http://repub.eur.nl/res/aut/1122/ List of Publications en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38780/ 2013-02-11T00:00:00Z In recent years, Combinatorial Clock Auctions (CCAs) have been used around the world to allocate frequency spectrum for mobile telecom licenses. CCAs are claimed to significantly reduce the scope for gaming or strategic bidding. In this paper, we show, however, that CCAs significantly enhance the possibilities for strategic bidding. Real bidders in telecom markets are not only interested in the spectrum they win themselves and the price they pay for that, but also in the price competitors pay for that spectrum. Moreover, budget constraints play an important role. When these considerations are taken into account, CCAs provide bidders with significant gaming possibilities, resulting in high auction prices and problems associated with multiple equilibria and bankruptcy (given optimal bidding strategies). http://repub.eur.nl/res/pub/38748/ 2013-01-09T00:00:00Z We analyze the effects of mergers in first-price sealed-bid auctions on bidders' equilibrium bidding functions and on revenue. We also study the incentives of bidders to merge given the private information they have. We develop two models, depending on how after-merger valuations are created. In the first, single-aspect model, the valuation of the merged firm is the maximum of the valuations of the two firms engaged in the merger. In the multi-aspect model, a bidder's valuation is the sum of two components and a merged firm chooses the maximum of each component of the two merging firms. In the first model, a merger creates incentives for bidders to shade their bids leading to lower revenue. In the second model, the non-merging firms do not shade their bids and revenue is actually higher. In both models, we show that all bidders have an incentive to merge. http://repub.eur.nl/res/pub/21429/ 2011-06-01T00:00:00Z There is by now a large literature arguing that auctions with a variety of after-market interactions may not yield an efficient allocation of the objects for sale, especially when the bidders impose strong negative externalities upon each other. In this note, we argue that these inefficiencies can be avoided by asking bidders prior to the auction to submit any publicly observable payment they would like to make. These payments, so-called flexible entry fees, do not affect the allocation decision of the auctioneer. We show that auctions with flexible entry fees have a fully revealing equilibrium where bidders signal their type before the auction itself takes place http://repub.eur.nl/res/pub/21427/ 2010-12-01T00:00:00Z We consider a government auctioning off multiple licences to firms that compete in an aftermarket. Firms have different costs, and cost-efficiency is private information in the auction and in the aftermarket. If only one licence is auctioned, standard results say that the most efficient firm wins the auction as it has the highest valuation for the licence. We analyse conditions under which this result does and does not generalise to the case of auctioning multiple licences and aftermarket competition. Strategic interaction in the aftermarket is responsible for the fact that auctions may select inefficient firms. http://repub.eur.nl/res/pub/21240/ 2010-07-01T00:00:00Z The introduction of the Dutch Social Support Act (in Dutch: Wmo) in 2007 symbolises a major welfare state reform in the Netherlands. It concerns the decentralisation of tasks and responsibilities with regard to social care and support. This reform is not only a matter of shifting tasks and responsibilities from central government to local government; the Wmo was also intended to cause a paradigm shift that should change the way in which clients, citizens, governments and providers act and think. The core of this paradigm is formed by the compensation principle which describes the replacement of citizens’ rights on care by an obligation for municipalities to compensate citizens. If the Wmo is however purely regarded as a decentralisation of tasks, its implementation may, three years after its introduction, be considered a success. After all, municipalities are making serious efforts to regulate home care and social support. Most crucially, however, is the question whether this actually leads to a realisation of the Wmo’s underlying goals and ambitions. This question is addressed in this report. http://repub.eur.nl/res/pub/20175/ 2010-06-01T00:00:00Z A simultaneous pooled auction with multiple bids and preference lists is a way to auction multiple heterogeneous objects to multiple bidders with unit demand. Bidders submit bids for every object, and a preference ordering over which object they would like to get if they have the highest bid on more than one object. This type of auction has been used in the Netherlands and in Ireland to auction available spectrum. We show that this type of auction does not satisfy elementary desirable properties such as the existence of an efficient equilibrium. http://repub.eur.nl/res/pub/19988/ 2010-01-01T00:00:00Z Firms signal quality through prices even if the market structure is very competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality and each firm's product quality is private information (unknown to consumers and to other firms), there exist symmetric fully revealing perfect Bayesian equilibria where low quality firms randomize over an interval of prices and high quality firms charge high prices. Signaling requires that the market power and rent of low quality firms be large enough and often this requires that high quality firms exercise sufficient market power. There is a unique symmetric fully revealing equilibrium satisfying the D1 criterion; in this equilibrium too, both low and high quality firms may exhibit considerable market power. Market power of high quality firms may persist even as the number of firms becomes arbitrarily large. Every D1 equilibrium involves some revelation of information. http://repub.eur.nl/res/pub/17494/ 2009-11-01T00:00:00Z There is by now a large literature arguing that auctions with a variety of after-market interactions may not yield an efficient allocation of the objects for sale, especially when the bidders impose strong negative externalities upon each other. This paper argues that these inefficiencies can be avoided by asking bidders prior to the auction to submit any public payment they would like to make. These payments, so-called flexible entry fees, do not affect the allocation decision of the auctioneer. We show that auctions with flexible entry fees have a fully revealing equilibrium where bidders signal their type before the auction itself takes place. http://repub.eur.nl/res/pub/17092/ 2009-10-12T00:00:00Z This paper is the first to examine the effect of minimum price guarantees in a sequential search model. Minimum price guarantees are not advertised and only known to consumers when they come to the shop. We show that in such an environment, minimum price guarantees increase the value of buying the good and therefore increase consumers’ reservation prices. This increase is so large that even after accounting for the fact that some consumers will buy at lower prices, firms profits are larger under minimum price guarantees than without it. We also show that an equilibrium where all firms offer minimum price guarantees does not exist because of a free-riding problem. Minimum price guarantees can only be an equilibrium phenomenon in an equilibrium where firms randomize their decision to offer these guarantees. http://repub.eur.nl/res/pub/16812/ 2009-09-01T00:00:00Z An important question in the dynamic European wholesale markets for electricity is whether to define the geographical market at the level of an individual member state or more broadly. We show that if we currently take the traditional approach by considering for each member state whether there