nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒04‒16
twenty-six papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. On the Demand for Budget Constrained Insurance By Richard Watt; Henri Loubergé
  2. Trading Volumes in Dynamically Efficient Markets By Tony Berrada; Julien Hugonnier; Marcel Rindisbacher
  3. Bargaining Power and Enforcement in Credit Markets By Garance Genicot (Georgetown University) and Debraj Ray (New York University)
  4. Incitamentsreglering av monopol med styckvis linjär approximation av efterfrågan By Lantz, Björn
  5. Moral hazard and moral motivation: Corporate social responsibility as labor market screening By Brekke, Kjell Arne; Nyborg, Karine
  6. Testing Near-Rationality using Detailed Survey Data By Bryan, Michael F.; Palmqvist, Stefan
  7. A Residential Energy Demand System for Spain By Xavier Labandeira; José M. Labeaga; Miguel Rodríguez
  8. Within-Team Competition in the Minimum Effort Coordination Game By Enrique Fatas; Tibor Neugebauer; Javier Perote
  9. Selfish-biased conditional cooperation: On the decline of contributions in repeated public goods experiments By Tibor Neugebauer; Javier Perote; Ulrich Schmidt; Malte Loos
  10. Collusion as an Informed Principal Problem By Lucia Quesada
  11. The Role of Contextual Clues in the Creation of Information Overload By Chris Kimble; Paul Hildreth; David J Grimshaw
  12. On the existence of Nash equilibrium in electoral competition By Alejandro Saporiti
  13. Partial Communication and Collusion with Demand Uncertainty By Heiko Gerlach
  14. Price Competition and Product Differentiation when Goods have Network Effects By Klaus CONRAD
  15. The Economic Incentives for Sharing Security Information By Esther Gal-Or; Anindya Ghose
  16. Forest owners’ collective action against the risk of forest fire: a game theoretical approach By Américo Mendes
  17. ICT productivity and firm propensity to innovative investment: learning effect evidence from italina micro data By Gianfranco Enrico Atzeni; Oliviero Antonio Carboni
  18. E-commerce, two-sided markets and info-mediation By Alexandre Gaudeul; Bruno Jullien
  19. El diagnóstico de poder de mercado en Economía Industrial: Una revisión de la literatura empírica española del siglo XX By Elena Huergo
  20. Joseph Schumpeter and Modern Nonlinear Dynamics By William Barnett; Morgan Rose
  21. Constructive Utility Functions on Banach spaces By Jose C. R. Alcantud; Ghanshyam B. Mehta
  22. Contracting for Information under Imperfect Commitment By Vijay Krishna; John Morgan
  23. Review of Privade Provided Public Goods Literature By Daniel Goulao
  24. Delivered versus Mill Nonlinear Pricing in Free Entry Markets By Sílvia Jorge; Cesaltina Pires
  25. The simple analytics of information and experimentation in dynamic agency By Thomas D. Jeitschko; Leonard J. Mirman; Egas Salgueiro
  26. Favouritism and cartel disruption in first-price auctions By Ricardo Gonçalves

  1. By: Richard Watt (Universidad Autónoma de Madrid); Henri Loubergé (University of Geneva and FAME)
    Abstract: Much of the traditional economic theory of insurance is based on the assumption that the risk against which insurance is to be purchased is entirely exogenous. This is usually modelled by simply allowing the individual to include insurance as a mechanism of covering risk, without any real analysis of how this insurance is paid for. However, in almost all real-life consumer insurance, the size of the risk is itself a choice variable (the type of car to purchase, the type of employment to take, the amount to invest in an insurable asset, etc.), and decisions are made taking budget constraints explicitly into account. While an enormous number of interesting theorems can be derived in the standard model, these results are typically not robust to the extention of making risk an endogenous choice variable and the explicit inclusion of a budget constraint. Here, we use a simple two state model of the demand for insurance in which we explicitly introduce a budget constraint and in which the insurable risk itself is a choice variable. In the model, we find that the standard result of full coverage being demanded if and only if the premium is such that the insurer earns an expected profit of 0 no longer holds as such, and it turns out that in a simple two state setting some of the ambiguity of the standard model’s comparative statics is avoided.
