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

  • Prabal Roy Choudhury

    ()

    (Indian Statistical Institute, New Delhi)

  • Debadatta Saha

    (Indian Statistical Institute, New Delhi)

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.

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File URL: http://www.isid.ac.in/~pu/dispapers/dp09-05.pdf
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Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 09-05.

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Length: 26 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:ind:isipdp:09-05
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  1. Farrell, Joseph & Saloner, Garth, 1987. "Coordination Through Committees and Markets," Department of Economics, Working Paper Series qt5sn4b6v4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Elisabeth Schulte, 2010. "Information aggregation and preference heterogeneity in committees," Theory and Decision, Springer, vol. 69(1), pages 97-118, July.
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