nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒02‒13
27 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. The Theory of the Firm and Its Critics: A Stocktaking and Assessment By Nicolai J. Foss; Peter G. Klein
  2. Advertising, Brand Loyalty and Pricing By Ioana Chioveanu
  3. The optimal behaviour of firms facing stochastic costs By Rosella Nicolini; Francesco Menoncin
  4. Optimal Duplication of Effort in Advocacy Systems By Giuliana Palumbo
  5. Household Wealth Distribution in Italy in the 1990s By Andrea Brandolini; Luigi Cannari; Giovanni D'Alessio; Ivan Faiella
  6. Speed and Quality of Collective Decision-Making II: Incentives for Information Provision By Grüner, Hans Peter; Schulte, Elisabeth
  7. Economic Integration and Agglomeration in a Middle Product Economy By Peng, Shin-Kun; Thisse, Jacques-François; Wang, Ping
  8. Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality By De Fraja, Gianni; Iozzi, Alberto
  9. Sectoral Regulators and the Competition Authority: Which Relationship is Best? By Barros, Pedro Pita; Hoernig, Steffen
  10. The Economics of Special and Differential Trade Regimes By Conconi, Paola; Perroni, Carlo
  11. Pricing to Firm: An Analysis of Firm- and Product-Level Import Prices By Halpern, László; Koren, Miklós
  12. Contracting with Diversely Naive Agents By Eliaz, Kfir; Spiegler, Ran
  13. Price Competition in a Differentiated Products Duopoly Under Network Effects By Griva, Krina; Vettas, Nikolaos
  14. Does Microsoft Stifle Innovation? Dominant Firms, Imitation and R&D Incentives By Cabral, Luís M B; Polak, Ben
  15. Competition, Incomplete Discrimination and Versioning By Diaw, Khaled; Pouyet, Jérôme
  16. Bilateral Market Power and Vertical Integration in the Spanish Electricity Spot Market By Kühn, Kai-Uwe; Machado, Matilde
  17. Competition and Incentives with Motivated Agents By Besley, Timothy; Ghatak, Maitreesh
  18. Platform Ownership By Nocke, Volker; Peitz, Martin; Stahl, Konrad O.
  19. Platform Competition in Telecommunications By Church, Jeffrey; Gandal, Neil
  20. Hold-Up Problems and Firm Formation By Gersbach, Hans; Haller, Hans
  21. Joint Production in Teams By Battaglini, Marco
  22. The temporary equilibrium method : Hicks against Hicks By Michel, DE VROEY
  23. Optimal Saving with Additive and Multiplicative Background Risk By Lionel, ARTIGE
  24. The Financing of Innovation: Learning and Stopping By Dirk Bergemann; Ulrich Hege
  25. Competition, Consumer Welfare and Monopoly Power By Donald J. Brown; G.A. Wood
  26. The Demand for Information: More Heat than Light By Jussi Keppo; Giuseppe Moscarini; Lones Smith
  27. Cooperative Models in Action: Simulation of a Nash-Bargaining Model of Household Labor Supply with Taxation By Bargain, Olivier; Moreau, Nicolas

  1. By: Nicolai J. Foss; Peter G. Klein
    Abstract: Ever since its emergence in the 1970s the modern economic or Coasian theory of the firm has been discussed and challenged by sociologists, heterodox economists, management scholars, and other critics. This paper reviews and assesses these critiques, focusing on behavioral issues (bounded rationality and motivation), process (including path dependence and the selection argument), entrepreneurship, and the challenge from knowledge-based theories of the firm.
    Keywords: Coasian theory of the firm; Bounded rationality; Motivation; Entrepreneurship
    JEL: B4 D23 L14 L22
    Date: 2005
  2. By: Ioana Chioveanu
  3. By: Rosella Nicolini; Francesco Menoncin
    Abstract: This paper aims at assessing the optimal behavior of a firm facing stochastic costs of production. In an imperfectly competitive setting, we evaluate to what extent a firm may decide to locate part of its production in other markets different from which it is actually settled. This decision is taken in a stochastic environment. Portfolio theory is used to derive the optimal solution for the intertemporal profit maximization problem. In such a framework, splitting production between different locations may be optimal when a firm is able to charge different prices in the different local markets.