    Keywords: insurance coverage; risk aversion; normality; Giffen good; actuarially fair premium
    JEL: D11 D80 G22
    Date: 2005–03
  2. By: Tony Berrada (HEC Montreal, CIRANO and CREF); Julien Hugonnier (University of Lausanne, CIRANO and FAME); Marcel Rindisbacher (Rotman School of Management, University of Toronto and CIRANO)
    Abstract: The classic Lucas asset pricing model with complete markets stresses aggregate risk and, hence, fails to investigate the impact of agents heterogeneity on the dynamics of the equilibrium quantities and measures of trading volume. In this paper, we investigate under what conditions non-informational heterogeneity, i.e. differences in preferences and endowments, leads to non trivial trading volume in equilibrium. Our main result comes in form of a non-informational no trade theorem which provides necessary and sufficient conditions for zero trading volume in a dynamically efficient, continuous time Lucas market model with multiple goods and securities.
    Keywords: General Equilibrium, Trading Volume; heterogenous agents; multiple goods; incomplete markets; no-trade theorem.
    JEL: D51 D52 G11 G12
    Date: 2005–03
  3. By: Garance Genicot (Georgetown University) and Debraj Ray (New York University) (Department of Economics, Georgetown University)
    Abstract: In a credit market with enforcement constraints, we study the effects of a change in the outside options of a potential defaulter on the terms of the credit contract, as well as on borrower payoffs. The results crucially depend on the allocation of “bargaining power” between the borrower and the lender. We prove that there is a crucial threshold of relative weights such that if the borrower has power that exceeds this threshold, her expected utility must go up whenever her outside options come down. But if the borrower has less power than this threshold, her expected payoff must come down with her outside options. In the former case a deterioration in outside options brought about, say, by better enforcement, must create a Lorenz improvement in state-contingent consumption. In particular, borrower consumption rises in all “bad” states in which loans are taken. In the latter case, in contrast, the borrower’s consumption must decline, at least for all the bad states. These disparate findings within a single model permit us to interpret existing literature on credit markets in a unified way. Classification-JEL Codes: O120, O160, G190
    Keywords: credit, no commitment, enforcement, bargaining power
  4. By: Lantz, Björn (Department of Business Administration, School of Economics and Commercial Law, Göteborg University)
    Abstract: One anonymous mechanism for monopoly regulation is the Chord-approximation Adjustment Process, CAP, suggested by Vogelsang (1988) where the change in consumer surplus is approximated as an average between a Laspeyres and a Paasche index. The main drawback of this method is an incentive for strategic pricing behaviour so that the price will not converge to marginal cost whenever demand is not linear. This paper shows how the change in consumer surplus under a non-linear demand curve can be approximated piecewise linearly based on solely verifiable information which removes the incentive for strategic behaviour. <p>
    Keywords: Monopoly regulation; incentive regulation
    Date: 2005–03–29
  5. By: Brekke, Kjell Arne (The Ragnar Frisch Centre for Economic Research); Nyborg, Karine (The Ragnar Frisch Centre for Economic Research)
    Abstract: Morally motivated individuals behave more cooperatively than predicted by standard theory. Hence,if a firm can attract workers who are strongly motivated by ethical concerns, moral hazard problems like shirking can be reduced. We show that employers may be able to use the firm’s corporate social responsibility profile as a screening device to attract more productive workers. Both pooling and separating equilibria are possible. Even when a substantial share of the workers have no moral motivation whatsoever, such screening may in fact drive every firm with a low social responsibility profile out of business.
    Keywords: Self-image; teamwork; shirking; voluntary abatement
    JEL: D21 D62 D64 J31 Q50 Z13
    Date: 2005–04–06
  6. By: Bryan, Michael F. (Federal Reserve Bank of Cleveland); Palmqvist, Stefan (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper considers the evidence of “near-rationality,” as described by Akerlof, Dickens, and Perry (2000). Using detailed surveys of household inflation expectations for the United States and Sweden, we find that the data are generally unsupportive of the near-rationality hypothesis. However, we document that household inflation expectations tend to settle around discrete and largely fixed “focal points,” suggesting that both U.S. and Swedish households gauge inflation prospects in rather broad, qualitative terms. Moreover, the combination of a low-inflation environment and an inflation target in Sweden has been accompanied by a disproportionately high proportion of Swedish households expecting no inflation. However, a similar low-inflation trend in the United States, which does not have an explicit inflation target, reveals no such rise in the proportion of households expecting no inflation. This observation suggests that the way the central bank communicates its inflation objective may influence inflation expectations independently of the inflation trend it actually pursues.
