In this paper, we develop a game-theoretic model to study how candidates compete in elections when voters care about the winner’s ability to implement policies. In our model, the candidates make commitments before the election regarding the plans they will try to implement if elected. These commitments serve as a signal of ability. In
equilibrium, candidates make overambitious promises. While the candidate with the highest ability wins, the electorate may be better off having a random candidate implement her best plan, rather than seeing the winner implementing an overambitious plan. We thus provide a new argument for sortition, the assignment of political offices by lot.
This version: November 17, 2023.
Globally, governments increasingly rely on auctions to advance renewable energy. This paper studies the design of wind farm auctions and evaluates the impact of price guarantees and subsidies on auction efficiency, government revenue, and renewable-energy production. While the theoretical analysis suggests that the price guarantee has no effect, our laboratory experiment suggests that the price guarantee improves efficiency and that it often increases production and revenue. An important explanation for these results is that less risk averse subjects tend to bid less aggressively and produce less. Without the price guarantee, and hence with more uncertainty in the auction, this increases the chances that risk-loving bidders win the auction, thus compromising auction efficiency. The subsidy is less effective than suggested by theory. Bidders with a higher valuation tend to bid more conservatively than the equilibrium prediction, thus neutralizing the efficiency-enhancing effect of the subsidy.
This version: July 19, 2023.
We study how digital platforms can choose competitive strategies to influence the number of multihoming consumers. Platforms compete for consumers and advertisers. A platform earns a premium from advertising to singlehomers, as it is a gatekeeper to these consumers. Competitive strategies leading to intense competition on the consumer side reduce profits on that side, but also increase consumer singlehoming and hence market power over advertisers. The size of the singlehoming premium determines where this competitive strategy ‘seesaw’ will end up. We apply this insight to four strategic choices that may affect singlehoming: reducing product differentiation, portfolio diversification, the choice of compatibility and tying.
This version: June 1, 2023.
There is a cartoon video version here.
Forthcoming in Games and Economic Behavior.
This paper studies the competitive role of list prices. We argue that such prices are often more salient than actual retail prices, so consumers’ purchase decisions may be
influenced by them. Two firms compete by setting prices in a homogeneous product
market. They first set a list price that serves as an upper bound on their retail price.
Then, after having observed each other’s list price, they set retail prices. Building on the canonical Varian (1980) model, we assume that some consumers observe no prices, some observe all prices, and some only observe list prices. We show that if the latter partially informed consumers use a simple rule of thumb, the use of list prices leads to lower retail prices on average. This effect is weakened if partially informed consumers are rational.
This version: March 16, 2023.
I introduce the possibility of consumer boycotts in a Hotelling model. The more a firm complies with consumers’ wishes, the higher its marginal cost, but the lower the
probability of facing a consumer boycott. I show that the threat of a consumer boycott can increase the expected profits of firms. Firms lose out when they do face a boycott, but gain even more when their competitor does, giving them more market power. The stronger a boycott will be, the more a firm will cater to consumers’ wishes. Yet, the effect of more competition is ambiguous.
This version: August 16, 2022.
Joint work with Wim Siekman.
We study retention offers, the practice that firms lower prices to consumers that want to cancel their contract. In a two-period Hotelling model, consumers have either low or high switching costs. In the second period, firms try to poach consumers. Consumers with a poaching offer can solicit a retention offer from their original supplier. In equilibrium, only low switching costs go though the effort of obtaining a poaching offer. Hence, retention offers serve as a mechanism to price discriminate against high switching cost consumers. In our model, the possibility of retention offers increases prices and profits. Consumer surplus decreases.
This version: May 19, 2021