Industrial Organization Commons^™

Essays On The Market Structure Of The U.S. Health Care System, Ayse S. Diebel

Dissertations, Theses, and Capstone Projects

This dissertation examines the welfare implications of vertical restraints in the U.S. health care market. I focus on two phenomena that influence vertical relationships between hospitals and insurers: vertical integration and vertical bundling. Both of these practices have potential efficiency-inducing and anti-competitive effects from a theoretical standpoint, making welfare implications ambiguous. I analyze their impact on welfare in an empirical setting. This task requires structurally modeling the market by using data on hospitals, insurers, and consumers, and simulating counterfactual worlds free of vertical restraints.

I construct my dataset by combining data from multiple sources. Hospital characteristics come from the American …

Bringing Emotions Into Social Exchange Theory, Edward J. Lawler, Shane R. Thye

Edward J Lawler

We analyze and review how research on emotion and emotional phenomena can elaborate and improve contemporary social exchange theory. After identifying six approaches from the psychology and sociology of emotion, we illustrate how these ideas bear on the context, process, and outcome of exchange in networks and groups. The paper reviews the current state of the field, develops testable hypotheses for empirical study, and provides specific suggestions for developing links between theories of emotion and theories of exchange.

Fractured Markets And Legal Institutions, Herbert J. Hovenkamp

All Faculty Scholarship

This article considers how we can improve legal outcomes of conflicts that occur in very small arenas. The conflicts can be of many kinds, including a nuisance dispute between neighbors, an impending collision between two moving vehicles, a joint decision between spouses about whether or on what terms to continue their marriage, or a disagreement between managers and shareholders within a firm.

The prevailing literature typically refers to these small environments as “markets.” Thinking of them as markets, however, averts our attention from larger environments that should be considered but that often do not function well as private markets. For …

Bilateral Bargaining With Externalities, Catherine De Fontenay, Joshua Gans

Catherine de Fontenay

This paper provides an analysis of a non-cooperative pairwise bargaining game between agents in a network. We establish that there exists an equilibrium that generates a coalitional bargaining division of the reduced surplus that arises as a result of externalities between agents. That is, we provide a non-cooperative justification for a cooperative division of a non-cooperative surplus. The resulting division is akin to the Myerson-Shapley value with properties that are particularly useful and tractable in applications. We demonstrate this by examining buyer-seller networks and vertical foreclosure.

Bargaining In Hospital Merger Models, David J. Balan, Keith Brand

David J. Balan

Hospital prices for commercially-insured patients are generally set through bilateral negotiations with health insurance companies. Reflecting common industry practice, contemporary models of hospital/health insurer bargaining usually assume that multi-hospital systems bargain on an all-or-nothing basis. However, hospitals within systems may bargain separately, and a commitment to do so is sometimes put forward as a remedy for an otherwise anticompetitive merger. We analyze and compare the merger-induced changes in equilibrium prices in a Nash Bargaining framework under these two modes of bargaining. We show that, while the magnitude of price effects under either mode depends critically on the degree of pre-merger …

Exclusivity, Competition And The Irrelevance Of Internal Investment, Catherine De Fontenay, Joshua Gans, Vivienne Groves

Catherine de Fontenay

This paper considers the effect of exclusive contracts on investment decisions in a market with two upstream and two downstream firms. Segal and Whinston’s (2000) irrelevance result is generalized and it is shown that exclusive contracts have no effect on the equilibrium level of internal investment for the contracted parties when competition exists in both the upstream and downstream markets. Furthermore, by considering a more competitive environment we are able to demonstrate that strongly internal investment by rival upstream-downstream bargaining pairs is similarly unaffected by the presence of exclusive contracts.