    Keywords: inflation expectations; rationality; inflation targeting; Phillips curve
    JEL: D10 D70 E60
    Date: 2005–04–01
  7. By: Xavier Labandeira (rede & Universidade de Vigo); José M. Labeaga (FEDEA & UNED); Miguel Rodríguez (rede & Universidade de Vigo)
    Abstract: Sharp price fluctuations and increasing environmental and distributional concerns, among other issues, have led to a renewed academic interest in energy demand. In this paper we estimate, for the first time in Spain, an energy demand system with household microdata. In doing so, we tackle several econometric and data problems that are generally recognized to bias parameter estimates. This is obviously relevant, as obtaining correct price and income responses is essential if they may be used for assessing the economic consequences of hypothetical or real changes. With this objective, we combine data sources for a long time period and choose a demand system with flexible income and price responses. We also estimate the model in different sub-samples to capture varying responses to energy price changes by households living in rural, intermediate and urban areas. This constitutes a first attempt in the literature and it proved to be a very successful choice.
    Keywords: households, energy, demand, spain, location
    JEL: D12 Q41 R22
    Date: 2005–03–08
  8. By: Enrique Fatas (University Valencia); Tibor Neugebauer (University Hannover); Javier Perote (Juan Carlos University Madrid)
    Abstract: We report the results of an experiment on a continuous version of the minimum effort coordination game. The introduction of within-team competition significantly increases effort levels relative to a baseline with no competition and increases coordination relative to a secure treatment where the payoff-dominant equilibrium strategy weakly dominates all other actions. Nonetheless, within-team competition does not prevent subjects to polarize both in the efficient and the inefficient equilibria.
    Keywords: Coordination Games, Team Incentives, Minimum Effort Game
    JEL: C91
    Date: 2005–03–25
  9. By: Tibor Neugebauer (University Hannover); Javier Perote (Juan Carlos University Madrid); Ulrich Schmidt (University Hannover); Malte Loos (University Kiel)
    Abstract: The recent literature suggests that people have social preferences with a self-serving bias. Our data analysis reveals that the stylized fact of declining cooperation in repeated public goods experiments results from this bias and adaptation.
    Keywords: experimental economics, information feedback, public goods, voluntary contributions, conditional cooperation
    JEL: C72 C92 H41
    Date: 2005–03–25
  10. By: Lucia Quesada (University of Wisconsin Madison)
    Abstract: In this paper we address the question of collusion in mechanisms under asymmetric information. We develop a methodology to analyze collusion as an informed principal problem. First, if collusion occurs after the agents accept or reject the principal's offer; the dominant-strategy implementation of the optimal contract without collusion is collusion proof. Second, we look at a different timing, assuming that the agents' decision to accept or reject the principal's offer is taken after collusion, so agents can collude on their participation decisions. We also assume that the collusion offer includes a punishment strategy, to be used whenever the other agent rejects the side contract. We establish the conditions that have to be satisfied for a contract to be collusion proof and we show that the optimal contract without collusion is no longer collusion proof. The optimal collusion proof contract is asymmetric, both in transfers and in quantities.
    Keywords: Collusion, Informed Principal, Mechanism Design
    JEL: C72 D23 D82 L23
    Date: 2005–04–06
  11. By: Chris Kimble (University of York UK); Paul Hildreth (University of York UK); David J Grimshaw (Cranfield University)
    Abstract: There has been an explosion of new forms of communications media for interpersonal communication. There is anecdotal evidence of people suffering from 'information overload' as a result of these developments. This paper presents the results from, and analysis of, a case study of a perceived problem of information overload from e-mail in a large international organization: Watson Wyatt Partners. The research took two approaches to exploring the problem. The first was a survey of 1500 members of staff in the UK and Europe. This was aimed at collecting factual information. The second approach was to conduct follow up interviews with 19 people at two sites in the UK to explore some of the issues raised by the survey in greater depth. In the paper, we argue that for CMCs (Computer Mediated Communications) to be effective there is a need to establish a 'context' in which the message can be interpreted. In doing so, we will demonstrate that ignoring the degree of 'context' a media provides can adversely affect the users perceptions of that media.
