At CAPCP, faculty work on a various range of topics related to auctions, procurements and competition policy. There are five active research programs, on which information is given below. Our research programs assemble researchers with different skills in theory, empirical analysis and econometrics. This particular feature makes CAPCP a unique research center. These research programs are articulated around relevant policy issues on which our faculty produce new insights. In addition, several of our faculty have a long experience with economic institutions, key sectors of the economy and several countries throughout the world ranging from Europe, Russia, Asia to South America.
Program Director: Joris Pinkse
Members: Kalyan Chatterjee, Kala Krishna, Vijay Krishna and Robert C. Marshall.
A substantial proportion of U.S. economic activity occurs via auctions and procurements involving both the private and public sectors. Following the inception of the internet, business-to-business auctions have known a tremendous development. Economists have made significant contributions over the past twenty years with regard to the design of auctions and procurements. In turn, the diversity of auction and procurement environments has prompted important theoretical and applied developments. In particular, our faculty are working on important issues such as whether the seller/buyer should restrict resale opportunities that can take place after the auction or whether they should split the lots to create more (sequential) auctions. For every question that is addressed, various settings need to be carefully studied. For instance, some auction designs may provide a larger revenue (or similarly a lower cost when considering a procurement) when bidders are financially constrained or when bidders’ entry is taken into account. Auction and procurement designs involve basic rules such as ascending or sealed-bid auctions, the use of reserve prices, and the announcement of information regarding the value of the good. The ordering of the lots in terms of value in a sequence of auctions is a crucial issue to generate more revenue. Another related issue concerns the uncertainty of future production.
As such, our researchers are able to provide practical responses to private and public institutions that face important choices when designing or participating in auctions and procurements. In parallel to these important developments, the economic profession has been interested in confronting these results with data, to test the validity of such results and to quantify the key parameters in auctions and procurements. The past ten years have witnessed important developments in the empirical analysis of auction data involving natural resources, public procurements and various other products. In particular, construction procurements have shown that firms tend to differ significantly because of the large transportation costs of their equipment. Such differences among firms can be exploited by the auctioneer by changing the procurement rules. As such, our researchers can quantify the effects of competition in auctions and procurements and advise private and public institutions on how to exploit such competition.
Program Director: Robert C. Marshall
Member: Joris Pinkse
Over the past twenty years, economists have developed an increasing interest in confronting auction models to auction data. Researchers have focused first on testable implications involving observed bids and possibly other information such as firms’ ex post revenue to detect whether bidders behave according to some particular auction models. A more recent approach goes further by assuming that observed bids are the outcome of a specific auction model. As such, the auction model provides the structure on which the econometric model relies. This approach allows researchers to recover the key elements of bidders’ behavior that can be used for policy evaluations and recommendations. Given their complexity, auction models lead to non standard econometric techniques and challenging questions regarding whether observations are sufficient to recover the key elements of bidding behavior. This problem is known as identification. Our faculty have been key players in the development of quantitative methods and in addressing such questions for analyzing auction data in various settings. The development of such tools allows business leaders and policy makers to assess the potential gain or loss that can result if the design of the auction and the value of the reserve price are changed.
In addition, our faculty have been interested in developing econometric methods that minimize parametric assumptions on the key elements of the model to avoid misspecification and potential bias in policy evaluations. These methods are easily implementable and computationally simple making them usable beyond the academic world. They can be adapted to a large set of situations and thereby have greatly contributed to the development of the empirical analysis of auction and procurement data. Our faculty continue to work in this area as many important problems remain to be studied such as how uncertainty affects bidding behavior. Moreover, additional econometric tools need to be developed to assess empirically the many auction models provided by auction theory.
Auctions can be viewed as relatively simple models of imperfect information in which bidders have some private information such as their valuations for the auctioned object. Other models involving asymmetric information can be found in contracts, regulation and nonlinear pricing in which some agents such as firms or consumers have some information about their efficiency or tastes. Contracts, regulation and nonlinear pricing affect many sectors of the economy such as electricity and telecommunications to name a few. An important set of empirical questions could be addressed in these areas. The experience acquired by our faculty in the econometrics of auctions and procurements is a stepping stone for the future development of econometric methods for regulation and contracts .
Program Director: Robert C.Marshall.
Members: Kalyan Chatterjee, Edward Green, Kala Krishna, Vijay Krishna and Joris Pinkse.
The suppression of interfirm rivalry can be highly profitable. In many industries the incremental payoffs from collusion are quite large while the effort to attain those incremental profits is relatively small. Effective collusion usually requires some kind of allocation mechanism; fixed market share or geographic divisions are two common examples. Our faculty are investigating a number of issues concerning tacit and explicit collusion, and thus their research is directly applicable to coordinated effects analysis with mergers.
Often an auction or procurement is the direct focus of collusive behavior. Even if it is not because the cartel is organized around, say, a market share allocation scheme, at the end of the day bidder collusion is required to attain the desired outcomes. Bidder collusion can be detected, and collusive arrangements among bidders can be quite difficult to implement for the parties themselves. Our faculty are investigating the conditions of sustainable collusion and the susceptibility of various auction/procurement schemes to collusion. The resulting models provide some testable implications on observed bids that can be used to detect collusion. There are many factors that can contribute to low bids in an auction context and high bids in a procurement context – accounting for these factors is typically important when assessing whether bidding was collusive. Work in this regard has been conducted for Forest Service timber sales as well as school milk procurements. In a different setting, bid protests by firms in procurements tend to encourage collusion as settlement can be used as a legal channel for side payments. Such court cases have been observed in procurements of telecommunication and computer equipment. A research project involving a unique data set of construction procurements (“Bos” shadow account) in which bidders have acknowledged collusion and have given information on side payments, will provide more insights on the formation of collusion and its sustainability.