is one single other country that provides a substitute for domestic production, the market in each separate member state has still to be considered a separate market. However, if we allow for the possibility that at different moments in time there is another country that provides a substitute for domestic production, then the conclusion should be that certain member states do not constitute a separate geographical market. This is in particular true for Belgium, but also for The Netherlands, France, and to some extent also for Germany and Austria. We call this alternative approach the "and/or" approach. http://repub.eur.nl/res/pub/16417/ 2009-02-01T00:00:00Z An important role of informative advertising is to inform consumers of the simple fact that the shop that advertises sells a particular product. This information may help consumers to save on their search activities: instead of wandering around, a consumer can simply visit the shop that has advertised, knowing that there he can find the commodity he is looking for. The implications of this simple fact have not been studied before. Using game theoretic reasoning in a model that combines consumer search and firms' advertising we show that firms may find it optimal to advertise prices that are higher than nonadvertised prices. The important mechanism underlying this result is that advertising lowers the expected search cost for consumers. Through this analysis we provide a new insight into the role of informative advertising. http://repub.eur.nl/res/pub/14055/ 2008-11-17T00:00:00Z This article analyzes the role of suggested prices in the Dutch retail market for gasoline. Suggested prices are announced by large oil companies with the suggestion that retailers follow them. There are at least two competing rationales for the existence of suggested prices: they may either help retailers translate changes in international gasoline spot market prices into retail prices, or they may coordinate retail prices. We show that there is, next to the international spot market prices, additional information in suggested prices that explains retail prices. Therefore, we conclude that suggested prices help to coordinate retail prices. http://repub.eur.nl/res/pub/14028/ 2008-07-11T00:00:00Z We consider an oligopolistic market where firms compete in price and quality and where consumers are heterogeneous in knowledge: some consumers know both the prices and quality of the products offered, some know only the prices and some know neither. We show that two types of signalling equilibria are possible. Both are characterised by dispersion and Pareto-inefficiency of the price/quality offers. But, better price/quality combinations are signalled with lower prices in one type and with higher prices in the other type. http://repub.eur.nl/res/pub/16416/ 2008-05-01T00:00:00Z This paper analyzes empirically whether and if so to what extent later entrants in the European mobile telephony industry have a disadvantage vis-à-vis incumbents and early mover entrants. To analyze this question a dynamic model of market share development and a series of static models are considered. There is clear evidence of early mover advantage, mainly caused by the influence of the penetration rate: it pays to enter when still few people have acquired a mobile telephone. Another important determining factor is the Herfindahl–Hirschman Index at the moment of entry: it is significantly easier to enter a highly concentrated industry. Finally, there are important differences between countries, possibly indicating the relative strength of the national regulators. http://repub.eur.nl/res/pub/13672/ 2008-03-28T00:00:00Z A simultaneous pooled auction with multiple bids and preference lists is a way to auction multiple objects, in which bidders simultaneously express a bid for each object and a preference ordering over which object they would like to get in case they have the highest bid on more than one object. This type of auction has been used in the Netherlands and in Ireland to auction available spectrum. We show that this type of auction does not satisfy elementary desirable properties such as the existence of an efficient equilibrium. http://repub.eur.nl/res/pub/10896/ 2008-01-11T00:00:00Z This paper builds a consumer search model where the cost of going back to stores already searched is explicitly taken into account. We show that the optimal search rule under costly recall is very different from the optimal search rule under perfect recall. Under costly recall, the optimal search behaviour is nonstationary and, moreover, the reservation price is not independent of previously sampled prices. We fully characterize the optimal search rule under costly recall when a finite number of firms draws price quotes from a given distribution. http://repub.eur.nl/res/pub/11671/ 2008-01-01T00:00:00Z We consider a duopoly in a homogenous goods market where part of the consumers are ex ante uninformed about prices. Information can come through two different channels: advertising and sequential consumer search. We arrive at the following results. First, there is no monotone relationship between prices and the degree of advertising. Second, advertising and search are “substitutes” for a large range of parameters. Third, when the cost of either search or advertising vanishes, the competitive outcome arises. Finally, both expected advertised and non-advertised prices are non-monotonic in search cost. One of the implications is that firms actually may benefit from consumers having low (rather than high) search costs. http://repub.eur.nl/res/pub/14638/ 2008-01-01T00:00:00Z With the experience of the sequence of UMTS auctions held worldwide in mind, we consider a situation where firms participate in license auctions to compete in an aftermarket. It is known that when a monopoly right is auctioned, auctions select the bidder that is least risk-averse. This firm will choose a higher value of the aftermarket strategic variable than any other firm will do, thereby implying a higher market price under price setting behavior and a lower price due to higher quantity under quantity-setting behavior. This paper extends the analysis to oligopoly aftermarkets and analyzes whether the monopoly result carries over to oligopoly settings. We argue that with multiple licenses and demand uncertainty auctions actually perform even worse from a welfare point of view than the monopoly case would suggest. A strategic effect strengthens the monopoly result with respect to prices, but weakens the result with respect to quantities. http://repub.eur.nl/res/pub/10748/ 2007-10-17T00:00:00Z Firms signal high quality through high prices even if the market structure is highly competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality, production cost is increasing in quality and the quality of each firm’s product is private information (not known to consumers or to other firms), we show that there exist fully revealing equilibria in mixed strategies. In such equilibria, low quality firms enjoy market power when other firms are of high quality. High quality firms charge higher prices than low quality firms but lose business to rival firms with higher probability. Some of the revealing equilibria involve high degree of market power (price close to full information monopoly level) while others are more “competitive”. Under certain conditions, if the number of firms is large enough, information is revealed in every equilibrium. http://repub.eur.nl/res/pub/11672/ 2007-10-01T00:00:00Z We investigate how market shares change when a new, superior technology exhibiting network externalities is introduced in a market initially dominated by an old technology. This is done under the assumption that consumers are heterogeneous in their valuation of technology quality and network externalities and that goods are not (perfectly) durable and thus have to be bought repeatedly. When