    Keywords: Firm behaviour, Portfolio theory, Risk aversion, Uncertainty.
    JEL: C61 D21 D81 G11
    Date: 2005–02–03
  4. By: Giuliana Palumbo (Bank of Italy, Law and Economics Research Dept.)
    Abstract: The paper focuses on the creation of information for decision-making when agents' effort is non observable and rewards are indirect, that is, only based on the final decision. Following Dewatripont and Tirole (1999), the paper shows that the creation of advocates of special interests, as opposed to non-partisans, generates an efficient mechanism of mutual monitoring that reduces the scope for manipulation. Such monitoring is preferable over imposing penalties for detected manipulation; it is also preferable to creating an agency that monitors the non partisan agent. Applications to transfer price policies and comparative judicial systems are considered.
    Keywords: advocacy, information creation, manipulation, monitoring
    JEL: D23 D74
    Date: 2004–06
  5. By: Andrea Brandolini (Bank of Italy, Economic Research Department); Luigi Cannari (Bank of Italy, Economic Research Department); Giovanni D'Alessio (Bank of Italy, Economic Research Department); Ivan Faiella (Bank of Italy, Economic Research Department)
    Abstract: This paper describes the composition and distribution of household wealth in Italy. First, the evolution of household portfolios over the last forty years is described on the basis of newly reconstructed aggregate balance sheets. Second, the characteristics and quality of the main statistical source on wealth distribution, the Bank of Italy’s Survey of Household Income and Wealth, are examined together with the statistical procedures used to adjust for non-response, non-reporting and under-reporting. The distribution of household net worth is then studied using both adjusted and unadjusted data. Wealth inequality is found to have risen steadily during the 1990s. The increased concentration of financial wealth was an important factor in determining this path.
    Keywords: household wealth, wealth inequality, Italy
    JEL: D31
    Date: 2004–12
  6. By: Grüner, Hans Peter; Schulte, Elisabeth
    Abstract: This Paper provides a game theoretic extension of Radner's (1993) model of hierarchical information aggregation. It studies the role of the hierarchy design for the speed and quality of a collective decision process. The hierarchy is described as a programmed network of agents. The programme describes how information is processed within the network. The network of P identical managers has to aggregate information in the form of a set of n data items in order to make an informed decision. Each manager benefits from reaching an accurate decision but suffers from an individual cost of effort, which has to be provided in order to understand the information contained in a data item properly. We find that decentralized information processing increases incentives for information provision. There may be boundaries on the appropriate extend of decentralization, however. We also compare three different hierarchy designs: two balanced hierarchies and the fastest (skip-level) hierarchy, proposed by Radner. Skip-level reporting outperforms balanced hierarchies in terms of decision speed and in terms of decision quality.
    Keywords: hierarchies; incentives for information provision; information processing
    JEL: D23 D70 D83 L22 P51
    Date: 2004–04
  7. By: Peng, Shin-Kun; Thisse, Jacques-François; Wang, Ping
    Abstract: The Paper examines the interactions between economic integration and population agglomeration in a middle product economy displaying neoclassical growth. There are two vertically-integrated economies. Each consists of a large number of final good competitive firms operating plants in both regions, and a large number of intermediate goods monopolistically competitive firms operating each in only one region. While immobile workers are employed with intermediate goods to produce the final good, mobile workers are used to design the line of differentiated intermediate good inputs. Capital is immobile and the final good is non-traded, whereas the intermediate goods are traded. We find that employment agglomeration and output growth need not be positively related. Furthermore, trade is not necessarily beneficial to regional growth, whereas trade between the two regions need not be associated with a widened skilled-unskilled wage gap.
