We analyze how agents use side payments to induce cooperation in the infinitely repeated Prisoners' Dilemma. We characterize the Pareto frontier of the set of subgame perfect equilibrium payoffs for all possible combinations of discount factors. Play paths implementing Pareto dominant equilibrium payoffs are uniquely determined in all but the first period. Full cooperation, supported by repeated payments from the patient player to the impatient, does not necessarily implement such payoffs, even when such behavior maximizes total stage game payoffs. Rather, when the difference in players' discount factors is sufficiently large, all Pareto dominant equilibrium payoffs are implemented by partial cooperation supported by repeated payments from the impatient player to the patient. When both players are sufficiently patient, such payoffs, while implemented via full cooperation, are in fact supported by repeated payments from the impatient player to the patient. We characterize conditions under which public randomization has no impact on the Pareto frontier and also, conditions under which our Pareto dominant equilibrium payoffs are robust to renegotiation-proofness.

A credence good is a product or service whose usefulness or necessity is better known to the seller than to the buyer. This information asymmetry often persists even after the credence good is consumed. The author proposes two new theories of expert cheating, suggesting that identifiable heterogeneities among customers can cause expert sellers to defraud their customers. According to these theories, cheating arises as a substitute for price discrimination, and experts cheat selectively. For instance, experts target high-valuation and high-cost customers. Finally, selective cheating may damage the communication of useful information from customers to experts and result in inferior services.

This paper is based on the idea that for each partner in a marriage, there are two distinct types of leisure. One type is each person's independent (or private) leisure, and the other type is spousal leisure, whose importance has long been emphasized in the literature of psychology. While each type of leisure is unobservable (only total leisure is observed), it is shown that the recent collective models of the intrahousehold allocation initiated by Chiappori can be extended to identify each type of leisure up to an additive constant. In particular, the effects of each member's wage, household unearned income, and extrahousehold environmental parameters on the independent and spousal leisure and on the sharing rule are fully identified. The observational requirement here is the same as in other studies, namely, the observation of individual labor supply, individual wages, household unearned income, one assignable good, and consumption expenditure at the household level.

We study a dynamic cheap talk model with multiple senders where the receiver can choose when to make her decision and communication can take place over time. No player has the ability to commit to any action in the future, in particular, the receiver cannot commit to delay the decision. In contrast to the results in static versions of the model, we show that when the senders have common knowledge about the state of the world, there exists an equilibrium with instantenous, full revelation irrespective of the size and direction of the senders' biases. We show that the equilibrium is robust to the introduction of noise in the senders' signals about the state. The conditions under which the equilibrium outcome with noisy observation converges to immediate full disclosure as the noise disappears involve the size of the senders' biases and their patience.

Firms in an oligopoly market can more easily maintain a reputation for a high quality experience good than a monopolist or firms in a competitive market. Intuitively, selling an experience good of unknown quality is like selling a primary good of known quality and a secondary upgrade of unknown quality. When a monopolist or a competitive firm deviates in the price or quality of its upgrade, they can anticipate that consumers will no longer buy the upgrade, but the profit they earn from their primary good is unchanged. On the other hand, when an oligopoly firm deviates in the price or quality of its upgrade, the firm can anticipate not only that consumers will no longer buy its upgrade but also that the price it can charge for its primary good will fall. We also find that for a wide range of parameter values consumer surplus is higher in any low quality equilibrium than in any high quality equilibrium, even when it is socially efficient to produce high quality. The impact on welfare is ambiguous. We show that an increase in the number of firms can increase the highest sustainable quality without lowering the highest sustainable prices, a welfare increase. However we also show that an increase in the number of firms can lower both the highest sustainable price and the highest sustainable quality, which has ambiguous consequences for welfare.

We propose a theory of reciprocity according to which reciprocal behavior is driven by a donor's guilt. Through an experiment we show that subjects respond to factors which induce guilt but do not reflect allocative equity or intention. When the guilt inducing factor is privately observed by the donor, a psychological signaling game results. We solve for the separating and pooling equilibria. In a separating equilibrium, the donor distorts her gift to signal a low level of the guilt inducing factor. Consequently, conditional on the realization of a low level of guilt inducing factor, the donor gives a smaller gift when the guilt inducing factor is privately observed than when it is commonly known. Our experiment confirms this implication of the separating equilibrium.

This paper investigates firms' abilities to collude when these firms each monopolize a proprietary aftermarket. When firms' aftermarkets are isolated from foremarket competition, they cannot tacitly collude more easily than single product firms do. However, when their aftermarket power is contested by foremarket competition as equipment owners view new equipment as a substitute for their incumbent firm's aftermarket product, the monopoly profit is sustainable among a larger number of firms. More strikingly, as long as existing customers have a shorter market life expectancy than incoming customers, for any discount factor, supranormal profits are sustainable among arbitrarily many firms each selling ex ante identical products. These results suggest the importance of distinguishing between two types of aftermarket power which are often considered to be qualitatively the same. Conditions under which introduction of aftermarket competition hinders firms' ability to tacitly collude are characterized.

The level of profits that can be sustained in repeated price game is higher when consumers are long-lived and firms can intertemporally bundle their output. With short-lived consumers, it is well known that any price and profit, up to the monopoly profit, can be sustained in a subgame perfect Nash equilibrium (SPNE) as long as the number of firms does not exceed 1/(1-delta), or equivalently, the discount factor is greater than (n-1)/n, and that marginal cost pricing is the unique SPNE otherwise. We show that when firms face long-lived, repeat-purchase consumers and are free to offer intertemporal bundles, strictly positive profits can be supported for any number of firms and for any strictly positive discount factor. One equilibrium strategy that increases profits is to temporally segment the market with staggered long-term contracts and exploit the fact that consumers anticipate future price cuts in response to current deviations. A second, potentially more profitable, equilibrium strategy is to sell unstaggered multi-period contracts and simultaneously offer single-period discounts in the period in which the multi-period contracts are being renewed. The single-period contracts are not purchased in equilibrium, but they limit firms' incentives to cut price.