both technologies are unsponsored, the old technology dominates when the quality difference is small, and it disappears when the quality difference is large. When the new technology is sponsored, the relationship between the quality difference and the long-run market share of the new technology is non-monotonic and the old technology always continues to exist http://repub.eur.nl/res/pub/10439/ 2007-07-16T00:00:00Z We study mergers in a market where N firms sell a homogeneous good and consumers search sequentially to discover prices. The main motivation for such an analysis is that mergers generally affect market prices and thereby, in a search environment, the search behavior of consumers. Endogenous changes in consumer search may strengthen, or alternatively, offset the primary effects of a merger. Our main result is that the level of search costs are crucial in determining the incentives of firms to merge and the welfare implications of mergers. When search costs are relatively small, mergers turn out not to be profitable for the merging firms. If search costs are relatively high instead, a merger causes a fall in average price and this triggers search. As a result, non-shoppers who didn’t find it worthwhile to search in the pre-merger situation, start searching post-merger. We show that this change in the search composition of demand makes mergers incentive-compatible for the firms and, in some cases, socially desirable. http://repub.eur.nl/res/pub/11622/ 2007-05-01T00:00:00Z We demonstrate that auctioning market licenses may result in higher market prices than assigning them via more random allocation mechanisms. When future market profit is uncertain, winning an auction is like winning a lottery ticket. If firms differ in risk attitudes, auctions select the least risk-averse firm, which, in turn, set a higher price (or a higher quantity, in case quantity is the decision variable) in the marketplace than an average firm. http://repub.eur.nl/res/pub/8345/ 2007-01-04T00:00:00Z This paper considers a government auctioning off multiple licenses to firms who compete in a market after the auction. Firms have different costs, and cost efficiency is private information at the auction stage and the market competition stage. If only one license is auctioned, standard results say that the most efficient firm wins the auction (license) as it will get the highest profit in the aftermarket, i.e., it has the highest valuation for the license. This paper argues that this result does not generalize to the case of multiple licenses and aftermarket competition. In particular, we determine conditions under which auctions may select inefficient firms and therefore lead to an inefficient allocation of resources. Strategic interactions in the aftermarket, in particular firms’ preferences to compete with the least cost-efficient firms rather than with the most efficient firms, are responsible for our result. http://repub.eur.nl/res/pub/11655/ 2006-10-01T00:00:00Z This article argues that the notion of focal points is important in understanding bargaining processes. Recent literature confines a discussion of the usefulness of the notion to coordination problems, and when bargaining experiments result in outcomes that are inconsistent with a straightforward interpretation of economic theory, some notion of “fairness” is invoked. This article uses symmetry requirements to formalize the notion of focal points. By doing so, it explains the focality of equal split division and it re-interprets recent experimental evidence in bargaining games. Experimental economists should try to empirically disentangle the importance of focal points from other explanatory factors (such as fairness). One way to do so would be to study modal (instead of average) responses more systematically. Future theoretical research should focus on the strategic implications of proposing a frame (focal point) to conceive of the bargaining problem. http://repub.eur.nl/res/pub/7916/ 2006-08-01T00:00:00Z The search literature assumes that consumers know which firms sell products they are looking for, but are unaware of the particular variety and the prices at which each firm sells. In this paper, we consider the situation where consumers are uncertain whether a firm carries the product at all by proposing a model where in the first stage firms decide on whether or not to carry the product. Firms may advertise, informing consumers not only of the price they charge, but also of the basic fact that they sell the product. In this way, advertising lowers the expected search cost. We show that this role of advertising can lead to a situation where advertised prices are higher than non—advertised prices in equilibrium. http://repub.eur.nl/res/pub/7683/ 2006-04-26T00:00:00Z This paper argues that the notion of focal points is important in understanding bargaining processes. Recent literature confines a discussion of the usefulness of the notion to coordination problems and when bargaining experiments result in outcomes that are inconsistent with a straightforward interpretation of economic theory, some notion of ‘fairness’ is invoked. This paper uses symmetry requirements to formalize the notion of focal points. By doing so, it explains the focality of equal split division and it re-interprets recent experimental evidence in bargaining games. Experimental economists should try to empirically disentangle the importance of focal points from other explanatory factors (such as fairness). One way to do so, would be to study modal (instead of average) responses more systematically. Future theoretical research should focus on the strategic implications of proposing a frame (focal point) to conceive of the bargaining problem. http://repub.eur.nl/res/pub/7684/ 2006-04-26T00:00:00Z This paper gives an overview and evaluates the literature on Microfoundations. http://repub.eur.nl/res/pub/11625/ 2006-04-01T00:00:00Z This paper develops an economic argument relating auctions to high market prices. At the core of the argument is the claim that market competition and bidding in an auction should be analyzed as part of one game, where the pricing strategies in the market subgame depend on the bidding strategies during the auction. I show that when there are two licenses for sale the only equilibrium in the overall game that is consistent with the logic of forward induction is the one where firms bid an amount (almost) equal to the profits of the cooperative market outcome and follow a cooperative pricing strategy in the market game resulting in high prices. With three or more licenses the auction format co-determines whether or not the forward induction argument works. http://repub.eur.nl/res/pub/11787/ 2006-01-01T00:00:00Z OPTA heeft besloten mobiele gespreksafgiftetarieven te reguleren. Dit artikel presenteert argumenten die de wenselijkheid van de voorgestelde regulering bestrijden. Asymmetrische regulering verdient de voorkeur of moet overwogen worden, als al gereguleerd moet worden. http://repub.eur.nl/res/pub/11627/ 2005-11-01T00:00:00Z This paper develops a model for multi-store competition between firms. Using the fact that different firms have different outlets and produce horizontally differentiated goods, we obtain a pure strategy equilibrium where firms choose a different location for each outlet and firms' locations are interlaced. The location decisions of multi-store firms are completely independent of each other. Firms choose locations that minimize transportation costs of consumers. Moreover, generically, the subgame perfect equilibrium is unique and when the firms have an equal number of outlets, prices are independent of the number of outlets. http://repub.eur.nl/res/pub/11653/ 2005-06-01T00:00:00Z We modify the paper of Stahl (1989) [Stahl, D.O., 1989. Oligopolistic pricing with sequential consumer search. American Economic Review 79, 700–12] by relaxing the assumption that