nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒04‒09
four papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Market equilibrium with search and computational costs By Pedro Cosme Costa Vieira
  2. Elements of a cognitive theory of the firm By Nooteboom,Bart
  3. Supermarkets as a Natural Oligopoly By Ellickson, Paul
  4. Bargaining Power in Marriage: Earnings, Wage Rates and Household Production By Robert A. Pollak

  1. By: Pedro Cosme Costa Vieira (Faculdade de Economia do Porto)
    Abstract: Although it is an empirical regularity that in the trade of homogeneous goods there is persistent price dispersion and buyers search for low-priced items, theoretically we find that in market equilibrium, when buyers are optimisers (the neo-classical framework), these regularities do not occur. Summing this undesirable theoretical result to the fact that the computation of optimal strategies is demanding, the relevance of using optimisation models in rationalising human behaviour is put in question. Even so, Lucas (1981) claims that optimisation models should not be abandoned because only these are “able to isolate those aspects of behaviour that remain invariant to policy shifts from those that do not”. In this work, following Lucas’ claim, we introduce economic agents as having computational limitations in the neo-classical optimisation model, which is new in the literature. As a result of this alteration to the model, in market equilibrium, we observe both price dispersion and search when buyers have information and computational limitations.
    Keywords: Computational limitations, Optimisation, Search, Market equilibrium
    JEL: D43 D83
    Date: 2005–04
  2. By: Nooteboom,Bart (Tilburg University, Center for Economic Research)
    Abstract: This paper presents elements of a cognitive theory of the firm, from the perspective of embodied cognition. It entails the notion of 'cognitive distance' between people that have developed their cognition in different environments. This yields the notion of the firm as a 'focusing device', to reduce cognitive distance for the sake of efficient collaboration and for the resolution of conflict. This focus yields organisational myopia, which needs to be compensated by outside relations, between firms, at some cognitive distance. Next, on the basis of principles derived from cognitive science, this paper tries to resolve the problem of combining structural stability and change, which in economics is known as the problem of combining exploitation and exploration. This provides the basis for a theory of learning and innovation in organisations and economies. The theory is elaborated on the basis of the notion of 'scripts', also derived from cognitive science.
    JEL: D21 D83 M13
    Date: 2005
  3. By: Ellickson, Paul
    Abstract: This paper uses a model of endogenous sunk cost (ESC) competition to explain the industrial structure of the supermarket industry, where a few powerful chains provide high quality products at low prices. The predictions of this model accord well with the features of the supermarket industry documented here. Using a novel dataset of store level observations, I demonstrate that 1) the same number of high quality firms enter markets of varying sizes and compete side by side for the same consumers and 2) quality increases with the size of the market. In addition to documenting a local structure of competition consistent with the ESC framework, I demonstrate that the choice of quality by rival firms behaves as a strategic complement. This key finding, which is consistent with an ESC model of quality enhancing sunk outlays, eliminates several alternative explanations of concentration in the supermarket industry, including most standard models of cost-reducing investment and product proliferation. These results suggest that the competitive mechanisms sustaining high levels of concentration in the supermarket industry are inherently rivalrous and unlikely to lead to the emergence of a single dominant firm.
    Keywords: endogenous sunk costs, vertical product differentiation, oligopoly, retail, supermarkets, market concentration, dartboard, complementarity
    JEL: L13 L22 L81
    Date: 2005
  4. By: Robert A. Pollak
    Abstract: What determines bargaining power in marriage? This paper argues that wage rates, not earnings, determine well-being at the threat point and, hence, determine bargaining power. Observed earnings at the bargaining equilibrium may differ from earnings at the threat point because hours allocated to market work at the bargaining solution may differ from hours allocated to market work at the threat point. In the divorce threat model, for example, a wife who does not work for pay while married might do so following a divorce; hence, her bargaining power would be related to her wage rate, not to her earnings while married. More generally, a spouse whose earnings are high because he or she chooses to allocate more hours to market work, and correspondingly less to household production and leisure, does not have more bargaining power. But a spouse whose earnings are high because of a high wage rate does have more bargaining power. Household production has received little attention in the family bargaining literature. The output of household production is analogous to earnings, and a spouse's productivity in household production is analogous to his or her wage rate. Thus, in a bargaining model with household production, a spouse's productivity in home production is a source of bargaining power.
    JEL: D1 J1 J2
    Date: 2005–04

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