nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒05‒07
thirteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Vertical Contracts between Manufacturers and Retailers: Inference with Limited Data By Sofia Villas-Boas
  2. The Law of Demand Versus Diminishing Marginal Utility By Bruce Beattie; Jeffrey LaFrance
  3. Measuring Transactions Costs from Observed Behavior: Market Choices in Peru By Renos Vakis; Elisabeth Sadoulet; Alain de Janvry
  4. Identification of Supply Models of Retailer and Manufacturer Oligopoly Pricing By Sofia Villas-Boas; Rebecca Hellerstein
  5. Job Protection Laws and Agency Problems Under Asymmetric Information By Schmitz, Patrick W.
  6. Content and Advertising in the Media: Pay-TV versus Free-To-Air By Peitz, Martin; Valletti, Tommaso
  7. Intermediation by Aid Agencies By Rowat, Colin; Seabright, Paul
  8. Reciprocal Dumping with Bertrand Competition By Friberg, Richard; Ganslandt, Mattias
  9. Vertical Distribution, Parallel Trade, and Price Divergence in Integrated Markets By Ganslandt, Mattias; Maskus, Keith E.
  10. Environmental Regulation and Technological Innovation with Spillovers By Samiran Banerjee; João E. Gata
  11. Does Format of Pricing Contract Matter? By Teck-Hua Ho; Juanjuan Zhang
  12. Brand and Price Advertising in Online Markets By Michael Baye; John Morgan
  13. An Equilibrium Model of Managerial Compensation By Michael Magill; Martine Quinzii

  1. By: Sofia Villas-Boas (University of California, Berkeley)
    Abstract: In this paper we compare different models of vertical contracting between manufacturers and retailers in the supermarket industry. Demand estimates are used to compute price-cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed. The focus is on identifying which set of margins seems to be compatible with the margins obtained from direct estimates of cost and to select the best among the non-nested competing models. The models considered are: (1) a simple linear pricing model; (2) a vertically integrated model; and (3) a variety of alternative (strategic) supply scenarios, that allow for collusion, non-linear pricing and strategic behavior with respect to private label products. Using data on yogurt sold at several stores in a large urban area of the United States, we find that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain. This is consistent with non-linear pricing by the manufacturers or with high bargaining power of the retailers.
    Keywords: Vertical contracts, multiple manufacturers and retailers, non-nested tests, yogurt local market.,
    Date: 2004–08–01
  2. By: Bruce Beattie (University of Arizona, Tucson); Jeffrey LaFrance (University of California, Berkeley)
    Abstract: Diminishing marginal utility is neither necessary nor sufficient for downward sloping demand, and it is not necessary for convex indifference curves. We illustrate these facts with two simple counter examples, using valid and easy to understand utility functions. The examples are accompanied with intuition, geometry, and basic mathematics of the utility functions, marginal utilities, marginal utility slopes, indifference curves, indifference curve slopes and curvatures, and ordinary demands and slopes.
    Keywords: convex indifference curves, diminishing marginal utility, downward sloping demand,
    Date: 2003–09–01
  3. By: Renos Vakis (World Bank); Elisabeth Sadoulet (University of California, Berkeley); Alain de Janvry (University of California, Berkeley)
    Abstract: Farmers incur proportional and fixed transactions costs in selling their crops on markets. Using data for Peruvian potato farmers, we propose a method to measure these transactions costs. When opportunities exist to sell a crop on alternative markets, the observed choice of market can be used to infer a monetary measure of transactions costs in market participation. The market choice model is first estimated at the reduced form level with a conditional logit, as a function of variables that explain transactions costs. We then use these market choice equations to control for selection in predicting the idiosyncratic prices that would be received on all markets and the idiosyncratic proportional transactions costs that would be incurred to reach all markets. The net between the two gives us a measure of effective farm-level prices. This allows us to estimate a semi-structural conditional logit of the market choice model. In this model, the choice of market is a function of predicted effective farm-level prices, and of market information that accounts for fixed transactions costs. We can use the estimated coefficients to derive the price equivalence of the fixed cost due to information. We find that the information on market price that farmers receive from their neighbors reduces fixed transactions costs by the equivalent of doubling the price received, and is equal to four times the average transportation cost.
    Keywords: transactions costs, market choice, information,
    Date: 2003–10–01
  4. By: Sofia Villas-Boas (University of California, Berkeley); Rebecca Hellerstein (Federal Reserve Bank of New York)
    Abstract: This note outlines conditions under which we can identify a vertical supply model of multiple retailers' and manufacturers' oligopoly-pricing behavior. This is an important question particularly when the researcher believes, contrary to the traditional assumption followed in the empirical literature, that retailers may not be neutral pass-through intermediaries. We show that a data-set of an industry's product prices, quantities, and input prices over time is sufficient to identify the vertical model of retailers' and manufacturers' oligopoly-pricing behavior given nonlinear demand, for homogeneous-products industries, and given multi-product firms, for differentiated-products industries.