consumers obtain the first price quotation for free. When all price quotations are costly to obtain, the unique symmetric equilibrium need not involve full consumer participation. The region of parameters for which non-shoppers do not fully participate in the market becomes larger as the number of shoppers decreases and/or the number of firms increases. The comparative statics properties of this new type of equilibrium are interesting. In particular, expected price increases as search cost decreases and is constant in the number of shoppers and in the number of firms. Welfare falls as firms enter the market. We show that monopoly pricing never obtains with truly costly search. http://repub.eur.nl/res/pub/11629/ 2005-03-01T00:00:00Z We take a dynamic perspective on insurance markets under adverse selection and study a dynamic version of the Rothschild and Stiglitz model. We investigate the nature of dynamic insurance contracts by considering both conditional and unconditional dynamic contracts. An unconditional dynamic contract has insurance companies offering contracts where the terms of the contract depend on time, but not on the occurrence of past accidents. Conditional dynamic contracts make the actual contract also depend on individual past performance (such as in car insurances). We show that dynamic insurance contracts yield a welfare improvement only if they are conditional on past performance. With conditional contracts, the first-best can be approximated if the contract lasts long. Moreover, this is true for any fraction of low-risk agents in the population. http://repub.eur.nl/res/pub/6586/ 2005-03-01T00:00:00Z We analyze the incentives for incumbent bricks-and-mortar firms and new entrants to start an online retail channel in a differentiated goods market. To this end we set up a two-stage model where firms first decide whether or not to build the infrastructure necessary to start an online retail channel and then compete in prices using the channels they have opened up. Consumers trade-off the convenience of online shopping and the ease to compare prices, with online uncertainties. Without a threat of entry by a third pure online player we find that for most parameter constellations firms' dominant strategy is not to open an online retail channel as this cannibalizes too much on their conventional sales. As the cannibalization effect is not present for a pure Internet player, we show that these firms will start online retail channels under a much wider range of parameter constellations. The threat of entry may force incumbent bricks-and-mortar firms to deter entry by starting up an Internet retail channel themselves. We also show that a low cost of building up an online retail channel or online shopping conveniences may not be to the benefit of online shopping as the strategic interaction between firms may be such that no online retail channel is built when the circumstances seem to be more favourable. http://repub.eur.nl/res/pub/6596/ 2005-02-16T00:00:00Z We consider a duopoly in a homogenous goods market where part of the consumers are ex ante uninformed about prices. Information can come through two different channels: advertising and sequential consumer search. The model is similar to that of Robert and Stahl (1993) with two major (and some minor) modifications: (i) a (small) percentage of consumers is fully informed and (ii) less informed consumers do not have to pay a search cost for buying at a firm from which they have received an ad. We derive the symmetric Nash equilibria and show that price dispersion is an essential ingredient of any equilibrium. Despite the similarities in the models, our results differ substantially from those obtained by Robert and Stahl (1993). First, advertising and search are "substitutes" for a large range of parameters. Second, there is no monotone relationship between prices and the degree of advertising. In particular, it is possible that high prices are advertised, while low prices are not. Third, when the cost of either one of the information channels (search or advertising) vanishes, the competitive outcome arises. Finally, both expected advertised and non-advertised prices are non-monotonic in search cost. One of the implications is that firms actually may benefit from consumers having low (rather than high) search costs. http://repub.eur.nl/res/pub/6594/ 2005-02-01T00:00:00Z This paper develops one possible argument why auctioning licenses to op- erate in an aftermarket may lead to higher prices in the aftermarket compared to a more random allocation mechanism. Key ingredients in the argument are differences in firms' risk attitudes and the fact that future market prof- its are uncertain so that winning an auction is like winning a lottery ticket. li one license is auctioned, auctions select the firm that is least risk averse. This is what we call the risk attitude effect. Firms that are less risk averse tend to set higher prices (or higher quantities in case quantity is the decision variable) in the marketplace than an average firm. When multiple licenses are auctioned, this conclusion gets strengthened when there is a differenti- ated Eertrand oligopoly in the marketplace. In case of Cournot competition, a strategic effect works against the risk attitude effect so that under certain conditions the more risk averse firms will be selected leading (again) to higher market prices. http://repub.eur.nl/res/pub/6603/ 2004-12-22T00:00:00Z In this paper we analyze empirically whether and if so to what extent later entrants in the European mobile telephony industry have a disadvantage vis-à-vis incumbents and early mover entrants. To analyze this question we consider a series of static models and a dynamic model of market share development. We find a clear early mover advantage, mainly caused by the influence of the penetration rate: it pays to enter when still few people have acquired a mobile telephone. Another important determining factor is the Herfindahl-Hirschman Index at the moment of entry: it is significantly easier to enter a highly concentrated industry. Finally, there are important differences between countries possibly indicating the relative strength of the national regulators. For example, it turns out that it is relatively difficult to enter the mobile telephony sector and gain market share in the Scandinavian countries. http://repub.eur.nl/res/pub/11628/ 2004-11-01T00:00:00Z We study the impact of financial incentives on social approval, showing that in a society with altruists and egoists, who all care about social approval, introducing financial incentives to agents to contribute to a socially desirable outcome may actually decrease the number of contributions. Withdrawing the financial incentive does not restore the norm to contribute and may reduce the level of contributions even further. When the norm has disappeared, it may be possible to restore voluntary contributions by first introducing high price and then reducing it, but such an operation is costly and its success uncertain. http://repub.eur.nl/res/pub/11214/ 2004-10-01T00:00:00Z We examine an oligopoly model where some consumers engage in costly non-sequential search to discover prices. There are three distinct price-dispersed equilibria characterized by low, moderate and high search intensity. The effects of an increase in the number of firms on search behaviour, expected prices, price dispersion and welfare are sensitive (i) to the equilibrium consumers’ search intensity, and (ii) to the status quo number of firms. For instance, when consumers search with low intensity, an increase in the number of firms reduces search, does not affect expected price, leads to greater price dispersion and reduces welfare. In contrast, when consumers search with high intensity, increased competition results in more search and lower prices when the number of competitors in the market is low to begin