    Keywords: Electronic mail, e-mail, CMC, communication technology, contextual clues, information overload
    JEL: D73 D82 D83
    Date: 2005–04–08
  12. By: Alejandro Saporiti (Queen Mary, University of London)
    Abstract: This paper generalizes previous existence results on unidimensional electoral competition, by extending the traditional two-party electoral game to the case where parties have mixed motivations, in the sense that they are interested in winning the election, but also in the policy implemented after the contest. Although this game has discontinuous payoffs, it satisfies payoff security and reciprocally upper semi- continuity. However, conditional payoffs might violate quasi-concavity. Hence, our first result shows that the existence of a pure-strategy Nash equilibrium can be guaranteed only if parties' interests are symmetric. Instead, we prove that the mixed extension satisfies better reply security and, therefore, that a mixed-strategy equilibrium always exists. We also characterize the set of equilibria for a tractable version of the model. This shows that the interaction between the electoral uncertainty, the aggregate level of opportunism and its distribution among parties shape the equilibrium strategies. In particular, when the opportunism is large and asymmetrically distributed, the support of each mixed-strategy equilibrium is a closed interval located on one side of the median. Further, as the uncertainty increases, the probability distributions concentrate on the extremes of the support. And the mixed-strategy equilibrium vanishes above a critical level, over which each party plays a pure strategy in its own ideological side.
    Keywords: Electoral competition, mixed motivations, discontinuous games, Nash equilibrium.
    JEL: D70 D72 C72
    Date: 2005–04–11
  13. By: Heiko Gerlach (University OF AUCKLAND)
    Abstract: This paper analyzes the role of communication in an infinitely repeated Bertrand game in which firms receive an imperfect private signal of a common value i.i.d. demand shock. Communication allows firms to coordinate on the most collusive price and it eliminates the possibility of undetectable price cuts. It is shown that firms can use stochastic intertemporal market sharing as a perfect substitute for communication in low demand states. Therefore, partial communication in high demand states is sufficient to achieve the first-best, full communication outcome. And partial communication in low demand state does not improve on the equilibrium without communication. Communication is most valuable to firms if signal frequency is intermediate, demand is characterized by upward shocks and the number of firms is neither too small nor too large.
    Keywords: Communication, Collusion, Repeated Games, Competition Policy
    JEL: L41 L13 D
    Date: 2005–01–31
  14. By: Klaus CONRAD (University of Mannheim Department of Economics)
    Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be either one with the firm offering the conventional engine as the only producer, one with the firm offering the new technology as the only producer, or one in which both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important. In order to find out whether private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare maximizing authority.
    Keywords: Price competition; Quality competition; Environmental awareness; Network effects; Automobiles.
    JEL: L Q H L
    Date: 2005–02–07
  15. By: Esther Gal-Or (Katz School, University of Pittsburgh); Anindya Ghose (Stern School, New York University)
    Abstract: Given that Information Technology (IT) security has emerged as an important issue in the last few years, the subject of security information sharing among firms, as a tool to minimize security breaches, has gained the interest of practitioners and academics. To promote the disclosure and sharing of cyber-security information among firms, the US federal government has encouraged the establishment of many industry based Information Sharing & Analysis Centers (ISACs) under Presidential Decision Directive 63. Sharing security vulnerabilities and technological solutions related to methods for preventing, detecting and correcting security breaches, is the fundamental goal of the ISACs. However, there are a number of interesting economic issues that will affect the achievement of this goal. Using game theory, we develop an analytical framework to investigate the competitive implications of sharing security information and investments in security technologies. We find that security technology investments and security information sharing act as ``strategic complements'' in equilibrium. Our results suggest that information sharing is more valuable when product substitutability is higher, implying that such sharing alliances yield greater benefits in more competitive industries. We also highlight that the benefits from such information sharing alliances increase with the size of the firm. We compare the levels of information sharing and technology investments obtained when firms behave independently (Bertrand-Nash) to those selected by an ISAC which maximizes social welfare or joint industry profits. Our results help us predict the consequences of establishing organizations such as ISACs, CERT or InfraGard by the federal government.
    Keywords: Technology Investment, Information Sharing, Security Breaches, Externality Benefit, Spillover Effect, Social Welfare
    JEL: L
    Date: 2005–03–13
  16. By: Américo Mendes (Portuguese Catholic University - Porto, Faculty of Economics & Management)
    Abstract: This paper is a follow up on a earlier one (Mendes, 1998) where I proposed a series of models for forest owners associations represented as organisation made up of two groups of strategically interacting players: the forest owners who are members of the association and the board of directors they have elected. The directors decide on the amount of services provided by the association which can be public goods (collective representation of the members, promotion of their common interests, diffusion of general information about forest programmes and best forest management practices, etc.) and private goods and services (silvicultural works preventive of forest fires, technical advice, etc.). The models were set up as games in strategic form with complete information and no payoff uncertainty. Here I pick up the second of, what is called in that previous paper, the 'Portuguese' models and extend it in the following directions: - there is payoff risk for the forest owners due to exogenous hazards (forest fires or others); - forest owners can buy private services from the owners which contribute to reduce the losses resulting from those hazards. The main focus in this paper is to derive the comparative static results about the demand of these private services by the forest owners.
