IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v171y2020icp153-164.html
   My bibliography  Save this article

Explaining escalating prices and fines: A unified approach

Author

Listed:
  • Buehler, Stefan
  • Eschenbaum, Nicolas

Abstract

This paper provides an explanation for escalating prices and fines based on a unified analytical framework that nests monopoly pricing and optimal law enforcement. We show that escalation emerges as an optimal outcome if the principal (i) lacks commitment ability, and (ii) gives less than full weight to agent benefits. Escalation is driven by decreasing transfers for non-active agents rather than increasing transfers for active agents. Some forward-looking agents then strategically delay their activity, which drives a wedge between the optimal static transfer and the benefit of an indifferent agent. This wedge is the source of escalation.

Suggested Citation

  • Buehler, Stefan & Eschenbaum, Nicolas, 2020. "Explaining escalating prices and fines: A unified approach," Journal of Economic Behavior & Organization, Elsevier, vol. 171(C), pages 153-164.
    • Handle: RePEc:eee:jeborg:v:171:y:2020:i:c:p:153-164
    DOI: 10.1016/j.jebo.2020.01.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268120300093
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jebo.2020.01.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Funk, Patricia, 2004. "On the effective use of stigma as a crime-deterrent," European Economic Review, Elsevier, vol. 48(4), pages 715-728, August.
    2. Miceli Thomas J. & Bucci Catherine, 2005. "A Simple Theory of Increasing Penalties for Repeat Offenders," Review of Law & Economics, De Gruyter, vol. 1(1), pages 71-80, April.
    3. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
    4. Belleflamme, Paul & Vergote, Wouter, 2016. "Monopoly price discrimination and privacy: The hidden cost of hiding," Economics Letters, Elsevier, vol. 149(C), pages 141-144.
    5. Mitchell Polinsky, A. & Rubinfeld, Daniel L., 1991. "A model of optimal fines for repeat offenders," Journal of Public Economics, Elsevier, vol. 46(3), pages 291-306, December.
    6. Xavier Freixas & Roger Guesnerie & Jean Tirole, 1985. "Planning under Incomplete Information and the Ratchet Effect," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(2), pages 173-191.
    7. Hylton Keith N, 2005. "The Theory of Penalties and the Economics of Criminal Law," Review of Law & Economics, De Gruyter, vol. 1(2), pages 175-201, September.
    8. Stefan Buehler & Daniel Halbheer & Michael Lechner, 2017. "Payment Evasion," Journal of Industrial Economics, Wiley Blackwell, vol. 65(4), pages 804-832, December.
    9. Alessandro Acquisti & Hal R. Varian, 2005. "Conditioning Prices on Purchase History," Marketing Science, INFORMS, vol. 24(3), pages 367-381, May.
    10. Polinsky, A. Mitchell & Shavell, Steven, 1998. "On offense history and the theory of deterrence," International Review of Law and Economics, Elsevier, vol. 18(3), pages 305-324, September.
    11. Müller, Daniel & Schmitz, Patrick W., 2015. "Overdeterrence of repeat offenders when penalties for first-time offenders are restricted," Economics Letters, Elsevier, vol. 129(C), pages 116-120.
    12. Emons, Winand, 2007. "Escalating penalties for repeat offenders," International Review of Law and Economics, Elsevier, vol. 27(2), pages 170-178.
    13. Rasmusen, Eric, 1996. "Stigma and Self-Fulfilling Expectations of Criminality," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 519-543, October.
    14. Nuno Garoupa & Daniel Klerman, 2002. "Optimal Law Enforcement with a Rent-Seeking Government," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 116-140, January.
    15. J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
    16. Vincent Conitzer & Curtis R. Taylor & Liad Wagman, 2012. "Hide and Seek: Costly Consumer Privacy in a Market with Repeat Purchases," Marketing Science, INFORMS, vol. 31(2), pages 277-292, March.
    17. Jean Tirole, 2016. "From Bottom of the Barrel to Cream of the Crop: Sequential Screening With Positive Selection," Econometrica, Econometric Society, vol. 84, pages 1291-1343, July.
    18. Lisa R. Anderson & Gregory DeAngelo & Winand Emons & Beth Freeborn & Hannes Lang, 2017. "Penalty Structures And Deterrence In A Two-Stage Model: Experimental Evidence," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1833-1867, October.
    19. Baik, Kyung Hwan & Kim, In-Gyu, 2001. "Optimal punishment when individuals may learn deviant values," International Review of Law and Economics, Elsevier, vol. 21(3), pages 271-285, September.
    20. Lewin, Jeff L. & Trumbull, William N., 1990. "The social value of crime?," International Review of Law and Economics, Elsevier, vol. 10(3), pages 271-284, December.
    21. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
