“Non-reservation price equilibria and consumer search”, with Maarten C.W. Janssen, Alexei Parakhonyak, Journal of Economic Theory (2017) 172, pp. 120-162
Beyond Connectivity: Stock Market Participation in a Network (with Olga Balakina and Claes Backman)
SAFE Working Paper No. 416 (R&R in Journal of Economic Dynamics and Control )
What are the aggregate and distributional consequences of the relationship be-tween an individual’s social network and financial decisions? Motivated by several well-documented facts about the influence of social connections on financial decisions, we build and calibrate a model of stock market participation with a social network that emphasizes the interplay between connectivity and network structure. Since connections to informed agents help spread information, there is a pivotal role for factors that determine sorting among agents. An increase in the average number of connections raises the average participation rate, mostly due to richer agents. A higher degree of sorting benefits richer agents by creating clusters where information spreads more efficiently. We show empirical evidence consistent with the importance of connectivity and sorting. We discuss several new avenues for future research into the aggregate impact of peer effects in finance.
Online Appendix: Data and Code
Popularity or Price: Which Should Determine the Display of Top Firms? (with Cole Williams)
(R&R in Management Science)
We investigate the demand-steering rules used by an online platform to connect buyers and sellers in the marketplace when sellers employ pricing algorithms. We introduce the popularity-based prominence (PBP) display rule, in which the platform allocates prominent positions to sellers who have demonstrated greater popularity in terms of sales compared to their competitors. We show that PBP performs effectively in low-information environments, encouraging competitive pricing and guiding consumers to high-quality products, thereby increasing consumer surplus. Furthermore, PBP proves robust to being outperformed by other steering rules. We assess the practical implementation and effectiveness of PBP through Q-learning experiments, demonstrating its potential to improve marketplace outcomes.
“When Markets Get Confused: Misperception versus Inventory” (with Claes Backman, Olga Balakina and Arzé Karam)
(Research project is supported by BA SRG1819\191443 research grant)
We examine episodes in which investors mistakenly trade similarly named stocks to identify short-term, non-fundamental pricing errors. Using a long time series and a broad crosssection of U.S. equities, we systematically document the frequency, magnitude, and market response to these "confusion events". These incidents generate pronounced abnormal returns and wider effective spreads, consistent with transient mispricing. By exploiting confusion events as exogenous, we provide new causal evidence that such dislocations primarily arise from investor misperception rather than inventory frictions. Importantly, the two channels are not mutually exclusive but represent orthogonal sources of inefficiency-belief-driven demand shocks versus dealer balance-sheet constraints. We demonstrate that, under normal conditions, the misperception channel dominates, whereas under systemic stress, inventory constraints become binding. This duality bridges the behavioral and structural perspectives on market inefficiency, underscoring that belief errors remain a pervasive driver of transient dislocations, even in deep, liquid, and technologically advanced markets.
“Multichannel retailers: monopoly pricing and cross-border competition”
(New version coming soon)
Showrooming is a situation where consumers try products at brick-and-mortar stores before purchasing them online at a lower price. One way to prevent showrooming is to use a price matching policy, whereby price is the same in both the physical store and the online channel. We show that for small search costs, a price matching policy is indeed optimal. However for higher search costs price matching is suboptimal, and online and offline purchases coexist with showrooming. A firm which faces online competition from a foreign multichannel retailer has an incentive to geo-block, i.e. refuse to serve foreign customers, even though it leads to a decrease in potential demand. Geo-blocking relaxes online competition and leads to higher prices both online and in brick-and mortar stores. A legal price parity requirement helps to eliminate incentives to geo-block and thus restores online competition.
“Loss Aversion, Advertisement, and Linear Market Demands” (with Mauro Bambi and Simone Tonin)
(Working paper coming soon)
We develop a model of advertising by considering firms that can manipulate the reference point (or status quo) of a loss averse representative consumer. We investigate the effects of advertising on the representative consumer’s linear demand. We show that firms’ decisions to advertise and the effect of advertising on the optimal market supply depend on how much importance consumers place on maintaining the status quo. The results shed some light on the ambiguous role of advertising in the markets and its relation with firms’ ability to impact consumers’ reference points for consumption.