Esop Fables: The Impact Of Employee Stock Ownership Plans On Labor Disputes, Peter Cramton, Hamid Mehran, Joseph Tracy

Peter Cramton

By the early 1990s employee stock ownership plans (ESOPs) had become as prevalent in unionized firms as in nonunionized firms. However, little research has been devoted to examining the implications of ESOPs for collective bargaining, or cross ownership more generally. In this paper, we extend the signaling model of Cramton and Tracy (1992) to allow partial ownership by the union. We demonstrate that ESOPs create incentives for unions to become weaker bargainers. As a result, the model predicts that ESOPs will lead to a reduction in strike incidence and in the fraction of labor disputes that involve a strike. We …

Unions, Bargaining And Strikes, Peter Cramton, Joseph Tracy

Peter Cramton

Labor disputes are an intriguing feature of the landscape of industrialized economies. Economists have had a long-standing interest in formulating a framework for understanding and analyzing labor disputes. The development of noncooperative bargaining theory provided the tools for a theory of collective bargaining and labor disputes. A general aim of this theoretical development is to inform policy makers of the efficiency and equity effects associated with different labor laws and institutions that govern and shape the collective bargaining process. While this new literature is still evolving, it can already offer many insights into the interplay between policy and the bargaining …

Bargaining With Incomplete Information, Peter Cramton, Lawrence M. Ausubel, Raymond J. Deneckere

Peter Cramton

A central question in economics is understanding the difficulties that parties have in reaching mutually beneficial agreements. Informational differences provide an appealing explanation for bargaining inefficiencies. This chapter provides an overview of the theoretical and empirical literature on bargaining with incomplete information. The chapter begins with an analysis of bargaining within a mechanism design framework. A modern development is provided of the classic result that, given two parties with independent private valuations, ex post efficiency is attainable if and only if it is common knowledge that gains from trade exist. The classic problems of efficient trade with one-sided incomplete information …

Impacts Of Strike Replacement Banks In Canada, Peter Cramton, Morley Gunderson, Joseph Tracy

Peter Cramton

In the labor relations area no issue generates as much controversy and division between labor and management as does the legislative ban on replacement workers. In the United States, the issue of a ban on permanent replacement workers has come before Congress four times since 1988, although the only action taken has been an executive order in 1995, banning the government from doing business with firms that use permanent replacements (Cramton and Tracy 1998). In Canada, where labor matters are under provincial jurisdiction, legislative bans on permanent replacement workers exist in most jurisdictions (except New Brunswick, Nova Scotia and Prince …

The Effect Of Collective Bargaining Legislation On Strikes And Wages, Peter Cramton, Morley Gunderson, Joseph Tracy

Peter Cramton

Using Canadian data on large, private-sector contract negotiations from January 1967 to March 1993, we find that wages and strikes are substantially influenced by labor policy. The data indicate that conciliation policies have largely been ineffective in reducing strike costs. In contrast, contract reopener provisions appear to make both unions and firms better off by reducing negotiation costs without systematically affecting wage settlements. Legislation banning the use of replacement workers appears to lead to higher strike costs both by increasing the frequency and duration of strikes.

Efficient Relocation Of Spectrum Incumbents, Peter Cramton, Evan Kwerel, John Williams

Peter Cramton

Changes in technologies and in consumer demands have made prior radio spectrum allocations far from efficient. To address this problem the FCC has recently reallocated spectrum for more flexible use in bands that are partially occupied by incumbent license holders. Often, it is necessary for the new license holder to relocate incumbents to make efficient use of the spectrum. Regulations structuring the negotiation between incumbent and new entrant can promote efficiency. In particular, giving the new entrant the right to move the incumbent with compensation can reduce negotiation costs and promote efficiency when there is private information about spectrum values …

The Use Of Replacement Workers In Union Contract Negotiations: The U.S. Experience, 1980-1989, Peter Cramton, Joseph Tracy

Peter Cramton

It is argued in many circles that a structural change occurred in U.S. collective bargaining in the 1980s. Strike incidence declined, dispute incidence increased, and the composition of disputes shifted away from strikes and toward holdouts. We investigate the extent to which the hiring of replacement workers can account for these changes. For a sample of over 300 major strikes since 1980, we estimate the likelihood of replacements being hired. We find that the risk of replacement is lower for bargaining units with more experienced workers, and declines during tight labor markets. The composition of disputes shifts away from strikes …

