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Quality choice, signalling, and moral hazard
Abstract
In this paper it is argued that prices should not reveal the quality of the good to the consumers, when there is asymmetric information about quality between the firm and the consumers, and the firm can affect the quality of its product. Instead, prices should be completely uninformative, so that firms are able to make larger investments to improve the quality, and increase the expected utility of the consumers.
Endast avhandlingens sammandrag. Pappersexemplaret av hela avhandlingen finns för läsesalsbruk i Statsvetenskapliga biblioteket (Unionsgatan 35). Dessa avhandlingar fjärrutlånas endast som microfiche. Abstract only. The paper copy of the whole thesis is available for reading room use at the Library of Social Sciences (Unioninkatu 35) . Microfiche copies of these theses are available for interlibrary loans. Vain tiivistelmä. Opinnäytteiden sidotut arkistokappaleet ovat luettavissa HY:n keskustakampuksen valtiotieteiden kirjastossa (Unioninkatu 35). Opinnäytteitä lainataan ainoastaan mikrokortteina kirjaston kaukopalvelun välityksellä Essay 1: An astonishing phenomenon is the rise of a large population of programmers who, seemingly against economic logic, develop and distribute software that is copylefted: freely available but licensed. Our paper suggests that the occupational choices of programmers based on reputation incentives determine the qualities of programs. When software implementation costs are low, the monopolist accepts the copyleft program in the market. We explain the simultaneous existence of commercial and copylefted programs, like Windows and Linux, and also why commercial alternatives to copyleft programs may not exist. Essay 2: Firms in the IT-industry use resources to initiate and support copyleft programmers’ communities, which develop competing free programs. We introduce a model where programs exhibit network effects in the consumer market and where a monopoly firm selling a copyright program has an incentive to support the development of a free copyleft substitute program. The incentive arises under a weak network effect even when the network of copyleft programmers is small compared to consumer network. We report welfare results under different market outcomes. Essay 3: The future compatibility of a product can be important to a buyer. With IT products, switching costs may in the worst cases well exceed the purchasing price. We develop a model in which rational buyers value products by their expected levels of future compatibility, using suppliers’ R&D budget levels as signals. Suppliers compete by investing in R&D to increase compatibility. In all the analysed market scenarios R&D investment levels fall short of the social optimum. Essay 4: When buyers value products in terms of the expected compatibility between the current and the new vintage, firms can invest strategically to control for the switching costs. Their open announcements of R&D budgets transmit information to buyers and to competitors. Since only an efficient firm finds it optimal to have a large R&D-budget, a firm can signal its private information of its production cost to the uninformed rival. The paper proves that the likely outcome is a unique separating equilibrium if the R&D cost is low but the uncertainty of the rival’s production cost large.
When buyers value products in terms of the expected compatibility between the current and the new vintage, firms can invest strategically in R&D to control for the switching costs. Open announcements of R&D budgets transmit information. The announcements determine the buyers' beliefs of the compatibility. As only an efficient firm finds it optimal to have a large R&D-budget, a firm can signal its unit cost. The likely outcome is a unique separating equilibrium if the marginal cost of R&D is low but the uncertainty over the rival's unit cost large. With high R&D cost, the dominating motive is to affect the rival's cost belief.
I modify the uniform-price auction rules in allowing the seller to ration bidders. This allows me to provide a strategic foundation for underpricing when the seller has an interest in ownership dispersion. Moreover, many of the so-called "collusive-seeming" equilibria disappear.
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