigation of the strategic components to political participation. Using state-by-state voting data for the eleven U.S. Presidential elections, 1948-1988, we first show that voter turnout is a positive function of predicted closeness and a negative function of the voting population size. We then develop a follow-the-leader model of political participation to explain and to impose structure on these empirical regularities. In the model, leaders expend effort according to their chance of being pivotal, which depends on the expected closeness of the race (at both the state and national levels), its unpredictability, the number of eligible voters, and the rationally anticipated turnout in response to effort by leaders. Returning to the data with structural estimation shows that closeness counts: a one percent increase in the predicted closeness at the state level increases turnout by 0.34 percent. Through simulations, we calculate the chance that each state is pivotal in the national elections. This national closeness effect is significant in explaining effort and participation. Winning the national election is worth thirteen times the value of winning the state. However, since the average chance of a state being pivotal is small, in 96 percent of the observations the value of winning the state had a larger net impact on motivating effort. As a test of the model, we compare our effort variable with National Election Studies data on the proportion of individuals contacted by campaign representatives. Although our effort variable is inferred from the equilibrium model and thus is estimated without using direct data on campaign effort levels, it is significantly correlated with party contact.