Decption And Mutual Trust: A Reply To Strudler, Peter Cramton, J Gregory Dees

Peter Cramton

Alan Strudler has written a stimulating and provocative article about deception in negotiation. He presents his views, in part, in contrast with our earlier work on the Mutual Trust Perspective. We believe that Strudler is wrong in his account of the ethics of deception in negotiation and in his quick dismissal of the Mutual Trust Perspective. Though his mistakes may be informative, his views are potentially harmful to business practice. In this paper, we present arguments against Strudler’s position and attempt to salvage the Mutual-Trust Perspective from his attack. Strudler’s work reaffirms the need for a more pragmatic approach to …

Ratifiable Mechanisms: Learning From Disagreement, Peter Cramton, Thomas R. Palfrey

Peter Cramton

In a mechanism design problem, participation constraints require that all types prefer the proposed mechanism to some status quo. If equilibrium play in the status quo mechanism depends on the players’ beliefs, then the inference drawn if someone objects to the proposed mechanism may alter the participation constraints. We investigate this issue by modeling the mechanism design problem as a two-stage process, consisting of a ratification stage followed by the actual play of the chosen game. We develop and illustrate a new concept, ratifiability, that takes account of inferences from a veto in a consistent way.

Wage Bargaining With Time-Varying Threats, Peter Cramton, Joseph Tracy

Peter Cramton

We study wage bargaining in which the union is uncertain about the firm's willingness to pay and threat payoffs vary over time. Strike payoffs change over time as replacement workers are hired, as strikers find temporary jobs, and as inventories or strike funds run out. We find that bargaining outcomes are substantially altered if threat payoffs vary. If dispute costs increase in the long-run, then dispute durations are longer, settlement rates are lower, and wages decline more slowly during the short-run (and may even increase). The settlement wage is largely determined from the long-run threat, rather than the short-run threat.

The Determinants Of U.S. Labor Disputes, Peter Cramton, Joseph Tracy

Peter Cramton

We present a bargaining model of union contract negotiations, in which the union decides between two threats: the union can strike or continue to work under the expired contract. The model makes predictions about the level of dispute activity and the form the disputes take. Strike incidence increases as the strike threat becomes more attractive, because of low unemployment or a real wage drop during the prior contract. We test these predictions by estimating logistic models of dispute incidence and dispute composition for U.S. labor contract negotiations from 1970 to 1989. We find empirical support for the model's key predictions, …

Promoting Honesty In Negotiation: An Exercise In Practical Ethics, Peter Cramton, J Gregory Dees

Peter Cramton

In a competitive and morally imperfect world, business people are often faced with serious ethical challenges. Harboring suspicions about the ethics of others, many feel justified in engaging in less-than-ideal conduct to protect their own interests. The most sophisticated moral arguments are unlikely to counteract this behavior. We believe that this morally defensive behavior is responsible, in large part, for much undesirable deception in negotiation. Drawing on recent work in the literature of negotiations, we present some practical guidance on how negotiators might build trust, establish common interests, and secure credibility for their statements thereby promoting honesty We also point …

Strikes And Holdouts In Wage Bargaining: Theory And Data, Peter Cramton, Joseph Tracy

Peter Cramton

We develop a private-information model of union contract negotiations in which disputes signal a firm’s willingness to pay. Previous models have assumed that all labor disputes take the form of a strike. Yet a prominent feature of U.S. collective bargaining is the holdout: negotiations often continue without a strike after the contract has expired. Production continues with workers paid according to the expired contract. We analyze the union’s decision to strike or hold out and highlight its importance to strike activity. Strikes are more likely to occur after a drop in the real wage or a decline in unemployment.

