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It is well established in vertical product differentiation models that the high–quality firm reaps a larger profit in a two–stage quality–price game as long as the cost of quality improvement is zero or is borne as fixed cost in the first stage quality choice. This note shows that the high–quality advantage may fail to hold if there is variable cost of production that is dependent on quality.

ABSTRACTUsing a standard differentiated goods quantity competition setting, we show three facts about horizontal two‐firm mergers that are not true for a homogeneous goods Cournot market. First, merger of two firms is profitable for the merging firms provided that goods are sufficiently distant substitutes. Second, merging of two firms can lead to more two‐firm mergers. Third, an initially non‐profitable two‐firm merger can occur in anticipation of subsequent mergers. These facts imply that mergers are more likely to occur in differentiated goods markets than in homogeneous goods markets.

In the last decade the literature has established the empirical importance of the tradeoff between risk and downside risk in a variety of economic settings. While the notions of risk and downside risk have been generalized in the theoretical literature, the literature has yet to provide a choice‐theoretic characterization of their tradeoff. This paper provides an analytical characterization of the risk–downside risk tradeoff and shows its relevance in the analysis of optimal decisions under uncertainty, such as the precautionary savings decision.

This note discusses the classifications of general symmetric and anti-diagonally symmetric 2×2 games, illustrated with business-related examples. It also shows how 2×2 games can be used to explain and interpret business strategies such as "top dog," "puppy dog," "fat cat" and "lean-and-hungry look" (Fudenberg and Tirole, 1984). A strategic move basically changes a prisoner's dilemma game, coordination game or chicken game into one with a unique Nash equilibrium that favors the strategic player.

AbstractThis paper attempts to employ a microeconomic model (industrial‐organization approach to banking) to formalize the concept that banks in an economy may also unilaterally create money, at least initially, rather than passively multiplying the base money exogenously issued by the Central Bank in the money creation process. It shows that in equilibrium, banks may indeed create money (bank deposits) when making loans without relying on the newly issued base money from the Central Bank. Instead, the endogenously created money by banks would cause the Central Bank to endogenously adjust base money to hit the target policy interest rate.

In this paper we study the optimal file-sharing mechanism in a peer-to-peer network with a mechanism design perspective. This mechanism improves upon existing incentive schemes. In particular, we show that peer-approved scheme is never optimal and service-quality scheme is optimal only under certain circumstances. Moreover, we find that the optimal mechanism can be implemented by a mixture of peer-approved and service-quality schemes.