Transport cost and endogenous quality choice

This paper examines how the quality of exports depends on relative country size and its remoteness. Specific transportation cost is the key variable in our analysis as it gives rise to the Alchian-Allen effect. In the model, we allow for endogenous quality choice by a producer serving many international locations. Higher quality comes at higher marginal cost of production, but can be delivered at the same absolute, and thus proportionally lower, transportation cost to a given destination. Our model complements the well documented demandside response to the distribution of transportation costs (known as the Alchian-Allen effect) by the supply side response. We show that, ceteris paribus, equilibrium quality decreases in the domestic country size and increases in remoteness from foreign markets. This happens because a larger portion of the demand is affected by the Alchian-Allen effect for smaller countries’ producers, and the Alchian-Allen effect is stronger for remote countries. We confirm our predictions empirically on a detailed product level dataset of all exporters worldwide into a sample of Latin American importers

Transport Cost and Endogenous Quality Choice

This paper examines how the quality of exports depends on relative country size and its remoteness. Specific transportation cost is the key variable in our analysis as it gives rise to the Alchian-Allen effect. In the model, we allow for endogenous quality choice by a producer serving many international locations. Higher quality comes at higher marginal cost of production, but can be delivered at the same absolute, and thus proportionally lower, transportation cost to a given destination. Our model complements the well documented demandside response to the distribution of transportation costs (known as the Alchian-Allen effect) by the supply side response. We show that, ceteris paribus, equilibrium quality decreases in the domestic country size and increases in remoteness from foreign markets. This happens because a larger portion of the demand is affected by the Alchian-Allen effect for smaller countries’ producers, and the Alchian-Allen effect is stronger for remote countries. We confirm our predictions empirically on a detailed product level dataset of all exporters worldwide into a sample of Latin American importers.

The Trade Reducing Effects of Market Power in International Shipping

Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that shipping firms charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. Markups increase shipping prices by at least 83 percent for the mean shipment in Latin American imports. Our findings are also important for evaluating the impact of tariff liberalization. Shipping firms decrease prices by 1-2 percent for every 1 percent reduction in tariffs.

Caps on Bidding in All-Pay Auctions: Comments on the Experiments of A. Rapoport and W. Amaldoss.

In an article published in this journal, Rapoport and Amaldoss (2000, Journal of Economic Behavior and Organization, 42, 483-521) analyze symmetric and asymmetric investment games similar to two-player all-pay auctions with bid caps. In this note, we correct an error in their characterization of the set of Nash Equilibria of their symmetric investment game. In particular, we find Equilibria that Rapoport and Amaldoss (2000) fail to identify. Taking these Equilibria into account has important implications for the analysis of data from Rapoport and Amaldoss’s experiments.All-Pay Auction ; Mixed strategies ; Discrete strategy space ; Bid caps ; Experiments

A Comment on “David and Goliath: An Analysis on Asymmetric Mixed-Strategy Games and Experimental Evidence”.

In this note, we characterize the full set of Equilibria of the 2-firm patent race analyzed by Amaldoss and Jain (Management Science, 48(8), August 2002, pp. 972-991). Contrary to Amaldoss and Jain’s (2002) claim, we show that the equilibrium is not always unique and that the set of Equilibria is non-robust to changes in the (discrete) set of available strategies. In some Equilibria, the qualitative results are the reverse of those in the only equilibrium Amaldoss and Jain identify. Our findings have important implications for the analysis of the data from Amaldoss and Jain’s experiments, as well as other experiments appearing in the literature.All-Pay Auction ; Contests ; Experimental Economics ; Competitive Strategy ; R&D

An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Trading Institution

We report the results of an experiment designed to study the role of institutional structure in the formation of bubbles and crashes in laboratory asset markets. In a setting employing double auctions and call markets as trading institutions, bubbles and crashes are a quite robust phenomenon. The only factor appearing to reduce bubbles is experience across markets. In this study, we employ the tâtonnement trading institution, which has not been previously explored in laboratory asset markets, despite its historical and contemporary relevance. The results show that bubbles are significantly reduced, suggesting that the trading institution plays a crucial role in the formation of bubbles.Experimental Asset Markets; Price Bubbles; Trading Institutions; Tâtonnement

An experimental investigation of overdissipation in the all pay auction

Pervasive overbidding represents a well-documented feature of all-pay auctions. Aggregate bids exceed Nash predictions in laboratory experiments, and individuals often submit bids that guarantee negative profits. This paper examines three factors that may reduce pervasive overbidding: (a) repetition (experience), (b) reputation (strangers vs. partners) and (c) active participation. We find that aggregate over-dissipation diminishes but is not eliminated with repetition, and that repetition, in conjunction with active participation generates bids consistent with the static Nash predictions.

An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Pricing Mechanism

We report the results of an experiment designed to study the role of institutional structure in the formation of bubbles and crashes in laboratory asset markets. In a setting employing double auctions and call markets as trading institutions, bubbles and crashes are a quite robust phenomenon. The only factor appearing to reduce bubbles is experience across markets. In this study, we employ the tâtonnement trading institution, which has not been previously explored in laboratory asset markets. The results show that bubbles are eliminated, suggesting that the trading institution plays a crucial role in the formation of bubbles.Bubbles; Trading Institutions; Pricing Mechanisms; Tâtonnement

An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Trading Institution

This paper is a revision of “An Experimental Study of Bubble Formation in Asset Markets Using the Tâtonnement Pricing Mechanisms” (Working Paper Number 09/19)We report the results of an experiment designed to study the role of institutional structure in the formation of bubbles and crashes in laboratory asset markets. In a setting employing double auctions and call markets as trading institutions, bubbles and crashes are a quite robust phenomenon. The only factor appearing to reduce bubbles is experience across markets. In this study, we employ the tâtonnement trading institution, which has not been previously explored in laboratory asset markets, despite its historical and contemporary relevance. The results show that bubbles are significantly reduced, suggesting that the trading institution plays a crucial role in the formation of bubbles