Every year competition enforcement authorities around the world unearth cartels that are significantly impacting large amounts of commerce. Our faculty have studied the international vitamins cartel, which was a market share allocation cartel, and have analyzed the use of coordinated price announcements by that cartel. In the context of international markets, firms can use export quotas as a collusive device when competition among firms is limited.
The payoff to incremental post-merger collusion can be addressed through extensions of asymmetric auction/procurement models. Our faculty are ideally suited to handle the difficult calibration and numerical issues associated with these analyses. This line of study has the potential to provide significant quantification to coordinated effects analysis of mergers.
Another related issue is the formation of coalitions and their communication structure. Some laboratory experiments are expected to provide key insights on these issues.
Program Director: Mark Roberts.
Members: Kalyan Chatterjee, Edward Green, Vijay Krishna, Joris Pinkse, and James Tybout.
Competition policy refers to all aspects of government intervention in the market place. One aspect of this field that is of significant interest to both businesses and policy makers is the use of antitrust policy to spur competition. Our faculty members have been actively involved in the empirical analysis of the effects of firm restructuring through mergers and takeovers. They have developed econometric tools to quantify the effects of mergers and applied them to the study of the food industry. They have also developed models of takeovers that take into account the role of managerial compensation.
A second aspect of competition policy involves the direct regulation of firms pricing, entry, exit, and investment strategies by state or federal government agencies. Traditional concerns focused on the control of pricing to limit the exercise of monopoly power in industries dominated by large economies of scale and few producers. Recent experience with market deregulation in the electric power industry have renewed interest in whether or not utilities should be regulated and which mode of regulation should be adopted. Our faculty have relied on recent models of regulation to develop empirical tools to assess the role and impacts of regulation. They have expertise in the regulation of water utilities, public transit, and postal services. They have undertaken projects to study the productivity impacts of environmental regulation on electric utilities, and the role of government regulation to offset effects of credit rationing by banks on the small business sector.
Our faculty are also involved in a number of empirical projects utilizing micro data that study the entry, exit, growth, investment, and pricing decisions of firms. They have studied how patterns of entry and exit are related to underlying differences in profitability and productivity across firms and how investments in physical capital or R&D, adoption of new technologies, or exposure to the export market can improve firms’ competitive standing. These studies cover industries from the United States, South America, and East Asia. The pricing strategies of firms have been investigated by several faculty. They have undertaken studies of the effects of the spatial dispersion of competing firms on pricing patterns in wholesale gasoline markets.
Program Director: James Tybout.
Members: Edward Green, Barry Ickes, Kala Krishna, and Mark Roberts.
Reductions in transport costs, commercial policy reforms, improvements in international communication, and rapid industrialization in Asia have changed the nature of the marketplace for many producers. The research program on international policies documents and analyzes these changes from the perspective of firms and policy makers throughout the world. Topics recently addressed by faculty in this program include the effects of openness on industrial evolution patterns (pricing, investment and entry/exit), the effects of openness on productivity, the exporting behavior of firms in different environments, the interplay between rules of origin and market structure, and the effects of globalization on economic conditions in transition economies.
These studies have yielded a variety of findings. For example, they show that the effects of import competition on industrial evolution patterns are likely to evolve over time, with short-run pricing adjustments eventually dampened by the exit of some domestic firms, and by changes in the innovative efforts of those that remain. Similarly, sectors that produce exportable goods are likely to respond differently over different time horizons, as firms adjust their expectations concerning the returns to retooling for foreign markets.
A related set of studies describes the relation between exporting, innovation and the absorption of foreign technologies. They find that in some Latin American countries, the greater efficiency of exporters is due to the simple fact that high efficiency firms stand to gain more from breaking into foreign markets that is, efficient firms have self-selected into exporting. But in other regions, especially East Asia, firms appear to have improved their efficiency as a consequence of interacting with knowledgeable foreign buyers and facing off against relatively advanced firms in global markets.
Other studies have focused more directly on trade policy, particularly rules of origin and licensing requirements. Concerning the former, program faculty have shown that the effects of rules of origin are surprisingly sensitive to the context in which they are applied. Concerning the latter, program faculty have shown how changes in the rules governing quota license auctions in New Zealand and Australia impacted the resale market for quota licenses and affected its efficiency.
Finally, program faculty have researched the determinants of economic performance in Russia and Eastern Europe. These studies have analyzed the role of external factors (climate, geography, and the socialist legacy) and internal factors (institutional underdevelopment, privatization policy, and federalism) in shaping the transition process. In particular, they have linked the high cost of investment in former Soviet economies to these factors. They have also argued that the organization of the oil and gas sector in Russia could threaten future energy production.
In pursuing their research, the faculty involved in this program have worked in Asia, Latin America, Australia, Africa, Russia, and Eastern Europe. In addition to grants from the National Science Foundation, their work has been funded by The World Bank, The International Monetary Fund, The Board of Governors of the Federal Reserve, The Organization for Economic Cooperation and Development, and the Mexican government.
Program Director: Barry Ickes.
Adjunct Research Scientists : Oleg Yankelev and Evgeny Kovalishin.
Volatility is a key feature of financial markets. Asset prices fluctuations are a major source of risk in financial markets. It is precisely through asset price fluctuations that financial markets allocate resources. Volatility is thus a central element of the financial system. Volatility is also a key measure of the riskiness of assets. In addition, however, volatility can be measured and estimated and it can be traded through dynamic trading strategies involving options and other derivatives.
Understanding the sources of financial volatility and the causes of movements in volatility is crucial for understanding the financial system. Financial crises can be thought as periods of extreme volatility. The projects in this research program study the methods for measuring volatility and models of the causes and consequences of fluctuations in volatility. We also are studying how market institutions impact financial volatility.