    Keywords: agglomeration; economic integration; growth; intermediate goods trade
    JEL: D90 F15 O41 R13
    Date: 2004–08
  8. By: De Fraja, Gianni; Iozzi, Alberto
    Abstract: Vogelsang and Finsinger’s seminal paper (Bell Journal of Economics, 1979) proposes a mechanism for price regulation with some desirable properties, such as convergence to a second best optimum. This mechanism applies to situations where quality is fixed: in practice, quality can be varied by the firm, and regulators have typically imposed constraints on the firm’s quality choice. This Paper lays a rigorous theoretical foundation to the inclusion of quality measures in the constraints faced by a regulated firm. We identify a potential pitfall in the approach taken in practice by regulators, and show that, in order to avoid it, the regulated firm should be subject to an additional constraint, which, loosely speaking, requires firms’ choices not to be too erratic.
    Keywords: price cap; quality; regulation; RPI-X
    Date: 2004–08
  9. By: Barros, Pedro Pita; Hoernig, Steffen
    Abstract: Inspired by the creation of the new Competition Authority in Portugal, we consider the interplay between regulatory agencies with overlapping competencies; for example, a competition authority and a sectoral regulator. We analyse how authorities’ incentives are affected if they can decide independently, or must follow each others’ opinions, respectively, and consider how this relationship performs in the presence of institutional biases and lobbying efforts. It is found that the best results tend to be achieved when the authorities act independently of each other: the probability of coming to a decision is higher, and decisions are less vulnerable to lobbying.
    Keywords: competition authority; institutional relationship; lobbying; sectoral regulators; strategic substitutes and complements
    JEL: L51
    Date: 2004–08
  10. By: Conconi, Paola; Perroni, Carlo
    Abstract: We examine the theoretical rationale for the simultaneous granting of temporary Special and Differential (S&D) treatment to developing countries - both in ite protection and market-access components - under the WTO agreements. S&D rules constitute the centrepiece of the WTO’s strategy for integrating developing countries into the trading system, but have been criticized–both on theoretical and empirical grounds–as being ineffective. We show that seemingly non-reciprocal, limited-duration S&D treatment can be rationalized as a transitional equilibrium feature of a self-enforcing international agreement between a large developed and a small developing country, where the two sides have a joint interest in helping the developing country to overcome a policy commitment problem.
    Keywords: international agreements; policy commitment; trade and development
    JEL: D72 D78 F13
    Date: 2004–07
  11. By: Halpern, László; Koren, Miklós
    Abstract: We use Hungarian Customs data on product-level imports and exports of manufacturing firms to document that the import price of a particular product varies substantially across buying firms. Importantly, we can relate the level of import prices to firm characteristics such as size, foreign ownership and market power. We develop a theory of ‘pricing to firm’ (PTF), where markups depend on the technology and competitive environment of the buyer. The predictions of the model are confirmed by the data: import prices are higher for firms with greater market power, and for intermediate inputs with a high share in material costs. We take account of the endogeneity of the buyer's market power with respect to higher import prices. We show that even if unobserved cost heterogeneity within product categories is substantial, it is uncorrelated with our variables of interest. The magnitude of PTF is big: the standard deviation of price predicted by PTF is 21.5%.
    Keywords: import prices; price discrimination; pricing to firm
    JEL: D43 F14 F23
    Date: 2004–08
  12. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: A principal contracts with agents who have diverse abilities to forecast changes in their future tastes. While the principal knows that the agent’s tastes are changing, the agent believes that with probability ?, their future preferences will be identical to their present preferences. The principal does not observe ?, but knows the probability distribution from which it is drawn. Thus, the agent’s prior probability ? is their ‘private type’, and the principal has to offer a menu of contracts in order to screen the agent’s type. We provide a full characterization of the principal’s optimal menu. The results allow us to interpret some real-life contractual arrangements in a variety of examples.
