Working Paper: CEPR ID: DP1564
Authors: Jeremy Bulow; Paul Klemperer
Abstract: We generalize the War of Attrition model to allow for N+K firms competing for N prizes. Two special cases are of particular interest. First, if firms continue to pay their full costs after dropping out (as in a standard-setting context), each firm?s exit time is independent both of K and of the actions of other players. Second, in the limit in which firms pay no costs after dropping out (as in a natural-oligopoly problem), the field is immediately reduced to N+1 firms. Furthermore, we have perfect sorting, so it is always the K?1 lowest-value players who drop out in zero time, even though each player?s value is private information to the player. We apply our model to politics, explaining the length of time it takes to collect a winning coalition to pass a bill.
Keywords: war of attrition; auctions; standards; natural monopoly; oligopoly; twoness; strategic independence; political decision-making
JEL Codes: D43; D44; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private valuations (G19) | exit timing of firms (D25) |
| exit timing of firms (D25) | k-1 lowest-value players exit immediately (C70) |
| exit timing of firms (D25) | overall dynamics of competition (L11) |
| costs of holding out for votes (D72) | time taken to gather votes (D72) |
| costs of holding out for votes (D72) | prolonged duration of political negotiations (F51) |
| exit strategies of firms (L21) | competition dynamics (L13) |
| exit strategies of firms (L21) | coalition building (D74) |