MANAGERIAL ECONOMICS & DECISION SCIENCES
Associate Professor of Managerial Economics & Decision Sciences
Game Theory
International Economics
Mechanism Design
Microeconomics
- Recent Media Coverage
New York Times (Room for Debate blog): Dangers of a Weak Dictator - 6/17/2009
Economist Intelligence Unit: Executive Briefing: Seeing Profit Despite Misunderstood Pricing Strategy - 12/16/2008
See all Kellogg in the Media
- Recent Kellogg News
Decoding terror - 3/25/2009
Experts at Kellogg summit fight terrorism with analysis - 11/12/2008
See all Kellogg News
Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk and variable costs, leading to distorted pricing decisions. This paper investigates the extent to which market forces and learning eventually eliminate these distortions. We envision firms that experiment with cost methodologies that are consistent with real-world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk costs to pricing decisions. Firms follow "naive" adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. In some market structures, but not in others, this process of reinforcement causes pricing practices of all firms to systematically depart from standard equilibrium predictions.
A big country is facing a small country that may have developed weapons of mass destruction. The small country can create strategic ambiguity by not allowing arms inspections. We study the impact of strategic ambiguity on arms proliferation and the probability of conflict. We find that creating strategic ambiguity is a substitute for actually acquiring new weapons: behind the veil of ambiguity, there is less incentive for the small country to invest in a weapons program. Therefore, strategic ambiguity reduces the risk of arms proliferation. On the other hand, strategic ambiguity may hurt the small country because it does not always protect it from an attack. We allow cheap-talk, and find that messages can be used to trigger inspections when they are most valuable to the big country. To preserve incentive compatibility, the "tough" messages which make inspections more likely must also imply a greater risk of arms proliferation.
Two players simultaneously decide whether or not to acquire new weapons in an arms race game. Each player's type determines his propensity to arm. Types are private information, and are independently drawn from a continuous distribution. With probability close to one, the best outcome for each player is for neither to acquire new weapons (although each prefers to acquire new weapons if he thinks the opponent will). There is a small probability that a player is a dominant strategy type who always prefers to acquire new weapons. We find conditions under which the unique Bayesian–Nash equilibrium involves an arms race with probability one. However, if the probability that a player is a dominant strategy type is sufficiently small, then there is an equilibrium of the cheap-talk extension of the game where the probability of an arms race is close to zero.
We study trading models when the distribution of signals such as costs or values is not known to traders or the mechanism designer when the profit-maximizing trading procedure is designed. We present adaptive mechanisms that simultaneously elicit this information (market research) while maintaining incentive compatibility and maximizing profits when the set of traders is large (market design). First, we study a monopoly pricing model where neither the seller nor the buyers know the distribution of values. Second, we study a model with a broker intermediating trade between a large number of buyers and sellers with private information about their valuations and costs. We show that when the set of traders becomes large our adaptive mechanisms achieve the same expected profits for the monopolist and the broker as when the distribution of signals is common knowledge.
We study a multilateral negotiation procedure that allows for "partial agreements" in which responders are told only their own shares. Applications of our model include negotiations under "joint and several liability." Unlike previous models of multilateral bargaining with exit, we find that there are multiple equilibrium outcomes.
In the bilateral hold-up model and the moral hazard in teams model, introducing a third party allows implementation of the first-best outcome, even if the agents can renegotiate inefficient outcomes and collude. Fines paid to the third party provide incentives for truth-telling and first-best levels of investment. Our results suggest that models that provide foundations for hold-up and incomplete contracts by invoking renegotiation are sensitive to the introduction of third parties.