with, but in less search and higher prices when the number of competitors is large. Duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms. http://repub.eur.nl/res/pub/11631/ 2004-08-01T00:00:00Z We investigate the nature of trading and sorting induced by the dynamic price mechanism in a competitive durable good market with adverse selection and exogenous entry of traders over time. The model is a dynamic version of Akerlof (1970). Identical cohorts of durable goods, whose quality is known only to potential sellers, enter the market over time. We show that there exists a cyclical equilibrium where all goods are traded within a finite number of periods after entry. Market failure is reflected in the length of waiting time before trade. The model also provides an explanation of market fluctuations. http://repub.eur.nl/res/pub/6628/ 2004-06-01T00:00:00Z This paper presents an empirical examination of oligopoly pricing and consumer search. The theoretical model allows for sequential and non-sequential search and using the theoretical restrictions firm and consumer behavior impose on the data we study the empirical validity of the models. Two equilibria arise: one with costless search and the other with costly search. We find that the costless search equilibrium works well for products with a relatively low value, and, by implication, a small number of sellers. By contrast, the costly search equilibrium explains the observed data in a manner that is consistent with the underlying theoretical model for almost all products (for 86 out of 87!). http://repub.eur.nl/res/pub/6629/ 2004-06-01T00:00:00Z We modify the paper of Stahl (1989) on sequential consumer search in an oligopoly context by relaxing the assumption that consumers obtain the first price quotation for free. When all price quotations are costly to obtain, a new equilibrium arises where consumers randomize between not searching at all and searching for one price. The region of parameters for which this equilibrium exists becomes larger as the number of shoppers decreases and/or the number of firms increases. The comparative statics properties of this new equilibrium are interesting. In particular, the expected price increases as search cost decreases, and is constant in the number of shoppers and in the number of firms. We show that the Diamond result never obtains with truly costly search. http://repub.eur.nl/res/pub/6711/ 2004-01-06T00:00:00Z This paper develops a model for multi-store competition between firms. Using the fact that different firms have different outlets and produce horizontally differentiated goods, we obtain a pure strategy equilibrium where firms choose a different location for each outlet and firms' locations are interlaced. Moreover, generically, the subgame perfect equilibrium is unique and when the firms have an equal number of outlets, prices are independent of the number of outlets. http://repub.eur.nl/res/pub/11668/ 2004-01-01T00:00:00Z Governments own many assets that are of genuine importance to society and that, for one reason or another, they do not want to exploit on their own. It can use auctions, Beauty Contests, first-come-first-served, grandfather rights and lotteries, to mention just a few of the most common allocation mechanisms. Grandfather rights are conservative in nature: they basically determine that the company which has used the asset in the past will continue to use it (unless it has badly performed). Grandfather rights are typically used to allocate airport slots. 1 10 Maarten Janssen Scoring the alternative mechanisms on the other objectives mentioned above, we also get a picture that tends to favour auctions. Withjin the EUR IP-range, the full-text of this book is available through NetLibrary (http://www.netlibrary.com/Details.aspx) http://repub.eur.nl/res/pub/11656/ 2003-04-01T00:00:00Z This comment makes four related points. First, explaining coordination is different from explaining cooperation. Second, solving the coordination problem is more important for the theory of games than solving the cooperation problem. Third, a version of the Principle of Coordination can be rationalized on individualistic grounds. Finally, psychological game theory should consider how players perceive their gaming situation. -------------------------------------------------------------------------------- http://repub.eur.nl/res/pub/6724/ 2003-02-19T00:00:00Z This paper develops an economic argument relating auctions to high market prices. At the core of the argument is the claim that market competition and bidding in an auction should be analyzed as part of one game, where the pricing strategies in the market subgame depend on the bidding strategies during the auction.I show that the only equilibrium in the overall game that is consistent with the logic of forward induction is the one where firms bid an amount (almost) equal to the profits of the cooperative market outcome and follow a cooperative pricing strategy in the market game resulting in high prices. http://repub.eur.nl/res/pub/11790/ 2003-01-01T00:00:00Z Thomas Schelling krijgt op 7 november een eredoctoraat uitgereikt aan de Erasmus Universiteit Rotterdam. Zijn verdiensten voor de economie zijn groot. http://repub.eur.nl/res/pub/11791/ 2003-01-01T00:00:00Z Sinds 2001 heb ik een paar grotere, interessante projecten mogen doen, zoals het evaluatieonderzoek voor de Tweede Kamer naar de veiling van UMTS-frequenties. Daarnaast heb ik in opdracht van verschillende bedrijven diverse NMa-studies van commentaar voorzien. Vanuit mijn persoonlijke ervaring wil ik een aantal reacties op het artikel van Geurts en Raes geven. http://repub.eur.nl/res/pub/11793/ 2003-01-01T00:00:00Z http://repub.eur.nl/res/pub/11638/ 2002-10-01T00:00:00Z The paper investigates the nature of market failure in a dynamic version of Akerlof (1970) where identical cohorts of a durable good enter the market over time. In the dynamic model, equilibria with qualitatively different properties emerge. Typically, in equilibria of the dynamic model, sellers with higher quality wait in order to sell and wait more than sellers of lower quality. The main result is that for any distribution of quality there exist an infinite number of cyclical equilibria where all goods are traded within a certain number of periods after entering the market. http://repub.eur.nl/res/pub/6816/ 2002-04-25T00:00:00Z We analyze a market where firms compete in a conventional and an electronic retail channel. Consumers easily compare prices online, but some incur purchase uncertainties on the online channel. We investigate the market shares of the two retail channels and the prices that are charged. We find that the share of the electronic channel is decreasing in the size of the uncertainty. Furthermore, searching consumers do not always buy. They drop out when the uncertainty associated with buying online is not offset by a low price. Finally, the model exhibits price dispersion and the expected price is increasing in the magnitude of the online purchase uncertainty. http://repub.eur.nl/res/pub/11632/ 2002-01-01T00:00:00Z We investigate the nature of the adverse selection problem in a market for a durable good where trading and entry of new buyers and sellers takes place in continuous time. We focus on the role of the interest rate and physical depreciation. We show that when the physical depreciation rate is relatively small, infinitely many equilibria exist where all goods are traded within finite time after their appearance in the market. In contrast, when the physical depreciation rate is relatively large the trade of new goods will stop in any equilibrium after a finite moment in time. At intermediate values, stationary equilibria, different from the static equilibria, may emerge. For any given level of the relative depreciation rate the interest rate only determines the speed of evolution along the equilibrium path. http://repub.eur.nl/res/pub/11640/ 