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Does the market kill bad ideas? An institutional comparision of committees and markets in network industries

Author

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  • Prabal Roy Choudhury

    (Indian Statistical Institute, New Delhi)

  • Debadatta Saha

    (Indian Statistical Institute, New Delhi)

Abstract

The paper analyzes the problem of protocol coordination between two firms, where one firm has private information about its own protocol. The institutional characteristics of the market and the class of strategies adopted by the firms admit multiple equilibria in the market. Of these, one particular equilibrium has an interior information revelation cutoff for the firm with private information. This demonstrates that the market might not be able to "kill bad ideas", but it does "reward good ideas". In contrast, the institutional design of the committee ensures that the same class of strategies gives rise to a unique equilibrium in the committee, with the informed firm revealing all private information. The committee game results generalize easily to multiple periods as well as to multiple firms and is robust to an exit option. The market game result holds for a certain range of parameter values for multiple firms.

Suggested Citation

  • Prabal Roy Choudhury & Debadatta Saha, 2009. "Does the market kill bad ideas? An institutional comparision of committees and markets in network industries," Discussion Papers 09-05, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:09-05
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    File URL: http://www.isid.ac.in/~pu/dispapers/dp09-05.pdf
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    References listed on IDEAS

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    1. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    2. Joseph Farrell & Garth Saloner, 1988. "Coordination through Committees and Markets," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 235-252, Summer.
    3. Farrell, Joseph & Saloner, Garth, 1992. "Converters, Compatibility, and the Control of Interfaces," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 9-35, March.
    4. Elisabeth Schulte, 2010. "Information aggregation and preference heterogeneity in committees," Theory and Decision, Springer, vol. 69(1), pages 97-118, July.
    5. Coughlan, Peter J., 2000. "In Defense of Unanimous Jury Verdicts: Mistrials, Communication, and Strategic Voting," American Political Science Review, Cambridge University Press, vol. 94(2), pages 375-393, June.
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    More about this item

    Keywords

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    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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