Games and Markets - Essays on Communication, Coordination and Multi-Market Competition

University dissertation from Department of Economics, Lund Universtiy

Abstract: This thesis consists of a collection of essays on coordination in games and competition in international oligopolies. The first essay presents a theoretical analysis of a simple coordination game in which players simultaneously choose efforts from a compact interval. The original game has a continuum of Pareto-ranked equilibria. In a noisy variant of the model an error term is added to each player's choice before his effort is determined. By perturbing the original game we derive a unique solution, the noise-proof equilibrium. The results agree with experimental findings and have an interesting connection with the notion of potential. The second essay investigates the prospects for efficient coordination in a game with asymmetric information and costly communication. The purpose is to analyze the relationship between simplicity and efficiency in games of mutual interest. It is shown that costly and structured communication results in successful coordination in an equilibrium that is easily described in the language constructed by players. Partial information is transmitted from the informed to the uninformed player when communication is costly. Thus, the expected outcome is not necessarily a Pareto-efficient outcome in the underlying game. The third essay presents a multi-market game of entry deterrence. The first mover in the multi-market game can install production capacity to deter entry. Sufficient conditions for entry deterrence in the multi-market game are derived. The entry-deterring capacity is strictly larger when it can be used in all markets (global capacity) compared to the one needed to deter entry when it is possible to assign parts of the capacity to specific markets (market commitments). Market commitments are possible if sufficient conditions apply. The fourth essay studies the microfoundations for the commonly used integrated and segmented markets assumptions in international trade theory. A simple oligopoly model of international competition is presented. The model builds on two assumptions; increasing returns to scale in the transportation technology and market-specific access costs. It is shown that markets are segmented when the fixed trade cost and market-specific barriers are high. Markets are integrated if market-specific barriers and trade barriers are simultaneously dismantled. The fifth essay focuses on third degree price discrimination and arbitrage in international trade. A single manufacturing firm produces a homogenous good and complementary services for two markets with differences in willingness to pay. The manufacturing firm has an incentive to price-discriminate. Arbitrage is introduced and it is shown that the positive welfare effects of price equalization can be reversed if barriers in the arbitrage sector are endogenously determined by the manufacturing firm or arbitrage firms free-ride on market-specific investments by the manufacturing firm in high-valuation markets.

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