    Keywords: contracts; dynamic inconsistency; naivety; non-common priors
    JEL: L12 L14
    Date: 2004–08
  13. By: Griva, Krina; Vettas, Nikolaos
    Abstract: We examine price competition under product-specific network effects, in a duopoly where the products are differentiated horizontally and vertically. When consumers' expectations are not affected by prices, firms may share the market equally, or one firm (possibly the low-quality one) may capture the entire market. When product qualities are different, we may also have interior asymmetric equilibria. With expectations affected by prices, firms' competition becomes more intense and the high quality firm captures a larger market share.
    Keywords: network effects; price competition; product differentiation; product variety; quality
    JEL: D43 L13
    Date: 2004–08
  14. By: Cabral, Luís M B; Polak, Ben
    Abstract: We provide a simple framework to analyse the effect of firm dominance on incentives for R&D. An increase in firm dominance, which we measure by a premium in consumer valuation, increases the dominant firm's incentives and decreases the rival firm's incentives for R&D. These changes influence the probability of innovation through two effects: changes in total R&D effort and changes in how this total is distributed between the two firms. For a given level of total research effort, the shift from the rival firm to the dominant firm is a good thing as it decreases the likelihood of duplicate innovation (we call this the duplication effect). The shift in research effort is not one-to-one, however. The dominant firm's benefit from increased dominance is more inframarginal than marginal when compared to the rival firm's disincentive. As a result, total research effort decreases when firm dominance increases (we call this the total effort effect). We show the total effort effect dominates the duplication effect when intellectual property protection is weak, and the opposite when property rights are strong. That is, firm dominance is good for innovation when (but only when) property rights are strong. We also examine consumer and social surplus.
    Keywords: dominant firm; imitation; innovation; R&D
    JEL: L13 L41 O31
    Date: 2004–08
  15. By: Diaw, Khaled; Pouyet, Jérôme
    Abstract: Two producers offer differentiated goods to a representative consumer. The buyer has distinct marginal valuations for the quality of the products. Each producer knows perfectly the consumer’s taste for its own product, but remains uninformed about its taste for the rival’s product. When each product cannot be purchased in isolation of the other one, a phenomenon of endogenous preferences arises since a firm’s offer to the consumer depends on the information unknown by the rival firm. Multiple equilibria emerge and the consumer’s rent increases with their valuation for one product and decreases with the valuation for the other product. This provides some foundations for the phenomenon of versioning, which has been observed in some digital goods markets. By contrast, when each product can be purchased in isolation of the other one, at the unique equilibrium consumers with larger valuations for a product earn higher rents. The analysis is undertaken under two alternative pricing policies: in the partially-discriminatory case, producers make use of the known information only; in the fully-discriminatory case, each producer offers second-degree price discriminates the consumer according to the unknown information. We show that, sometimes, firms prefer partial to full discrimination to soften competition.
    Keywords: price competition; price discrimination; versioning
    JEL: D82 L13
    Date: 2004–09
  16. By: Kühn, Kai-Uwe; Machado, Matilde
    Abstract: The Spanish electricity spot market is highly concentrated both on the seller and the buyer side. Furthermore, unlike electricity spot markets in other deregulated electricity systems, large buyers and sellers are typically vertically integrated. This allows both large net sellers and large net buyers to strategically influence the spot market price. We develop a supply function model of this market to analyse the impact of market power on prices and productive efficiency and use it empiricially to detect such bilateral market power. Our estimates suggest that market power has had little impact on spot market prices but that substantial productive inefficiencies may have arisen from the exercise of bilateral market power.
    Keywords: bilateral market power; electricity markets; market power test; supply function equilibirum; vertical integration
    JEL: L13 L41 L94
    Date: 2004–09
  17. By: Besley, Timothy; Ghatak, Maitreesh
    Abstract: A unifying theme in the literature on organizations such as public bureaucracies and private non-profits is the importance of missions, as opposed to profit, as an organizational goal. Such mission-oriented organizations are frequently staffed by motivated agents who subscribe to the mission. This Paper studies incentives in such contexts and emphasizes the role of matching principals’ and agents’ mission preferences in increasing organizational efficiency and reducing the need for high-powered incentives. The framework developed in this Paper is applied to non-profits, school competition, and incentives in the public sector.
