Auctions and the Consumer Market: Studying the Mechanics
On February 1st a new Laboratory for Strategic Behaviour and Institutional Design Studies opened at the HSE. Maarten Janssen, Academic Supervisor of the Laboratory and prominent expert in microeconomics, and Alexey Parakhonyak, Laboratory Head, told us about the role of the new department.
Professor Janssen’s cooperation with the Higher School of Economics started in 1992 – almost from the first moment of the foundation of the university. In 1994 he became the first foreign expert to teach at the HSE. During those years he was assistant professor at Erasmus University and taught the basics of microeconomics, game theory and organization theory teaching to young HSE lecturers coming to the university as part of the TASIS project. Later Maarten Janssen came annually to the HSE with lecture courses and held research seminars for master’s students. He was also a member of the examination committee and then an academic coordinator of the double-degree programme of the Erasmus University and the HSE. Now he is Professor at Erasmus University and Director of the Tinbergen Institute but still continues to work with HSE students and actively participates in the training of young teachers, inviting HSE master’s graduates to Ph.D programmes.
— Could you please tell us what institutional design is?
Professor Janssen: This term can most easily be explained by the example of an auction. If the rules of an auction change, its participants change their behavior accordingly. From an economist’s point of view, an auction is an institution and its rules and regulations are its institutional design. We would like to understand which rules should be established so that people behave in a certain way. It is necessary to find out which rules lead to the most effective market activity and which rules impede its development.
If we consider economics from a game theory perspective, the participants of any game strive to achieve their goal by interacting with each other, and the rules of the game have a great importance. In an economy, the rules are set by the national government, and the result of the ‘game’ depends on these rules. Institutional design answers questions about the optimal rules of the game, which provide success in a certain area. The Laboratory will study the principles of the market’s institutional design and their influence over a consumer’s strategy of behavior.
— What will be the key methods and forms of the laboratory work?
Professor Janssen: The methodological basis will be game theory – the science studying the models of people’s interaction, reactions and strategies.
Alexey Parakhonyak: Game theory is a tool for analysing situations. The idea of game theory applied to standard market mechanisms is that the players’ actions change the situation in general: when one player alters his or her tactics, the other players react to this and change their behavior. Accordingly, the initial player should take this into consideration from the very beginning, and then, in turn, react to the changes. To cut a long story short, he should think strategically, as in a chess game. In a situation when the number of players is not very big, this analysis tool is very effective.
— What scientific tasks will the laboratory solve?
Professor Janssen: We shall focus on the study of two key themes – auctions and the consumer market. Generally, our task is to study how the market functions, and more specifically, we would like to analyze how the search for certain goods and prices by consumers influences the market development itself. On one hand, a buyer has to pay considerable costs searching for the necessary product, and on the other hand, the companies spend a lot on advertising their products and influencing a consumer’s costs. In general, the process looks like different sides of the same coin. Is it possible to somehow influence the costs of both parts? For example, to make the information more available by publishing it on the internet in a convenient way for searching? What influence does consumer demand and competitors’ advertising have on the company strategies (company acquisitions, their pricing policies, including a guarantee of the minimum price for a certain product)? We should analyze these interrelations, since in Russia they have not been studied enough, while in the West they have been researched in various contexts for a long time. It is necessary to integrate that European knowledge into the Russian academic environment.
Alexey Parakhonyak: Ideas for specific research can often be taken from everyday life. I shall give a simple example. Recently I have been looking for an apartment to rent and found out that in this process it is not always possible to make a ‘step backwards’ and return to an apartment you’ve previously looked at. The agencies ask for a deposit for a certain apartment and only in this case they guarantee that the flat will be kept for you. This situation is suitable for analysis. A deposit – is it good or bad? What should be its minimum or maximum? Does the necessity of making a deposit increase or lower the chances of the flat being rented, how does it change the whole situation in the real estate market? As a result, is a person more likely to rent an apartment which he preferred, or is he forced to make a decision under the pressure, knowing that the apartment may be rented by another person?
— Taking into account your workload at your home university, how often will you be able to come to Russia?
Professor Janssen: I’m planning to come to Moscow about 9 times a year, each time for about a week, for coordination and academic supervision of the laboratory activities. In addition to this, I shall be involved in the organization of seminars and conferences, working with HSE young researchers and postgraduate students and helping them with publications in international journals. The first international conference, where we intend to invite some leading researchers from Europe and the U.S., will take place at the Higher School of Economics in June.
During my visits to Moscow the staff of the laboratory will make presentations on the process of research, about the results, problems, new questions and plans for further work. We are planning to hold meeting with international colleagues involved in similar studies. During my absence the laboratory staff will meet once a week and discuss current activities. The project budget includes means for international trips for the staff members and in addition to that, we will hold video conferences and exchange opinions via e-mail. Distance is no longer an obstacle or a problem for effective work. Long distance cooperation is very productive in the world academic community.
— Who will work in the laboratory?
Professor Janssen: Now we are in the process of recruiting, we are holding meetings and interviews. I would not like to mention specific names at this stage, but the laboratory staff will include both experienced researchers along with postgraduate and master’s students.
Alexey Parakhonyak: We are inviting HSE undergraduate and postgraduate students to join our collaboration. If you would like to be interviewed for work in the laboratory, please send your CV to my e-mail address. It is also advisable to send an example of your work – a yearly, graduate work or just an essay. If you are interested in the topics which we shall work on, or if you just want to know more about us, you are welcome to come to our seminars and presentation. To get information on those events, please contact us via e-mail: parakhonyak at hse ru.
Valentina Gruzintseva, HSE News Service
Photos by Nikita Benzoruk