Papers by Matthew Clements
When is it better for the government to provide information, and when is this role better left to... more When is it better for the government to provide information, and when is this role better left to the market? I present a simple framework for evaluating this question, where the key factors are the cost of errors based on imperfect information and whether information is eventually revealed to consumers. I then apply the framework to examples. .
High-frequency trading, as distinct from other forms of algorithmic trading, does not enhance soc... more High-frequency trading, as distinct from other forms of algorithmic trading, does not enhance social welfare and can lead to instability. Mandating short, regular trading delays would prevent high-frequency trading while retaining the benefits of algorithmic trading.
This paper analyzes the effects of disinformation in a military conflict. If one army distorts it... more This paper analyzes the effects of disinformation in a military conflict. If one army distorts its opponents' perception of its ability, this will create a greater propensity for soldiers on the opposing side to surrender. The sender of disinformation will thus have a greater probability of victory. However, disinformation may also lengthen the battle and increase the total number of casualties. This depends not only on the degree of disinformation but also on whether and to what extent the sender of disinformation is superior to the receiver.
I investigate the competition between suppliers of components of a system for which there are net... more I investigate the competition between suppliers of components of a system for which there are network e¤ects among users. Bundling one of these components with an outside good reduces the cost to consumers of using the system. This cost reduction is not necessarily welfare-enhancing, and bundling can also reduce welfare by decreasing innovation incentives. The model is used to evaluate Microsoft's bundling of Windows with Internet Explorer and its e¤ect on competition with Netscape.
When one victim's precautions against crime have spillover bene…ts to other victims, individuals ... more When one victim's precautions against crime have spillover bene…ts to other victims, individuals do not take the socially optimal amount of precaution. I explore the use of criminal sanctions as a mechanism to correct this: criminals are punished based on the level of precaution taken by the victim. The problem is compounded when victims have private information about their costs of precaution. I …nd that, when a sanctioning scheme is used to induce di¤erent levels of precaution from high-cost and low-cost victims, a sanction less than the maximum may be used to punish crimes against either type of victim. I also consider the extent to which such a mechanism is consistent with current legal doctrine. ¤ I would like to thank Kathryn Spier, James Schummer, Omri Ben-Shahar, Patrick Martin, Charles Hope, and two anonymous referees for helpful commments.
Network effects may be either direct or indirect. While many analyses conßate the two, I show tha... more Network effects may be either direct or indirect. While many analyses conßate the two, I show that the ways in which direct and indirect effects inßuence technological standardization are quite different. Some parameter changes have opposite effects in the two models, and some factors which are irrelevant under direct effects are central under indirect effects. Compatibility in particular has a different interpretation and more subtle implications for standardization in the indirect model.
This paper examines the possibility that consumers will adopt an inefficient standard. When there... more This paper examines the possibility that consumers will adopt an inefficient standard. When there are successive generations of consumers, the current generation will not consider the costs and benefits to past and future generations of adopting a new standard. If a standard is proprietary, the incentives of a firm to induce adoption of the standard generally do not match the social incentives. The divergence is caused by the firm's imperfect ability to appropriate the future surplus generated by the standard. JEL classification codes: D62, L1 * I would like to thank Keith Head, Tom Ross, and two anonymous referees for comments and suggestions.
Frequent flier plans (FFPs) --operated by almost all of the world's major airlines --have become ... more Frequent flier plans (FFPs) --operated by almost all of the world's major airlines --have become the most famous, and probably the most valuable, customer loyalty programs in the world. In addition, plans created on the FFP model are now offered by sellers in a number of other industries such as hotels, car rental agencies and credit cards. In this paper we present a theory of FFPs that models them as efforts to take advantage of the agency relationship between employers --who pay for airline tickets --and employees -who book those tickets. In this view, FFP benefits constitute "bribes", inducing employees to book flights on airlines with higher prices. The model considers two airlines competing in a differentiated product environment and shows that a single airline offering an FFP has a large advantage. However, when both airlines operate plans, it is very possible that, while raising prices, competition (now via FFP benefits) will be intensified so much that the airlines end up worse off than had they not created the plans. Thus, in contrast to switching cost treatments of FFPs, we may observe prices and profits moving in opposite directions. † The authors thank Jim Dana for contributions that significantly improved this paper.
If a product has two dimensions of quality, one observable and one not, a firm can use observable... more If a product has two dimensions of quality, one observable and one not, a firm can use observable quality as a signal of unobservable quality. The correlation between consumers' valuation of high quality in each dimension is a key determinant of the feasibility of such signaling. A firm may use price alone as a signal, or price and quality together. Both signals tend to be used when the market is very uninformed, whereas price signaling alone tends to be used when the market is moderately informed. If high observable quality is inexpensive to provide, then it cannot signal high unobservable quality, and low observable quality is always an indication that unobservable quality is high.
Markets can only function well if there is an appropriate legal framework to restrict the behavio... more Markets can only function well if there is an appropriate legal framework to restrict the behavior of market participants; however, the legal framework is inevitably inadequate.
Uploads
Papers by Matthew Clements