Category: Research Day

Out-of-Court Settlements

May 14th, 2012 in Behavioral Approaches, Research Day

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William Samuelson

Markets, Public Policy and Law

Author: William Samuelson

This paper considers the incidence of out-of-court negotiated settlements versus adjudicated outcomes as predicted by a number of game-theoretic models. A number of questions are addressed: How do varying offer and acceptance methods effect the terms of out-of-court settlements? In favor of which side? Which kinds of cases settle and which go to court? How does the expected court outcome (including legal costs and possibly reputation costs) affect the terms and likelihood of an out-of-court settlement? How does private information about the case merits held by one or more sides affect player strategies and outcomes? Among other results, we show that the strategic behavior of the disputants combined with asymmetric information about the value of the case constitutes a road block to achieving a first-best, ideal settlement mechanism. There is an inevitable trade-off between efficiency and equity. In equilibrium, out-of-court settlements can save all or some part of the costs of going to court, but are unable to mimic perfectly those court outcomes.

Simple Economics of the Price Setting Newsvendor Problem

May 14th, 2012 in Applications to Firms, Sectors, and Industries, Research Day

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Michael Salinger

Markets, Public Policy and Law

Authors: Michael Salinger and Miguel Ampudia

The Lerner relationship linking the profit-maximizing price to marginal cost and the elasticity of demand generalizes to the price-setting newsvendor and the result resolves the puzzle over the different effects of additive and multiplicative uncertainty on the solution. Multiplicative uncertainty increases the optimal price because it increases the marginal cost of a unit sold and does not affect the mark-up factor. Additive uncertainty has no effect on the marginal cost of a unit sold and lowers the mark-up factor because it increases the elasticity of the average quantity sold with respect to price.