2002-01-01T00:00:00Z We analyze a dynamic version of the Akerlof–Wilson “lemons” market in a competitive durable good setting. There is a fixed set of sellers with private information about the quality of their wares. The price mechanism sorts sellers of different qualities into different time periods—prices and average quality of goods traded increase over time. Goods of all qualities are traded in finite time. Market failure arises because of the waiting involved—particularly for sellers of better quality. The equilibrium path may exhibit intermediate breaks in trading. http://repub.eur.nl/res/pub/11644/ 2002-01-01T00:00:00Z In this paper, I study the wage a firm sets to attract high ability workers (hipos) in situations where people compete for a job. I show that the more people compete, the larger a firm's incentives to sort high and low ability workers. Moreover, workers will signal their (high) ability in situations with many competitors only if a job offers a high enough wage. The main result, therefore, is that a firm sets higher wages, when more people compete. http://repub.eur.nl/res/pub/11654/ 2002-01-01T00:00:00Z We look at a Bertrand model in which each firm may be inactive with a known probability, so the number of active firms is uncertain. The model has a mixed-strategy equilibrium, in which industry profits are positive and decline with the number of firms, the same features which make the Cournot model attractive. Unlike those in a Cournot model with similar uncertainty, Bertrand profits always increase in the probability that firms are inactive. Profits decline more sharply than in the Cournot model, the pattern found empirically in Bresnahan and Reiss [1991]. http://repub.eur.nl/res/pub/6833/ 2001-11-22T00:00:00Z We present an oligopoly model where a certain fraction of consumers engage in costly non-sequential search to discover prices. There are three distinct price dispersed equilibria characterized by low, moderate and high search intensity, respectively. We show that the effects of an increase in the number of firms active in the market are sensitive (i) to the equilibrium consumers' search intensity, and (ii) to the status quo number of firms. For instance, when consumers search with low intensity, increased competition does not affect expected price, leads to greater price dispersion and welfare declines. In contrast when consumers search with high intensity, increased competition results in lower prices when the number of competitors in the market is low to begin with, but in higher prices when the number of competitors is large. Moreover, duopoly yields identical expected price and price dispersion but higher welfare than an infinite number of firms. http://repub.eur.nl/res/pub/6834/ 2001-11-20T00:00:00Z We take a dynamic perspective on insurance markets under adverse selection and study a generalized Rothschild and Stiglitz model where agents may differ with respect to the accidental probability and their expenditure levels in case an accident occurs. We investigate the nature of dynamic insurance contracts by considering both conditional and unconditional dynamic contracts. An unconditional dynamic contract has insurance companies offering contracts where the terms of the contract depend on time, but not on the occurrence of past accidents. Conditional dynamic contracts make the actual contract also depend on individual past performance (like in car insurances). We investigate whether allowing insurance companies to offer dynamic insurance contracts results in Pareto- improvements over static contracts. Our main results are as follows. When agents only differ in their accidental expenditures, then dynamic insurance contracts yield a welfare improvement only if dynamic contracts are conditional on past performance. When, however, agents' expenditures differ just a little bit dynamic insurance contracts are strictly Pareto improving even for unconditional dynamic contracts. http://repub.eur.nl/res/pub/6861/ 2001-06-30T00:00:00Z There is increasing empirical and experimental evidence that providing financial incentives to agents to perform certain socially desirable actions may permanently reduce other types of motivations to undertake these actions. We study the impact of financial incentives on the desire for social approval, using the example of blood donation. We show that in a society with altruists and egoists, who all care about social approval, introducing a payment into a voluntary system may actually decrease the amount of blood donated. Withdrawing the financial incentive does not restore the norm to donate and may reduce the supply of blood even further. http://repub.eur.nl/res/pub/11657/ 2001-01-01T00:00:00Z On many occasions, individuals are able to coordinate their actions. The first empirical evidence to this effect has been described by Schelling (1960) in an informal experiment. His results were corroborated many years later by Mehta et al. (1994a,b) and Bacharach and Bernasconi (1997). From the point of view of mainstream game theory, the success of individuals in coordinating their actions is something of a mystery. If there are two or more strict Nash equilibria, mainstream game theory has no means of explaining why people tend to choose their part of one and the same equilibrium. Textbooks (see, e.g., Rasmusen, 1989 and Kreps, 1990) refer to the fact that players may use focal points (see Schelling (1960)) or social conventions (see Lewis (1969)). Both notions cannot easily be incorporated into mainstream game theory, however. The notion of social conventions has recently been extensively studied in the context of evolutionary game theory where a population of agents interacts with each other. The central focus of this paper, however, is on situations where a few players play a game only once and I study how they may coordinate their actions. http://repub.eur.nl/res/pub/11658/ 2001-01-01T00:00:00Z Focal points seem to be important in helping players coordinate their strategies in coordination problems. Game theory lacks, however, a formal theory of focal points. This paper proposes a theory of focal points that is based on individual rationality considerations. The two principles upon which the theory rest are the Principle of Insufficient Reason (IR) and a Principle of Individual Team Member Rationality. The way IR is modelled combines the classic notion of description symmetry and a new notion of pay-off symmetry, which yields different predictions in a variety of games. The theory can explain why people do better than pure randomization in matching games. http://repub.eur.nl/res/pub/11796/ 2001-01-01T00:00:00Z Publiek-private samenwerking (PPS) krijgt veel aandacht als wijze van uitvoering van projecten waarin investeringen in infrastructuur (bijvoorbeeld in een station voor de hogesnelheidslijn) gecombineerd worden met stedelijke vernieuwing en investeringen in vastgoed. Het gaat om zogenaamde Combinatieprojecten. Doel van dit onderzoek is bij te dragen aan inzicht in de voorwaarden waaronder de mogelijke voordelen van PPS bij Combinatieprojecten zijn te realiseren. De focus hierbij is hoe publieke belangen het best gerealiseerd kunnen worden. We richten ons daartoe op het Rijk en de gemeenten. Deze keuze impliceert geenszins dat de problematiek benaderd wordt vanuit het idee dat het de ´goedwillende overheid´ tegen de ´gehaaide private partijen´ is. De doelstelling van private partijen is in de regel overzichtelijk: het maximaliseren van winst. Daartegenover staat een complexe verzameling mogelijk tegengestelde publieke belangen. De vraag is hoe de kracht van private partijen benut kan worden om die complexe verzameling publieke doelen te realiseren. Daarbij liggen de kansen van PPS vooral in een hoger maatschappelijk rendement door uitruil van prestaties en een betere risicoverdeling tussen de partijen. De risico's van PPS zitten vooral in