Strategic Delay In Bargaining With Two-Sided Uncertainty, Peter Cramton

Peter Cramton

The role of strategic delay is analyzed in an infinite-horizon alternating-offer model of bargaining. A buyer and seller are engaged in the trade of a single object. Both bargainers have private information about their own preferences and are impatient in that delaying agreement is costly. An equilibrium is constructed in which the bargainers signal the strength of their bargaining positions by delaying prior to making an offer. A bargainer expecting large gains from trade is more impatient than one expecting small gains, and hence makes concessions earlier on. Trade occurs whenever gains from trade exist, but due to the private …

Dynamic Bargaining With Transaction Costs, Peter Cramton

Peter Cramton

A buyer and seller alternate making offers until an offer is accepted or someone terminates negotiations. The seller's valuation is common knowledge, but the buyer's valuation is known only by the buyer. Impatience to reach an agreement comes from two sources: the traders discount future payoffs and there are transaction costs of bargaining. Equilibrium behavior involves either immediate trade, delayed trade, or immediate termination, depending on the size of the gains from trade and the relative bargaining costs. This contrasts with the pure discounting model where termination never occurs, and the pure transaction cost model where delayed trade never occurs.

Shrewd Bargaining On The Moral Frontier: Toward A Theory Of Morality In Practice, Peter Cramton, J Gregory Dees

Peter Cramton

From a traditional moral point of view, business practitioners often seem overly concerned about the behavior of their peers in deciding how they ought to act. We propose to account for this concern by introducing a mutual trust perspective, where moral obligations are grounded in a sense of trust that others will abide by the same rules. When grounds for trust are absent, the obligation is weakened. We illustrate this perspective by examining the widespread ambivalence with regard to deception about one’s settlement preferences in negotiation. On an abstract level, such deception generally seems undesirable, though in many individual cases …

Cartel Enforcement With Uncertainty About Costs, Peter Cramton, Thomas R. Palfrey

Peter Cramton

What cartel agreements are possible when firms have private information about production costs? For private cost uncertainty we characterize the set of cartel agreements that can be supported, recognizing incentive and participation constraints. If defection results in either Cournot or Bertrand competition, the incentive problem in large cartels is severe enough to prevent the cartel from achieving the monopoly outcome. However, if the cartel agreement requires less than unanimous ratification by the member firms, then the incentive problem can be overcome in large cartels. With common cost uncertainty, perfect collusion is possible in large cartels, regardless of the ratification rule.

Dissolving A Partnership Efficiently, Peter Cramton, Robert Gibbons, Paul Klemperer

Peter Cramton

Several partners jointly own an asset that may be traded among them. Each partner has a valuation for the asset; the valuations are known privately and drawn independently from a common probability distribution. We characterize the set of all incentive-compatible and interim-individually-rational trading mechanisms, and give a simple necessary and sufficient condition for such mechanisms to dissolve the partnership ex post efficiently. A bidding game is constructed that achieves such dissolution whenever it is possible. Despite incomplete information about the valuation of the asset, a partnership can be dissolved ex post efficiently provided no single partner owns too large a …

Sequential Bargaining Mechanisms, Peter Cramton

Peter Cramton

The introductory discussion presented in this chapter considers the simplest type of sequential bargaining games in which the players’ time preferences are described by known and fixed discount rates. I begin by characterizing the class of perfect bargaining mechanisms, which satisfy the desirable properties of incentive compatibility (i.e., each player reports his type truthfully), individual rationality (i.e., every potential player wishes to play the game), and sequential rationality (i.e., it is never common knowledge that the mechanism induced over time is dominated by an alternative mechanism). It is shown that ex post efficiency is unobtainable by any incentive-compatible and individually …

Bargaining With Incomplete Information: An Infinite-Horizon Model With Two-Sided Uncertainty, Peter Cramton

Peter Cramton

The resolution of any bargaining conflict depends crucially on the relative urgency of the agents to reach agreement and the information each agent has about the others’ preferences. This paper explores, within the context of an infinite-horizon bargaining model with two-sided uncertainty, how timing and information affect the rational behavior of agents when commitment is not possible. Since the bargainers are uncertain about whether trade is desirable, they must communicate some of their private information before an agreement can be reached. This need for learning, due to incomplete information about preferences, results in bargaining inefficiencies: trade often occurs after costly …