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We propose a model of trade in over-the-counter (OTC) markets in which each dealer with private information can engage in bilateral transactions with other dealers, as determined by her links in a network. Each dealer's strategy is represented as a quantity-price schedule. We analyze the effect of trade decentralization and adverse selection on information diffusion, expected profits, trading costs, and welfare. Information diffusion through prices is not affected by dealers' strategic trading motives, and there is an informational externality that constrains the informativeness of prices. Trade decentralization can both increase or decrease welfare. A dealer's trading cost is driven by both her own and her counterparties' centrality. Central dealers tend to learn more, trade more at lower costs, and earn higher expected profit.

A finite number of sellers (n) compete in schedules to supply an elastic demand. The cost of each seller is random, with common and private value components, and the seller receives a private signal about it. A Bayesian supply function equilibrium is characterized: The equilibrium is privately revealing and the incentives to rely on private signals are preserved. Supply functions are steeper with higher correlation among the cost parameters. For high (positive) correlation, supply functions are downward sloping, price is above the Cournot level, and as we approach the common value case, price tends to the collusive level. As correlation becomes maximally negative, we approach the competitive outcome. With positive correlation, private information coupled with strategic behavior induces additional distortionary market power above full information levels. Efficiency can be restored with appropriate subsidy schemes or with a precise enough public signal about the common value component. As the market grows large with the number of sellers, the equilibrium becomes price-taking, bid shading is on the order of 1/n, and the order of magnitude of welfare losses is 1/n². The results extend to inelastic demand, demand uncertainty, and demand schedule competition. A range of applications in product and financial markets is presented.

This article explains why platforms such as Amazon and Visa rely predominantly on ad valorem fees, fees which increase proportionally with transaction prices. It also provides a new explanation for why ad valorem sales taxes are more desirable than specific taxes. The theory rests on the ability of ad valorem fees and taxes to achieve efficient price discrimination, given that the value of a transaction to buyers tends to vary proportionally with the cost of the good traded.

Web-based group-buying mechanisms are being widely used for both business-to-business (B2B) and business-to-consumer (B2C) transactions. We survey currently operational online group-buying markets, and then study this phenomenon using analytical models. We build on the literatures in information economics and operations management in our analytical model of a monopolist offering Web-based group-buying under different kinds of demand uncertainty. We derive the monopolist's optimal group-buying schedule under varying conditions of heterogeneity in the demand regimes, and compare its profits with those that obtain under the more conventional posted-price mechanism. We further study the impact of production postponement by endogenizing the timing of the pricing and production decisions in a two-stage game between the monopolist and buyers. Our results have implications for firms' choice of price-discovery mechanisms in e-markets, and for the scheduling of production and pricing decisions in the presence (and absence) of scale economies of production.

Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). This paper proposes a simple mechanism that implements the first-best for any number of firms: a uniform price, sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively. The mechanism also provides firms with incentives to invest in socially optimal R&D. (JEL D44, L51, Q21)

The use of relatively small-scale distributed electric power generation sources is one of the key focus areas in the development of global industry and regional power generation. By integrating distributed generation sources into their on-site energy infrastructure, industrial consumers gain new characteristics and possibilities as entities of the power system that do not only consume power, but in fact can flexibly generate and deliver electricity to local and even centralized grids. This type of entity is called a distributed energy resource system with demand response (Russian: ‘active energy complex’). The purpose of this study is to lay the methodological foundation for the use of distributed energy resource systems with demand response in industrial sites under existing gas and power market conditions and for ensuring the synchronization of parameters that is necessary for managing complex energy consumption. This article provides an empirical study of the principles of the natural gas pricing under the demand volatility of regional markets and the Russian Mercantile Exchange. The article outlines the key drivers, as identified by the authors, that impact gas consumption by a distributed energy resource system, including demand characteristics, limitations and capacity of the gas network and the mode of gas consumption by an industrial enterprise and its generator. Accounting for all of these factors is essential for effective management and proper operational adjustment of a distributed energy resource system with demand response. The result of the study is a proprietary model and a tool for the management of distributed energy resource systems in integration with the gas demand management, which analyze the internal and external parameters of the industrial entity’s operations and its distributed energy resource system, as well as factors existing in the integrated distributed energy system where the consumer is able to buy natural gas in various market segments. The proprietary tool of distributed energy resource system management is based on the centralized control system, which combines performance analytics, operational scheduling of production and the distributed energy resource system, price planning for the wholesale and retail power markets, regional gas markets and exchange, monitoring all elements of the system, and assessment of different active energy management scenarios under various external and internal conditions impacting production and energy demand. Our proprietary tool has been successfully tested in a typical industrial site and was reported to deliver a significant electricity and gas cost-saving effect, which amounted to an 18 percent reduction in the total energy costs of the company, or more than USD 2.6 million per year. The resulting saving effect can recoup the costs of investing in a distributed energy resource system, including construction and installation of the local grid and automation infrastructure, and can be obtained in any country of the world.

In uniform auctions, buyers choose demand schedules as strategies and pay the same \"market clearing\" price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by letting prices, quantities, and bids be discrete. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria.

The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are prudential, whereas first-best solutions are not.

We examine the role of allocation rules in determining the set of equilibrium prices in uniform-price auctions. Beginning with Wilson (1979), the theoretical literature has argued that these auctions are subject to possible low equilibrium prices. We show that this is due to the way the asset is being divided. We focus on allocation rules that specify the way the asset is divided in cases of excess demand. This may have a dramatic effect on the set of equilibrium prices. In particular, we show that a simple allocation rule (pro rata) eliminates underpricing, while the allocation rule used in practice has a negative effect on equilibrium prices.

The supply function model of the English electricity spot market is extended to include a contract market and contestable entry, both of which have dramatic effects on the determination of equilibrium. I present an analytically tractable model that can be solved with contracts, variable numbers of competitors, and capacity constraints. In the case of constant marginal costs and linear demand, two outcomes are possible: if new plant is the same as existing plant and incumbents have insufficient capacity, entry will occur, but if new plant has lower variable costs, then incumbents can invest to deter entry.