    Keywords: Identification, Vertical relationships, Oligopoly models of multiple manufacturers and retailers,
    Date: 2004–10–01
  5. By: Schmitz, Patrick W.
    Abstract: Under symmetric information, a job protection law that says that a principal who has hired an agent today must also employ them tomorrow can only reduce the two parties’ total surplus. The law restricts the principal’s possibilities to maximize their profit, which equals the total surplus, because they leave no rent to the agent. However, under asymmetric information, a principal must leave a rent to the agent, and hence profit maximization is no longer equivalent to surplus maximization. Therefore, a job protection law can increase the expected total surplus by restricting the principal’s possibilities to inefficiently reduce the agent’s rent.
    Keywords: employment protection; job security; labour market rigidities
    JEL: D82 E24 J65 K31
    Date: 2004–12
  6. By: Peitz, Martin; Valletti, Tommaso
    Abstract: We compare the advertising intensity and content of programming in a market with competing media platforms. With pay-tv media platforms have two sources of revenues, advertising revenues and revenues from viewers. With free-to-air media platforms receive all revenues from advertising. We show that if viewers strongly dislike advertising, the advertising intensity is greater under free-to-air television. We also show that free-to-air television tends to provide more similar content whereas pay-tv stations differentiate their content. In addition, we compare the welfare properties of the two different schemes.
    Keywords: advertising; media; product differentiation; two-sided markets
    JEL: D43 L13 L82
    Date: 2004–12
  7. By: Rowat, Colin; Seabright, Paul
    Abstract: This Paper models aid agencies as financial intermediaries that do not make a financial return to depositors, since the depositors' concern is to transfer resources to investor-beneficiaries. This leads to a significant problem of verification of the agencies' activities. One solution to this problem is for an agency to employ altruistic workers at below-market wages: workers can monitor the agency's activity more closely than donors, and altruistic workers would not work at below-market rates unless the agency were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible.D21
    Keywords: altruism; donations; non-profit; signalling; two-sided market; wage differential
    JEL: D21 D64 J31 L31
    Date: 2004–12
  8. By: Friberg, Richard (Department of Economics); Ganslandt, Mattias (The Research Institute of Industrial Economics)
    Abstract: This paper examines if international trade can reduce total welfare in an international oligopoly with differentiated goods. We show that welfare is a U-shaped function in the transport cost as long as trade occurs in equilibrium. With a Cournot duopoly trade can reduce welfare compared to autarchy for any degree of product differentiation. Under Bertrand competition we show that trade may reduce welfare compared to autarchy, if firms produce sufficiently close substitutes and the autarchy equilibrium is sufficiently competitive. Otherwise it can not.
    Keywords: Reciprocal Dumping; Intra-Industry Trade; Oligopoly; Product Differentiation; Transport Costs
    JEL: F12 F15 L13
    Date: 2005–03–16
  9. By: Ganslandt, Mattias (The Research Institute of Industrial Economics); Maskus, Keith E. (Department of Economics)
    Abstract: We develop a model of vertical pricing in which an original manufacturer sets wholesale prices in two markets that are integrated at the distributor level by parallel imports (PI). The manufacturing firm needs to set these two prices to balance three competing interests: restricting competition in the PI-recipient market, avoiding resource wastes due to actual trade, and reducing the double-markup problem in the PI-source nation. These trade-offs imply the counterintuitive result that both wholesale and retail prices could diverge as a result of declining trading costs, even as the volume of PI increases. Thus, in some circumstances it may be misleading to think of PI as an unambiguous force for price integration.
    Keywords: Vertical Restraints; Parallel Imports; Market Integration
    JEL: F12 F15
    Date: 2005–04–15
  10. By: Samiran Banerjee; João E. Gata
    Abstract: We present a two-period dynamic model of standard setting under asymmetric information to model the attempts by the Califormia Air Resources Board (CARB) in getting car manufacturers to comply with its phase-in of stringent emissions standards. After CARB chooses an initial emissions standard that ?rms are required to comply with, automakers respond by choosing R&D investment and production levels which provide CARB an imperfect signal whether they are more or less capable of complying with the standard. CARB resets the environmental standard and the ?rms once again choose research and production levels. Firms are Cournot duopolists in the product market and can choose to do research noncooperatively or cooperatively in the presence of spillovers. We show that ?rms will behave strategically and underinvest in research both under competitive and cooperative R&D, though the level of underinvestment — the ratchet effect — is greater under cooperative R&D when spillovers are large. We uncover a fundamental con?ict between the incentives of ?rms to do cooperative research and social welfare: that ?rms will want to engage in cooperative (resp. noncooperative) R&D only when spillovers are low (resp. high) while social welfare is greater under noncooperative (resp. cooperative) research.
