RESEARCH PROJECTS

The laboratory on Strategic Behavior and Institutional Design works on several key research projects in the areas of consumer search, auctions and network economics.

Consumer Search
The main focus of consumer search theory is to analyze how market outcomes are affected if the cost consumers have to make to get information about the prices and/or qualities firms offer is explicitly taken into account. One of the basic results of the extensive literature is that firms have some market power that they can exploit even if there are many firms in the market and that price dispersion emerges as a consequence of the fact that some firms aim at selling to many consumers at low prices, while others make higher margins over fewer customers. The consumer search literature sets out to analyze the implications (for market performance) of the fact that consumers have to spend valuable resources to discover the products and prices that are for sale. Firms, on the other hand, can influence the search costs of consumers, for example, by advertising. Governments can influence search costs by making certain information more public or by facilitating internet access, etc.  The search literature has recently investigated how to base economic policy
taking the effects on consumer search into account. This is also the perspective we take in the Laboratory on Institutional Design. Search and informative advertising are two sides of the same coin: they both try to overcome informational issues related to the fact that consumers are not informed about the product offerings of firms; with search consumers bear the cost, with advertising firms bear the cost. Search and advertising are important to understand the functioning of markets in which information is not available without making costs. As information is usually shared in networks, it is natural to analyze search and advertising in a network context (see the text there).

Auctions
Auctions are a traditional method for selling an object in an efficient way to the buyer that values the object the most. That is, auctions are recognized as efficient allocation mechanisms. Recently, governments have used auctions in many liberalization or privatization processes, to select firms to provide a formerly publicly provided service (such as telecommunication services).  One of the advantages of using auctions as a selection mechanism, so it is often thought, is that auctions select the most cost-efficient firms.  Markets where active firms are more cost-efficient typically yield more efficient market outcomes than when these same markets are served by less cost-efficient firms.  Other things being equal, cost-efficiency seems to be good for overall economic welfare. Many governments have relied on a combination of “competition for” and “competition in” the market. Competition in the market guarantees that the inefficiency of the market allocation is as small as possible.  This is achieved by auction designs that stipulate that each winning firm can obtain only one license.  Competition for the market guarantees that the government receives a financial return for the licenses that is in line with their value.
A relatively recent literature has studied how after-market competition affects bidders’ bidding behavior in auctions.  One application that has received particular attention, both in the theoretical literature and in the popular press, are the auctions for third generation mobile telecommunication licenses around the world, which enable the winning bidders to compete with each other by offering telecommunication services to final consumers. There are now many papers studying this framework, and most of these papers emphasize that common auction properties do not hold in such an environment and that inefficient outcomes are likely to result. This literature studies auctions in the presence of negative informational externalities due to after-market interactions. From an institutional design perspective, we will investigate how we can restore efficiency properties by changing the auction design.


Network economics
The important role of friends and neighbors in shaping consumers behavior has been recognized by a number of studies. Complementary to direct search, social networks allows consumers to share valuable information about price and quality of the available options. According to McKinsey's study, 67% of all consumer decisions are primarily influenced by word of mouth communication. However, the efficiency of a network as a source of information crucially depends on the search exerted by neighbors and advertisement strategies adopted by firms. The common feature of these studies is that they consider one producer and consumers that passively receive information about the product.