Thursday, September 25, 2014
Alexei Alexandrov, Consumer Financial Protection Bureau and Daniel F. Spulber, Northwestern University - Kellogg School of Management make Sufficient Decisions in Multi-Sided and Multi-Product Markets.
ABSTRACT: We show that in many applied economic models, it is possible to reduce the dimensionality of the space of actions to what we call "sufficient decisions." We find that for monopoly and oligopoly in multi-sided markets and multi-product markets, the market equilibrium can be transformed into an isomorphic market equilibrium in which each firm makes a single decision. Because profit maximization connects a firm's decisions to each other, it is often possible to introduce a constraint linking the firm’s decisions. For example, the bid-ask spread is a sufficient decision for a monopolist in a two-sided market. We provide a general regularity condition for that constraint that determines whether or not the model can be reduced to one in which each firm makes a sufficient decision. This is useful for addressing public policy questions using standard intuition and comparative statics developed for one-dimensional economic models.