    Keywords: competition; incentives; non-profits
    JEL: D23 H10 L31
    Date: 2004–09
  18. By: Nocke, Volker; Peitz, Martin; Stahl, Konrad O.
    Abstract: We develop a general theoretical framework of trade on a platform on which buyers and sellers interact. The platform may be owned by a single large, or many small independent or vertically integrated intermediaries. There also may be free entry into the market for platform slots, or platform owners my form a club that restricts entry. We provide a positive and normative analysis of the impact of platform ownership structure on platform size. The strength of network effects is important in the ranking of ownership structures by induced equilibrium platform size and welfare. We develop an intuitive taxonomy of these towards developing our results. We show that while vertical integration may be welfare-enhancing if network effects are weak, monopoly platform ownership is socially preferred if they are strong. These are also the ownership structures likely to emerge.
    Keywords: intermediation; network effects; product diversity; two-sided markets
    JEL: D40 L10
    Date: 2004–10
  19. By: Church, Jeffrey; Gandal, Neil
    Abstract: In this Paper we consider the economics of platform competition in telecommunications. Platform competition occurs when different, sometimes incompatible, technologies compete to provide telecommunications services to end-users. Battles between competing technologies have been an important feature of telecommunications in the last twenty or so years. Examples of platform competition in telecommunications include wireless vs. wireline networks, competing wireless options, such as satellite vs. cellular, and, within cellular, different digital standards.
    Keywords: platform competition; telecommunications
    JEL: L13
    Date: 2004–10
  20. By: Gersbach, Hans; Haller, Hans
    Abstract: Agents from a homogeneous population organize themselves into productive partnerships and are confronted with a hold-up problem when making relation-specific investments in those partnerships. The problem is mitigated if agents can leave a partnership in which they have invested, bear the costs yet forego the benefits of the investment, join another partnership, invest there anew, and appropriate the surplus created by the new investment. To capture the idea we introduce the notion of reinvestment-proof equilibria in which no agent has an incentive to reinvest or to change his investment in the current firm. We show that the presence of a small inefficient firm causes substantial efficiency gains in all larger firms.
    Keywords: efficient firm structure; firm formation; hold-up problem; reinvestment-proof equilibria
    JEL: D20 D60 L20
    Date: 2004–10
  21. By: Battaglini, Marco
    Abstract: Consider Holmström.s moral hazard in teams problem when there are n agents, each agent i has a a(i)-dimensional strategy space and output can be m-dimensional. We show that a compensation mechanism that satisfies budget balance, limited liability and implements an efficient allocation generically exists if and only if Sum_a(i)/(n-1)< m. When this condition is satisfied, the optimal mechanism discourages collusive behavior and, under a weak condition, filters out inefficient equilibria.
    Keywords: incentives; moral hazard; teams; theory of the firm
    JEL: D23 D82 J33 L23
    Date: 2004–10
  22. By: Michel, DE VROEY (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: Hicks is renown for having introduced the temporary equilibrium framework in his book Value and Capital. Subsequently, however, he partially recanted this framework by rejecting the market clearing idea while still keeping the week device. The aim of this paper is to assess whether this change was right. My answer will be broadly negative. To make my point, I will ponder on the meaning and implications of the week device, assess the validity of Hicks’ claim that slow adjustment can cause market rationing, examine his claim that the possibility of market clearing depends on the prevailing market form and, finally, assess his twofold filiations towards Marshall and Walras.
    Keywords: HICKS; Temporary Equilibrium
    JEL: B21 D50
    Date: 2004–04–15
  23. By: Lionel, ARTIGE (Universitat Autonoma de Barcelona (Spain))
    Abstract: We study optimal saving when incomes are certain and risk bears on consumption. A key finding is that, with CARA utility and additive uncertain consumption, or CRRA utility and multiplicative consumption, risk-averse individuals do not form precautionary saving as in the standard theory of saving under uncertainty.