    Keywords: forest owners’ associations, public and private goods joint supply, game theory
    JEL: L
    Date: 2005–03–13
  17. By: Gianfranco Enrico Atzeni (University of Sassari & CRENoS); Oliviero Antonio Carboni (University of Sassari & CRENoS)
    Abstract: This work attempts to shed light on the “information technology productivity paradox”. Employing a large data set of Italian manufacturing firms we compute ICT marginal productivity across different cluster of firms and the impact of information and communication technology (ICT) on output growth. Following Yorukoglu’s (1998) vintage capital idea, in which ICT is associated with consistent learning-by-doing effect, we explore whether firm capital replacement/introduction behaviour and firm’s technological investment aptitude have any role in explaining ICT productivity. We find that low capital replacement (high capital introduction) yields to sensibly greater ICT marginal revenues compared to high replacement (low capital introduction). However, what really matters in explaining ICT productivity is the level of innovation the new capital embodies. In fact, for non-innovative firms the ICT paradox is far less consistent. This strongly suggests the existence of learning by doing effects. In terms of growth contribution we find that ICT have an impact disproportionately wide compared to the share in total investment they represent
    Keywords: Growth, investment behaviour, information and communication technologies, productivity, replacement
    JEL: D21 D24 L2 O3
    Date: 2005–03–27
  18. By: Alexandre Gaudeul (University of East Anglia - Norwich and ESRC-CCP); Bruno Jullien (IDEI - GREMAQ - University of Toulouse)
    Abstract: Participants in a market, buyers and sellers, may need the service of an intermediary who will put them into contact and give them information about their potential trading partner. The intermediary chooses what price it will charge to each side to have access to its service. It also chooses what information it will reveal, for example to the buyer about the value of the seller’s product. In a market with network externalities, it would be optimal that everybody had access to the other side, as each side wants as many agents from the other side to be present as possible. This is however not feasible as the intermediary must charge positive access prices if it is to make any profit. In a market with asymmetric information, it would be optimal that all information about the buyers’ and sellers’ valuation for the traded product be available, but the intermediary will want to conceal or manipulate that information to increase its profit. The paper examines in the first part how network externalities play out in the intermediary’s access pricing strategies in both a monopoly and a competitive setting. In the second part, the paper shows how the intermediary will strategically manipulate and conceal information to extract the surplus from trade in the market it intermediates.
    Keywords: Intermediation, internet, asymmetric information, information goods, network effects, two sided markets, matching.
    JEL: D4 L1
    Date: 2005–03–31
  19. By: Elena Huergo (Universidad Complutense de Madrid)
    Abstract: El propósito de este trabajo es revisar las principales aplicaciones sobre el diagnóstico de poder de mercado que hacen referencia concreta a la industria española de manufacturas. En el marco del paradigma clásico las aplicaciones han consistido básicamente en estimaciones de ecuaciones de rentabilidad. La evidencia obtenida a partir de estas estimaciones tiende a señalar un efecto positivo de la concentración sobre los resultados empresariales, si bien su magnitud y significatividad varía en función del resto de variables explicativas. En la línea de la Nueva Organización Industrial Empírica, el conjunto de estudios empíricos sobre poder de mercado en la industria española es muy reducido, consecuencia en parte del retraso en el cambio de orientación del trabajo aplicado en España. Dentro de este pequeño grupo se observa una gran heterogeneidad que está en consonancia con la observada en la literatura empírica internacional, respecto a la que las aplicaciones españolas han reducido notablemente la distancia que manifestaban en décadas anteriores.
    Keywords: Market Structure, Market power, empirical evidence
    JEL: L
    Date: 2005–04–04
  20. By: William Barnett (University of Kansas); Morgan Rose (Washington University)
    Abstract: This paper explores the conceptual links between Joseph Schumpeter’s theory of instability under capitalism and both theoretical and empirical research that has been done over the past fifteen years in nonlinear dynamics. Recent work related to chaos and bifurcation theory is shown to be consistent with Schumpeter’s view that instability is an inherent feature of capitalism, and that there is a positive, though difficult, role for stabilization policy as a result. The strong claim that modern research has proven Schumpeter correct is not made, but rather that existing recent research is not inconsistent with his views.
