Fabian Herweg

• Prof. Dr.
• Professor (Full) at University of Bayreuth

We consider the intertemporal trade-off between obtaining a small amount soon or a large one later. To solve this trade-off, we propose a general model of a multi-attribute heuristic that is rooted in exponential discounting and contains several models discussed in the literature as special cases. First, we derive the necessary and sufficient condi...

Two non-transitive theories to model decision making under risk are regret theory (Loomes and Sugden, 1982, Loomes and Sugden, 1987) and salience theory (Bordalo, Gennaioli, and Shleifer, 2012). While the psychological underpinning of these two approaches is different, the models share the assumption that within-state comparisons of outcomes across...

According to the Phase IV (2021-2030) rules of the EU ETS, the total amount of emission permits allocated to firms is not fixed but endogenous. This implies that a national climate policy that overlaps with the ETS can have an impact on total aggregate emissions. Roughly speaking, if firms increase their holdings of emission permits, the total amou...

We provide an explanation for a frequently observed vertical restraint in e-commerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their high-quality products over the internet. We assume that a consumer has context-dependent preferences in the sense that he overvalues a product attribute – quality or p...

We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naïve. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The two retailers sell an identical base product, but the decepti...

We analyze a model of price competition between a transparent retailer and a deceptive one in a market where a fraction of consumers is naïve. The transparent retailer is an independent shop managed by its owner. The deceptive retailer belongs to a chain and is operated by a manager. The two retailers sell an identical base product, but the decepti...

Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constrained optimal award procedure: The procurer awards the contract via a price‐only auction and cannot commit not to renegotiate. If cost differences are more pronounced for a fancy than a standard design, it is optimal to fix the standard design ex ante....

We consider a simple trading relationship between an expectation-based loss-averse buyer and a profit-maximizing seller. When writing a long-term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post. We show that if the buyer expects renegotiation to occur, the seller can opportunistically exploit...

We consider a brand manufacturer who can offer, next to its high-quality product, also a decoy good and faces competition by a competitive fringe that produces low quality. We show that the brand manufacturer optimally provides a decoy good to boost the demand for its main product if consumers’ purchasing decisions are distorted by salient thinking...

We investigate the effect of a ban on third-degree price discrimination on the sustainability of collusion. We build a model with two firms that may be able to discriminate between two consumer groups. Two cases are analyzed: (i) Best-response symmetries so that profits in the static Nash equilibrium are higher if price discrimination is allowed. (...

We investigate the welfare effects of third-degree price discrimination in input markets when nonlinear wholesale tariffs are feasible. After accepting their respective wholesale contracts, two downstream firms have to pay a fixed cost in order to become active in the downstream market. If the downstream firm with lower marginal cost has significan...

For the procurement of complex goods the early exchange of infor-mation is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly out-performs auctions if sellers are likely to have superior information about possible design improvements, if renegotiation i...

We investigate the welfare effects of third-degree price discrimination in input markets when nonlinear wholesale tariffs and costly entry into the downstream market are feasible. A more efficient entrant becomes active on the downstream market only if the tariff offered by the manu-facturer allows the entrant to recoup the entry cost. For relative...

We modify the classic single-period inventory management problem by assuming that the newsvendor is expectation-based loss averse according to B. Köszegi and M. Rabin [Q. J. Econ. 121, No. 4, 1133–1165 (2006; Zbl 1179.91059); “Reference-dependent risk attitudes”, Am. Econ. Rev. 97, No. 4, 1047–1073 (2007; doi:10.1257/aer.97.4.1047)]. We show that t...

We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit-...

We propose a theory of inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversi...

The extant theory on price discrimination in input markets takes the structure of the downstream industry as exogenously given. This paper endogenizes the structure of the downstream industry and examines the effects of permitting third‐degree price discrimination on market structure and welfare. We identify situations where permitting price discri...

In this paper, I compare two-part tariff competition to linear pricing in a vertically differentiated duopoly. Consumers have identical tastes for quality but differ in their preferences for quantity. The main finding is that quality differentiation occurs in equilibrium if and only if two-part tariffs are feasible. Furthermore, two-part tariff com...

We consider a monopolistic supplier's optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs. The existing lit-erature typically ignores the possibility of downstream firms having private infor-mation. Under discriminatory pricing, downstream firms that differ in their ex ante distribution of retai...

We extend Akerlof ’s (1970) “Market for Lemons†by assuming that some buyers are overconfident. Buyers in our model receive a noisy signal about the quality of the good that is at display for sale. Overconfident buyers do not update according to Bayes’ rule but take the noisy signal at face value. The main finding is that the presence of ove...

The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertai...

We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to Koszegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully contingent contract. The logic is that, due to the stochastic r...

The extant theory on price discrimination in input markets takes the structure of the intermediate industry as exogenously given. This paper endogenizes the structure of the intermediate industry and examines the effects of banning third-degree price discrimination on market structure and welfare. We identify situations where banning price discrimi...

This paper extends the standard principal-agent model with moral hazard to allow for agents having reference- dependent preferences according to Köszegi and Rabin (2006, 2007). The main finding is that loss aversion leads to fairly simple contracts. In particular, when shifting the focus from standard risk aversion to loss aversion, the optimal con...

Earlier work has shown that procrastination can be explained by quasi-hyperbolic discounting. We present a model of effort choice over time that shifts the focus away from completion to performance on a single task. We show that quasi-hyperbolic discounting is detrimental for performance. More intrestingly, we find that being aware of the own self-...

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent-policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...