    Keywords: Consumption; risk-aversion; saving; uncertainty
    JEL: D8 D9
    Date: 2004–10–14
  24. By: Dirk Bergemann (Yale University); Ulrich Hege (ESSEC Business School, CEPR)
    Abstract: This paper considers the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm's length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm's length financing. The trade-off in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm's length financing.
    Keywords: Innovation, venture capital, relationship financing, arm's length financing, learning, time-consistency, stopping, renegotiation-proofness
    JEL: D83 D92 G24 G31
    Date: 2001–02
  25. By: Donald J. Brown (Cowles Foundation, Yale University); G.A. Wood
    Abstract: An applied general equilibrium analysis of monopoly power is proposed as an alternative to the partial equilibrium analyses of monopoly pricing current in antitrust economics. This analysis introduces a new notion of market equilibrium where firms with monopoly power are cost-minimizing price-takers in competitive factor markets and make supracompetitive profits in equilibrium, i.e., the monopoly price exceeds the marginal cost of production. We assume that the primary goals of antitrust policy are the promotion of competition and the enhancement of consumer welfare. To that end, we use Debreu's coefficient of resource utilization to determine the counterfactual competitive price levels in monopolized markets and then impute the economic costs of monopolization.
    Keywords: Monopoly power, Antitrust economics, Applied general equilibrium analysis
    JEL: D42 D58 D61 L12 L41
    Date: 2004–05
  26. By: Jussi Keppo (University of Michigan); Giuseppe Moscarini (Dept. of Economics, Yale University); Lones Smith (University of Michigan)
    Abstract: This paper produces a comprehensive theory of the value of Bayesian information and its static demand. Our key insight is to assume 'natural units' corresponding to the sample size of conditionally i.i.d. signals -- focusing on the smooth nearby model of the precision of an observation of a Brownian motion with uncertain drift. In a two state world, this produces the heat equation from physics, and leads to a tractable theory. We derive explicit formulas that harmonize the known small and large sample properties of information, and reveal some fundamental properties of demand: (a) Value 'non-concavity': The marginal value of information is initially zero; (b) The marginal value is convex/rising, concave/peaking, then convex/falling; (c) 'Lumpiness': As prices rise, demand suddenly chokes off (drops to 0); (d) The minimum information costs on average exceed 2.5% of the payoff stakes; (e) Information demand is hill-shaped in beliefs, highest when most uncertain; (f) Information demand is initially elastic at interior beliefs; (g) Demand elasticity is globally falling in price, and approaches 0 as prices vanish; and (h) The marginal value vanishes exponentially fast in price, yielding log demand. Our results are exact for the Brownian case, and approximately true for weak discrete informative signals. We prove this with a new Bayesian approximation result.
    Keywords: Value of information, Non-concavity, Heat equation, Demand, Bayesian analysis
    JEL: D81 D83
    Date: 2005–01
  27. By: Bargain, Olivier (IZA Bonn); Moreau, Nicolas (GREMAQ and LIRHE, University of Toulouse 1)
    Abstract: Several theoretical contributions, starting with McElroy and Horney (1981) and Manser and Brown (1980), have suggested to model household behavior as a Nash-bargaining game. Since then, very few attempts have been made to operationalize cooperative models of household labor supply for policy analysis. In this paper, we implement a Nash-bargaining model with external threat points (divorce) into the microsimulation of tax policy reforms in France. Following the suggestion of McElroy (1990) to achieve identification, we assume that the observation of single individuals can be used to predict outside options. Individual preferences in couples are allowed to display caring between spouses and are simulated in a way which guarantee consistency with the Nash bargaining setting, regularity conditions and observed behaviors. An extensive sensitivity analysis is provided in order to examine the various implications from using the cooperative model for tax policy analysis and the likely role of taxation on intra-household negotiation.
    Keywords: collective model, Nash-bargaining model, intrahousehold allocation, household labor supply, tax reform, microsimulation
    JEL: C25 C52 C71 D11 D12 H31 J22
    Date: 2005–01

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