    Keywords: Schumpeter, Austrian Economics, unstable dynamics, nonlinear dynamics
    JEL: D5
    Date: 2005–04–11
  21. By: Jose C. R. Alcantud (Universidad de Salamanca); Ghanshyam B. Mehta (University of Queensland)
    Abstract: In this paper we prove the existence of continuous order-preserving functions on subsets of ordered Banach spaces using a constructive approach.
    Keywords: Utility function Banach space
    JEL: D11
    Date: 2005–02–14
  22. By: Vijay Krishna (Department of Economics, Penn State University); John Morgan (Haas School of Business & Department of Economics, University of California, Berkeley)
    Abstract: Organizational theory suggests that authority should lie in the hands of those with information, yet the power to transfer authority is rarely absolute in practice. We investigate the validity and application of this advice in a model of optimal contracting between an uninformed principal and informed agent where the principal's commitment power is imperfect. We show that while full alignment of interests combined with delegation of authority is feasible, it is never optimal. The optimal contract is 'bang-bang'---in one region of the state space, full alignment takes place, in the other, no alignment takes place. We then compare these contracts to those in which the principal has full commitment power as well as to several 'informal' institutional arrangements.
    Keywords: Imperfect commitment, optimal contracting, delegation
    JEL: D23 D82
    Date: 2005–04–14
  23. By: Daniel Goulao (Department of Economics, University of Wisconsin- Madison)
    Abstract: The intention is to do a summary of the private provision of public goods literature; it also has the goal of seeing that there is no match between the classic theory predictions and the reality and empirical data. Another objective is to find within the literature aspects not studied yet, and so indicate future research topics
    Keywords: Public Goods
    JEL: D6 D7 H
    Date: 2005–01–25
  24. By: Sílvia Jorge (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro); Cesaltina Pires (Departamento de Gestão de Empresas, Universidade de Évora)
    Abstract: This paper discusses a model where consumers simultaneously differ according to one unobservable (preference for quality) and one observable characteristic (location). In these circumstances nonlinear prices arise in equilibrium. The main question addressed in this work is whether firms should be allowed to practise different nonlinear prices at each location (delivered nonlinear pricing) or should be forced to set an unique nonlinear contract (mill nonlinear pricing). Assuming that firms can costless relocate, we show that the free entry long-run number of firms may be either smaller, equal, or higher under delivered nonlinear pricing. In addition, we show that delivered nonlinear pricing yields in the long-run higher welfare and, consequently, our results support the view that discriminatory nonlinear pricing should not be prohibited.
    Keywords: Delivered nonlinear pricing, Mill nonlinear pricing, Asymmetric information, Pricing regulation
    JEL: D43 L13 D82
    Date: 2004–09
  25. By: Thomas D. Jeitschko (Department of Economics, Michigan State University); Leonard J. Mirman (Department of Economics, University of Virginia); Egas Salgueiro (Departamento de Economia e Gestão Industrial, Universidade de Aveiro)
    Abstract: The dynamics of a stochastic, two–period principal–agent relationship is studied. The agent’s type remains the same over time. Contracts are short term. The principal designs the second contract, taking the information available about the agent after the first period into account. Compared to deterministic environments significant changes emerge: First, fully separating contracts are optimal. Second, the principal has two opposing incentives when designing contracts: the principal ‘experiments,’ making signals more informative; yet dampens signals, thereby reducing up–front payments. As a result, ‘good’ agents’ targets are ratcheted over time.
    Keywords: Bayesian learning, Experimentation, Dynamic agency, Ratchet effect, Regulation, Procurement
    JEL: D8 L5 H57
    Date: 2004
  26. By: Ricardo Gonçalves (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro)
    Abstract: The seller in an auction will generally not be happy to know that a cartel of bidders will take part in that auction. Cartels generate their profits by inducing a final price which is lower (higher in the case of procurement contracts' auctions) than in a competitive auction. This paper proposes a solution to the problem. By allowing the seller to cheat on the auction rules, and to allocate the good to a given bidder with a predetermined probability (favouritism), we show that when no cartel is active, the auction leads to a lower price than that obtained in a purely competitive auction. However, if a cartel is operative, favouritism generates incentives for the favoured bidder to defect the cartel. This single defection is sufficient to disrupt the cartel. In equilibrium, the seller may choose this probability of cheating so as to obtain the highest possible final auction price, which we show to be a second-best outcome. In other words, this proposed solution to the cartel's existence does not lead to a final auction price as high as that obtained in a competitive auction.
    Keywords: First-price auctions, collusion, cartels
    JEL: D44
    Date: 2004–04

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