Working papers

When is Competition Price-increasing? The Impact of Expected Competition on Prices revision requested, RAND Journal of Economics

Abstract: We examine the effect of expected competition on markups in a random utility model where the number of competing firms is ex ante uncertain. Firms set prices using "limit pricing" (or Bertrand competition). We derive a precise condition under which the expected markup can be represented by a simple expression involving the consumer's expected utility and the expected demand. This simple expression delivers a general condition under which greater competition is price-increasing. The behavior of markups depends on the distribution of utility shocks, consumer's outside option, the expected number of firms, and the distribution of the number of competing firms.

Consumer Choice and the Cost of Inflation (with A. Bajaj)

Abstract: Is inflation more or less costly in economies where consumers have a greater degree of informed choice about their purchases? To answer this question, we introduce consumer choice into a competitive search model of monetary exchange. Consumers can meet multiple sellers and choose a seller with whom to trade. Consumers' preferences are given by private utility shocks. When consumers can observe these shocks prior to seller choice, we call this informed choice. We calibrate the model to U.S. data and find that a greater degree of informed choice amplifies the negative welfare effects of inflation, making it significantly more costly.

The Effect of Search Frictions on Extreme Outcomes (with Louis Becker)

Abstract: Extreme value processes involving maxima are widespread in economics. We provide some general results regarding the asymptotic effect of search frictions on the outcomes of such processes. To do this, we allow the number of draws from the underlying distribution (e.g. of productivities, efficiencies, or ideas) to be given by a discrete probability distribution called the search technology. We show that extreme value outcomes depend not only on the underlying distribution and its tail index, but also on the search technology. For example, if the underlying distribution is Pareto, the extreme value distribution is Fréchet if and only if the search technology is either Poisson or degenerate. We consider some applications of our results to both aggregate productivity and markups.

Work in progress

Personalized Pricing and Competitive Dispersion (with Louis Becker)

Abstract: This paper examines the effects of competitive dispersion on both personalized pricing and uniform pricing in an environment where the number of competing firms varies across consumers. We define an increase in competitive dispersion as a mean-preserving spread in the distribution of the number of competing firms. We provide conditions under which greater competitive dispersion decreases the average markup under uniform pricing, but increases the average markup under personalized pricing. We find that the degree of competitive dispersion has a significant effect on markups even in the competitive limit where the expected number of competing firms becomes large. Relative to uniform pricing, personalized pricing may either benefit or harm consumers depending on the degree of competitive dispersion. If competitive dispersion is relatively low, personalized pricing benefits consumers and harms firms relative to uniform pricing. However, if competitive dispersion is sufficiently high, personalized pricing harms consumers and benefits firms.

Publications

Efficiency in Search and Matching Models: A Generalized Hosios Condition (with B. Julien) Journal of Economic Theory 193, April 2021 PDF file

Abstract: When is entry efficient in markets with search and matching frictions? This paper generalizes the well-known Hosios condition to dynamic environments where the expected match output depends on the market tightness. Entry is efficient when buyers' surplus share is equal to the matching elasticity plus the surplus elasticity (i.e. the elasticity of the expected match surplus with respect to buyers). This ensures agents are paid for their contribution to both match creation and surplus creation. For example, vacancy entry in the labor market is efficient only when firms are compensated for the effect of job creation on both employment and labor productivity.

Unemployment and the Labor Share (with Petr Sedlacek) Journal of Monetary Economics, 94, pp 41-59, 2018 PDF file

Abstract: The labor share fluctuates over the business cycle. To explain this behavior, we develop a novel model featuring direct competition between heterogeneous firms to hire workers. This simultaneously endogenizes both average match productivity and the division of output between workers and firms. In existing matches, wages partly reflect labor market conditions at the time of hiring. A positive TFP shock therefore reduces the aggregate labor share, making it counter-cyclical. However, greater competition and lower unemployment increase labor’s share among new firms. As more firms enter, the aggregate labor share rises and eventually overshoots its initial level, as in the data.