    22. Allard van der Made, 2019. "Graduated Punishments in Public Good Games," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 939-959, January.
    23. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 509-540.
    24. Thomas J. Miceli, 2013. "Escalating Penalties for Repeat Offenders: Why are they So Hard to Explain?," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 587-604, December.
    25. Nancy L. Stokey, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(3), pages 355-371.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stefan Buehler & Nicolas Eschenbaum, 2021. "Dynamic Monopoly Pricing With Multiple Varieties: Trading Up," Papers 2108.07146, arXiv.org, revised Dec 2021.
    2. Kohei Daido & Tomoya Tajika, 2021. "Hidden Cost of Sanctions in a Dynamic Principal-Agent Model: Reactance to Controls and Restoration of Freedom," Discussion Paper Series 233, School of Economics, Kwansei Gakuin University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Buehler, Stefan & Nicolas Eschenbaum, 2018. "Explaining Escalating Fines and Prices: The Curse of Positive Selection," Economics Working Paper Series 1807, University of St. Gallen, School of Economics and Political Science.
    2. Lisa R. Anderson & Gregory DeAngelo & Winand Emons & Beth Freeborn & Hannes Lang, 2017. "Penalty Structures And Deterrence In A Two-Stage Model: Experimental Evidence," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1833-1867, October.
    3. Stan Miles & Derek Pyne, 2015. "Deterring repeat offenders with escalating penalty schedules: a Bayesian approach," Economics of Governance, Springer, vol. 16(3), pages 229-250, August.
    4. Wolfgang Eggert & Steffen Minter & Maximilian Stephan & Handirk Ungern-Sternberg, 2017. "Sanctions for repeat offenders: a question of wealth?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(5), pages 467-482, November.
    5. Thomas J. Miceli, 2012. "Escalating Interest in Escalating Penalties," Working papers 2012-08, University of Connecticut, Department of Economics.
    6. Tim Friehe, 2009. "Escalating penalties for repeat offenders: a note on the role of information," Journal of Economics, Springer, vol. 97(2), pages 165-183, June.
    7. Emons, Winand, 2007. "Escalating penalties for repeat offenders," International Review of Law and Economics, Elsevier, vol. 27(2), pages 170-178.
    8. Vincent Conitzer & Curtis R. Taylor & Liad Wagman, 2012. "Hide and Seek: Costly Consumer Privacy in a Market with Repeat Purchases," Marketing Science, INFORMS, vol. 31(2), pages 277-292, March.
    9. Echazu, Luciana & Nocetti, Diego, 2019. "Understanding risky behaviors during adolescence: A model of self-discovery through experimentation," International Review of Law and Economics, Elsevier, vol. 57(C), pages 12-21.
    10. Alfred Endres & Bianca Rundshagen, 2012. "Escalating penalties: a supergame approach," Economics of Governance, Springer, vol. 13(1), pages 29-49, March.
    11. Yash Kanoria & Hamid Nazerzadeh, 2021. "Incentive-Compatible Learning of Reserve Prices for Repeated Auctions," Operations Research, INFORMS, vol. 69(2), pages 509-524, March.
    12. Curtis Taylor & Liad Wagman, 2008. "Who Benefits From Online Privacy?," Working Papers 08-26, NET Institute.
    13. Leshem, Shmuel & Tabbach, Avraham, 2023. "The option value of record-based sanctions," Games and Economic Behavior, Elsevier, vol. 137(C), pages 1-22.
    14. Loertscher, Simon & Marx, Leslie M., 2020. "Digital monopolies: Privacy protection or price regulation?," International Journal of Industrial Organization, Elsevier, vol. 71(C).
    15. Mungan, Murat C., 2014. "A behavioral justification for escalating punishment schemes," International Review of Law and Economics, Elsevier, vol. 37(C), pages 189-197.
    16. Dengler, Sebastian & Prüfer, Jens, 2021. "Consumers' privacy choices in the era of big data," Games and Economic Behavior, Elsevier, vol. 130(C), pages 499-520.
    17. Alessandro Acquisti & Hal R. Varian, 2005. "Conditioning Prices on Purchase History," Marketing Science, INFORMS, vol. 24(3), pages 367-381, May.
    18. Didier Laussel & Ngo Van Long & Joana Resende, 2023. "Profit Effects of Consumers’ Identity Management: A Dynamic Model," Management Science, INFORMS, vol. 69(6), pages 3602-3615, June.
    19. Jiwoong Shin & K. Sudhir & Dae-Hee Yoon, 2012. "When to "Fire" Customers: Customer Cost-Based Pricing," Management Science, INFORMS, vol. 58(5), pages 932-947, May.
    20. Shota Ichihashi, 2020. "Online Privacy and Information Disclosure by Consumers," American Economic Review, American Economic Association, vol. 110(2), pages 569-595, February.

    More about this item

    Keywords

    Escalation; Behavior-based pricing; Repeat offenders; Deterrence;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:171:y:2020:i:c:p:153-164. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.