    Keywords: Car emissions; dynamic technology-forcing regulation; selfregulation; pre-commitment; cooperative R&D; ratchet effect.
    JEL: L5 O3
  11. By: Teck-Hua Ho (Univeristy of California, Berkeley); Juanjuan Zhang (University of California, Berkeley)
    Abstract: The use of linear wholesale price contract has long been recognized as a threat to achieving channel effciency. Many formats of nonlinear pricing contract have been proposed to achieve vertical channel coordination. Examples include two-part tariff and quantity discount. A two-part tariff charges the downstream party a fixed fee for participation and a uniform unit price. A quantity discount contract does not include a fixed fee and charges a lower unit price for each additional unit. Extant economic theories predict these contracts, when chosen optimally, to be revenue and division equivalent in that they all restore full channel effciency and give the same surplus to the upstream party assuming constant relative bargaining power. We conduct a laboratory experiment to test the empirical equivalence of the two pricing formats. Surprisingly, both pricing formats fail to coordinate the channel even in a well-controlled market environment with subjects motivated by significant monetary incentives. The observed channl effciencies were significantly lower than 100%. In fact, they are statistically no better than that of the linear wholesale price contract. Revenue equivalence fails because the quantity discount scheme achieves a higher channel effciency than the two-part tariff. Also, division equivalence does not hold because the quantity discount scheme accords a higher surplus to the upstream party than the two-part tariff. To account for the observed empirical regularities, we allow the downstream party to have a reference-dependent utility in which the upfront fixed fee is framed as loss andn the subsequent contribution margin as gain. The proposed model nests the standard economic model as a special case with a loss aversion coeffcient of 1.0. The estimated loss aversion coeffcient is 1.6, thereby rejecting the standard model. We rule out other plausible explanations such as parties having fairness concerns and non-linear risk attitudes.
    Keywords: Pricing Format, Two-Part Tariff, Quantity Discount, Channel Efficiency, Double Marginalization, Reference-Dependent Utility, Experimental Economics, Behavioral Economics
    JEL: C1 C2 C3 C4 C5 C8
    Date: 2005–04–29
  12. By: Michael Baye (Indiana University); John Morgan (Haas School of Business & Department of Economics)
    Abstract: We model a homogeneous product environment where identical e-retailers endogenously engage in both brand advertising (to create loyal customers) and price advertising (to attract 'shoppers'). Our analysis allows for 'cross-channel' effects; indeed, we show that price advertising is a substitute for brand advertising. In contrast to models where loyalty is exogenous, these cross-channel effects lead to a continuum of symmetric equilibria; however, the set of equilibria converges to a unique equilibrium as the number of potential e-retailers grows arbitrarily large. Price dispersion is a key feature of all of these equilibria, including the limit equilibrium. While each firm finds it optimal to advertise its brand in an attempt to 'grow' its base of loyal customers, in equilibrium, branding (1) reduces firm profits, (2) increases prices paid by loyals and shoppers, and (3) adversely affects gatekeepers operating price comparison sites. Branding also tightens the range of prices and reduces the value of the price information provided by a comparison site. Using data from a price comparison site, we test several predictions of the model.
    Keywords: Price dispersion
    JEL: D4 D8 M3 L13
    Date: 2005–04–29
  13. By: Michael Magill; Martine Quinzii
    Abstract: This paper studies a general equilibrium model with two groups of agents, investors (shareholders) and managers of firms, in which managerial effort is not observable and influences the probabilities of firms’ outcomes. Shareholders of each firm offer the manager an incentive contract which maximizes the firm’s market value, under the assumption that the financial markets are complete relative to the possible outcomes of the firms. The paper studies two sources of inefficiency of equilibrium. First, when investors are risk averse and effort influences probability, market-value maximization differs from maximization of expected utility. Second, because the optimal contract exploits all sources of information for inferring managerial effort, when firms’ outputs are correlated the contract of a manager depends on the outcomes of other firms. This leads to an external effect of the effort of one manager on the compensation of other managers, which market-value maximization ignores. We show that under typical conditions these two effects lead to an under-provision of effort in equilibrium. These inefficiencies disappear however if each firm is replicated, and in the limit there is a continuum of firms of each type.
    JEL: D23 D51 D62 D82
    Date: 2005–03

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