de afhankelijkheid van andere partijen. De twee vragen die in dit onderzoek centraal staan zijn: Welke afwegingen zijn voor het Rijk en de gemeenten van belang bij het kiezen voor PPS bij Combinatieprojecten? Gegeven een keuze voor PPS, welke factoren dragen bij tot coöperatief gedrag van alle betrokken partijen in de diverse fasen van een Combinatieproject? http://repub.eur.nl/res/pub/6928/ 2000-12-05T00:00:00Z We investigate the nature of the adverse selection problem in a market for a durable good where trading and entry of new buyers and sellers takes place in continuous time. In the continuous time model equilibria with properties that are qualitatively different from the static equilibria, emerge. Typically, in equilibria of the continuous time model sellers with higher quality wait in order to sell and wait more than sellers of lower quality do. Among other things, we show that for any distribution of quality there exist an infinite number of cyclical equilibria where all goods are traded within a finite time after entering the market. This holds true even if the good is not perfectly durable or when buyers are not risk-neutral. http://repub.eur.nl/res/pub/6933/ 2000-10-23T00:00:00Z In this paper we investigate whether markets with heterogeneous network externalities can be locked-in by old technologies even if superior technologies are available. Heterogeneous network externalities are present when some consumers care more about the size of the market share of a good than others. Interestingly, the answer depends on the quality difference between the old and the new technology and on whether firms compete in prices. Without price competition, a partial lock-in occurs if (and only if) the quality difference is small. In the presence of price competition, lock-in in the traditional sense completely disappears, although the old technology may keep some market share in some periods as the new technology is priced higher in equilibrium. http://repub.eur.nl/res/pub/6964/ 2000-05-17T00:00:00Z Despite the mixed empirical evidence, many economists still hold to the view that Internet will promote competition between firms, thereby lowering prices and increasing economic welfare. This paper presents a search model that provides a different view. We analyze the market for a homogeneous good where some consumers are fully informed while others are not. Depending on the parameter values, there may be three types of equilibria and the comparative statics results are different for each of these equilibria. For example, a reduction in search cost may raise equilibrium prices when consumers' search intensity is low, but reduce prices when consumers search intensity is high. These different comparative statics results may explain the mixed empirical evidence found so far. http://repub.eur.nl/res/pub/7693/ 2000-04-12T00:00:00Z In this paper, I study the wage a firm sets to attract high ability workers (hipo's) in situations of unemployment. I show that the higher unemployment, the larger a firm's incentives to sort high and low ability workers. Moreover, workers will signal their (high) ability in situations of (high) unemployment only if a job offers a high enough wage. The main result, therefore, says that a firm sets higher wages, the higher unemployment. As the model is applicable to the upper segment of the labour market, the result is in line with the empirical fact that income inequality increases when more people are unemployed. http://repub.eur.nl/res/pub/7694/ 2000-04-06T00:00:00Z We investigate the nature of market failure in a dynamic version of Akerlof (1970) where identical cohorts of a durable good enter the market over time. In the dynamic model, equilibria with qualitatively different properties emerge. Typically, in equilibria of the dynamic model, sellers with higher quality wait in order to sell and wait more than sellers of lower quality. Our main result is that for any distribution of quality that there exist an infinite number of cyclical equilibria where all goods are traded within a certain number of periods after entering the market. http://repub.eur.nl/res/pub/7695/ 2000-03-22T00:00:00Z In this paper I study conditions for the emergence of cooperative behavior in a dynamic model of population interaction. The model has finitely many individuals located on a circle. The pay- off of each individual is partly based on the (local) interaction with neighbors and partly on (uniform) interaction with the whole population. The dynamics is driven by imitative behavior. I show that for a large class of parameters cooperation will emerge if the population is large; if the population is small, defection will prevail in the long run. The result contrasts with conventional wisdom which says that the larger the population, the less likely cooperation will be. http://repub.eur.nl/res/pub/7697/ 2000-03-17T00:00:00Z Different variations of a Principle of Coordination are used in a number of different research traditions. Roughly speaking, one version of the Principle says that if there is a unique Pareto-efficient outcome in a game, then players will choose their part of that outcome. In this paper I will investigate the foundations of the Principle and see to what extent the Principle follows from some axioms regarding rational individual decision-making. http://repub.eur.nl/res/pub/11750/ 2000-01-01T00:00:00Z http://repub.eur.nl/res/pub/11798/ 2000-01-01T00:00:00Z Economen lijken het er over eens dat het internet positieve welvaartseffecten kan hebben. Maar of het werkelijk de mogelijkheden biedt om tot een perfecte markt te komen, blijft de vraag. Werpt het internet geen nieuwe barrières op? En aan wie valt de extra welvaart toe? Over visionairs en technocraten. http://repub.eur.nl/res/pub/9241/ 2000-01-01T00:00:00Z http://repub.eur.nl/res/pub/9364/ 2000-01-01T00:00:00Z http://repub.eur.nl/res/pub/7749/ 1998-06-24T00:00:00Z Consider a Bertrand model in which each firm may be inactive with a known probability, so the number of active firms is uncertain. This simple model has a mixed-strategy equilibrium in which industry profits are positive and decline with the number of firms, the same features which make the Cournot model attractive. Unlike in a Cournot model with similar incomplete information, Bertrand profits always ncrease in the probability other firms are inactive. Profits decline more sharply than in the Cournot model, and the pattern is similar to that found by Bresnahan & Reiss (1991). http://repub.eur.nl/res/pub/11646/ 1998-01-01T00:00:00Z This paper focuses on contractual relationships between two parties in which the contracted price can be interpreted by one of the parties and by an outside observer (like a court) as a signal that the other party engages in illegal activities in carrying out the contract. We use the Benckiser case as an illustration of such a situation. We construct a simple game to explain the court’s decision to sentence Benckiser to pay for the damage created by the contracted party for the fact that the price it had paid was so low that it should have been interpreted as a signal of illegal activities. More generally, the paper discusses price-setting behavior when illegal practices may occur. http://repub.eur.nl/res/pub/11801/ 1998-01-01T00:00:00Z Uit een speltheoretische benadering wordt duidelijk, hoe hoge werkloosheid tot een groter loonverschil tussen hoog- en laaggeschoolden leidt. http://repub.eur.nl/res/pub/11659/ 1997-11-01T00:00:00Z We study the long run outcome when communities with different conventions interact. We introduce the notion of non-exclusive conventions to model the idea that, by incurring some additional costs, agents can remain flexible and hence coordinate their activities more successfully. We show that if these costs of flexibility are low (high) and interaction is local then the Pareto-efficient (risk-dominant) convention prevails in both communities. At