Hobbes's "state of nature" has sometimes been described as a Prisoners's Dilemma but his fundamental law of nature says that "every man ought to endeavor peace, as far as he has hope of obtaining it; and when he cannot obtain it, that he may seek, and use, all helps, and advantages of war" (Hobbes, p. 68). Since the fundamental law suggests that what a man should do depends on what other men are doing, Hobbes's "state of nature" is more easily interpreted as a Stag Hunt game than as a Prisoners' Dilemma. In fact, Jervis has suggested that not only Stag Hunt but also Chicken represent canonical strategic interactions in international relations. Stag Hunt represents a situation where aggressiveness can feed on itself and escalate conflict. Chicken represents a situation where aggression can deter aggression from the other side. Moreover, Hobbes, Jervis and Schelling have both claimed that mutual fear and uncertainty plague the play and hence the outcome of these games. Symmetric information models cannot easily capture the logic of mutual fear. We show that introducing uncertainty into the model can select a unique equilibrium. Hence, we capture the logic of mutual fear and show that it actually helps to analyze the outcome of the two games. We compare our results to the seminal work on global games and perform comparative statics exercises.
If conflict is sufficiently costly to the average citizen, then full democracies are unlikely to be at war with each other. However, they may be very aggressive in their interactions with other types of regimes, so democracy is not always good for peace. Moreover, limited democracies will be the most aggressive regime types, if the leader thinks he can stay stay in power only by appealing to an aggressive minority. Empirically, we find that a dyad of limited democracies is more likely to be involved in a militarized dispute than any other pair of political regimes (including two dictatorships). A dyad of full democracies is less likely to be involved in a militarized dispute than any other pair. Thus, there seem to be strong non-linearities in the relationship between democracy and peace, with limited democracies inherently more aggressive than other regime types. This effect is not limited to a period of transition from democracy to dictatorship.
We consider a cheap-talk game with one sender and one receiver. If the receiver does not commit to listen to only one message, the equilibrium refinements due to Farrell [5], Grossman and Perry [7] and Matthews, Okuno- Fujiwara and Postlewaite [11] are no longer applicable. We discuss different notions of durability and sequential credibility when a message can later be followed by more messages, and both parties know this.
This case studies the impact of tariffs, subsidies, and quotas on the U.S. steel market. It pays particular attention to "winners" and "losers" from different policies. The impact of these policies is illustrated via applications to the events in the U.S. steel market in 2001.
Since 1981, the U.S. federal government has operated a price support program to help sugar beet and sugar cane producers and processors. This complex program works through a combination of loans, import quotas, and duties. As a result, sugar prices in the United States are significantly higher than world prices. For example, in December 2001, U.S. consumers paid 22.9 cents per pound, while the world price was just 9 cents per pound. The General Accounting Office estimates that the total cost to consumers is $1.9 billion a year. This case uses a simple demand-and-supply framework, using real-world data, to assess the economic and political consequences of the U.S. sugar program. The case provides students with a vivid, fact-based illustration of welfare concepts such as consumer surplus, producer surplus, and dead-weight loss in a concrete, real-world market context.
This course counts toward the following majors: Analytical Consulting, Management & Strategy, Managerial Economics.
The course studies the determinants nature of competitive strategy in a variety of industry structures. The course considers how the structure of a firm's industry affects its strategic choices and performance. Topics include the dynamic aspects of pricing, entry and predation in concentrated industries, and product differentiation, product proliferation and innovation as competitive strategies.
Values and Crisis Decision Making (SEEK-440-A)
This course counts toward the following majors: Social Enterprise
In recent decades corporations have increasingly become the dominant source for political and social change. Increased globalization and technological progress have further accelerated this process. Businesses are now held accountable by standards other than legal compliance or financial performance. Successful business leaders have recognized that these challenges are best mastered by a commitment to values-based management. However, simply "doing the right thing" is not enough. Rather, companies increasingly find themselves as targets of aggressive legal action, media coverage and social pressure. Organizations must be prepared to handle rapidly changing environments and anticipate potential threats. This requires a deep understanding of the strategic complexities in managing various stakeholders and constituencies. To confront students with these challenges in a realistic fashion, the class is structured around a rich set of challenging case studies and crisis simulation exercises.
Economics of Competition prepares students to diagnose the determinants of an industry’s structure and formulate rational, competitive strategies for coping with that structure.
Strategic Crisis Management (SEEKX-910-0)
Strategic Crisis Management provides conceptual tools for managers in high-pressure, complex crisis situations. Topics include management and media, dealing with activists and interest groups, and surviving legal, legislative and regulatory challenges.
PHONE: 847-467-4613
FAX: 847-467-1220
Jacobs Center Room 505