intermediate cost levels, the conventions coexist. We also show that the importance of relative size of the two communities varies across interaction structures. http://repub.eur.nl/res/pub/7795/ 1997-07-24T00:00:00Z This paper gives an overview of the literature on focal points. It starts with reviewing Schelling’s seminal book The Strategy of Conflict.I then discuss the problems that have to be faced when incorporating the notion of focal points in theory of games. Two recent approaches are discussed that deal with focal points. The eductive approach is static and concentrates on how players can use aymmetries in the descriptions of strategies. The evolutive approach is dynamic and focuses in the adaptive behaviour of players. http://repub.eur.nl/res/pub/11674/ 1997-01-01T00:00:00Z In this paper we consider a series of finitely repeated prisoners' dilemma games in which the payoff the players receive in a period depends on how they have played the game in the past. We show that this modification of the finitely repeated prisoners' dilemma game makes cooperation a feasible equilibrium configuration in the beginning of play. http://repub.eur.nl/res/pub/11760/ 1997-01-01T00:00:00Z Reviews the book "Evolution, Games, and Economic Behavior," by Fernando Vega-Redondo. http://repub.eur.nl/res/pub/8910/ 1997-01-01T00:00:00Z Preconditioning is an effective mean of protecting the heart against prolonged ischemia by pretreating it with a minor insult, and the present paper reviews various controversies in this highly active field of research. In many models, adenosine plays a role by triggering the activation of protein kinase C. It may work in conjunction with other agents, such as bradykinin, but the putative role of noradrenaline is uncertain. Regulation of the enzyme producing adenosine (i.e., 5'-nucleotidase) has been reported during preconditioning but, because its activity does not seem to be associated with infarct size, it is unlikely that the hydrolase plays a pivotal role. Controversial data have been published on the involvement of mitochondrial ATPase, which may be ascribed to the poor time resolution of the experiments described; however, we do not believe that either acidosis or tissue ATP are important factors in triggering preconditioning. The role of glycolysis in the preconditioning effect remains to be firmly established; opposite mechanisms are activated in low-flow and stop-flow protocols. Although species differences regarding preconditioning exist, they seem to be more of a quantitative than a qualitative nature. The phenomenon could be clinically relevant because evidence is accumulating that preconditioning may take place during bypass surgery and coronary angioplasty if longer balloon-occlusion times are used. http://repub.eur.nl/res/pub/11648/ 1996-01-01T00:00:00Z This paper applies a game theoretic model to situations in which the Dutch government expropriates land from some farmers in order to create a new public project. The model is a version of a finite period bargaining model with asymmetric information and one-sided offers. It is shown that the model can explain some casual observations as the fact that usually, but not always, the government and the farmers settle by agreement. http://repub.eur.nl/res/pub/11660/ 1996-01-01T00:00:00Z In this paper we examine the issue whether individual rationality considerations are sufficient to guarantee that individuals will learn to coordinate. This question is central in any discussion of whether social phenomena (read: conventions) can be explained in terms of a purely individualistic approach. We argue that the positive answers to this general question that have been obtained in some recent work require assumptions which incorporate some convention. This conclusion may be seen as supporting the viewpoint of institutional individualism in contrast to psychological individualism. http://repub.eur.nl/res/pub/11661/ 1995-01-01T00:00:00Z This paper examines the role of coordination devices such as work norms in creating and sustaining inefficient organizational practices in firms, in a dynamic environment. The role of signalling norms and product market competition in alleviating such inefficiencies is also examined. In particular, we show that Cournot competition may increase the inefficiency of organizational practices. http://repub.eur.nl/res/pub/11662/ 1995-01-01T00:00:00Z http://repub.eur.nl/res/pub/11675/ 1995-01-01T00:00:00Z We consider Cournot's model of oligopolistic competition in a market for a homogeneous good. We seek conditions under which the oligopolists' game is dominance solvable and hence the Cournot equilibrium is the only outcome that survives iterated deletion of dominated strategies. We focus on “large” oligopolies, whereby we define an oligopoly to be “large” if both the demand and the supply side are replicated more than a certain finite number of times. We show that “large” Cournot oligopolies are dominance solvable if and only if the equilibrium of the approximated perfectly competitive market is globally stable under cobweb dynamics. http://repub.eur.nl/res/pub/11771/ 1995-01-01T00:00:00Z http://repub.eur.nl/res/pub/11709/ 1993-01-01T00:00:00Z A Review Essay on James Coleman, Foundations of Social Theory, The Belknap Press of Harvard University Press, 1990. http://repub.eur.nl/res/pub/11773/ 1993-01-01T00:00:00Z http://repub.eur.nl/res/pub/11776/ 1992-01-01T00:00:00Z http://repub.eur.nl/res/pub/11778/ 1992-01-01T00:00:00Z http://repub.eur.nl/res/pub/11714/ 1991-01-01T00:00:00Z It is often said that models in the microfoundations literature derive macroeconomic results from the theory of individual behavior only. This paper examines two of the assumptions that are usually made in these models: market clearing and rational expectations. In the context of simple models it is shown that only in some special cases these assumptions can be derived from the fundamental notion that individuals behave rationally. Thus, the usual rationale for the microfoundations literature is challenged. The paper concludes with a more modest rationale for the “necessity” of microfoundations. http://repub.eur.nl/res/pub/11716/ 1991-01-01T00:00:00Z In this paper we will show that Hempel's covering law model can't deal very well with explanations that are based on incomplete knowledge. In particular the symmetry thesis, which is an important aspect of the covering law model, turns out to be problematic for these explanations. We will discuss an example of an electric circuit, which clearly indicates that the symmetry of explanation and prediction does not always hold. It will be argued that an alternative logic for causal explanation is needed. And we will investigate to what extent non-monotonic epistemic logic can provide such an alternative logical framework. Finally we will show that our non-monotonic logical analysis of explanation is not only suitable for simple cases such as the electric circuit, but that it also sheds new light on more controversial causal explanations such as Milton Friedman's explanation of the business cycle. http://repub.eur.nl/res/pub/11720/ 1990-09-01T00:00:00Z In this paper we consider a two-sector economy in which individual unions are affiliated into a federation of unions. We analyze the consequences of two different types of wage setting. Firstly, individual unions set wages in their own sector without taking into account the effect of their wages on the employment level in the other sector. There may be positive as well as negative externalities. A positive (negative) externality may exist if a higher (lower) wage in one sector implies a higher level of employment in the other sector. Both cases may occur in our model. Secondly, wages in the two sectors are set by the federation of unions. We show that in this case higher (lower) wages result than in the first case if a positive (negative) externality exists.