nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒06‒14
eighteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Consumers networks and search equilibria By Galeotti, Andrea
  2. Endogenous Market Incompleteness with Investment Risks By Meh, Césaire A.; Quadrini, Vincenzo
  3. Bundling and the Unanimity Rule By Erlenmaier, Ulrich; Gersbach, Hans
  4. Divide et Impera: Optimal Leniency Programmes By Spagnolo, Giancarlo
  5. The Impact of Consumer Loss Aversion on Pricing By Heidhues, Paul; Köszegi, Botond
  6. The Effects of Globalization on Worker Training By Gersbach, Hans; Schmutzler, Armin
  7. On the Community Patent By Hoernig, Steffen
  8. Intermediation in Innovation By Hoppe, Heidrun C.; Ozdenoren, Emre
  9. The Economics of Books By Canoy, Marcel; van der Ploeg, Frederick; van Ours, Jan C
  10. A Theory of Influence: The Strategic Value of Public Ignorance By Brocas, Isabelle; Carrillo, Juan D
  11. Two at the Top: Quality Differentiation in Markets with Switching Costs By Gehrig, Thomas; Stenbacka, Rune
  12. Optimality and Renegotiation in Dynamic Contracting By Battaglini, Marco
  13. What Determines the Future Value of an Icon Wine? New Evidence from Australia By Anderson, Kym; Wood, Danielle
  14. Inattentive Consumers By Reis, Ricardo A.M.R.
  15. Tying, Upgrades, and Switching Costs in Durable-Goods Markets By Dennis W. Carlton; Michael Waldman
  16. To Bundle or Not to Bundle By Norman, Peter; Fang, Hanming
  17. Trust, communication and equlibrium behaviour in public goods By Alexis Belianin; Marco Novarese
  18. Equilibrium Play and Best Response in Sequential Constant Sum Games By Pedro Rey Biel

  1. By: Galeotti, Andrea
    Abstract: We explore the effect of local information sharing among consumers on market functioning. Consumers are embedded in a consumers network, they may costly search non-sequentially for price quotations and the information gather are non-excludable along direct links. We first show that when search costs are low consumers randomize between searching for one price and two price quotations (high search intensity equilibrium). Otherwise, consumers randomize between searching for one price and not searching at all (low search intensity equilibrium). In both equilibria consumers search less frequently in denser networks. The main result of the paper show that when search costs are low the expected price and the social welfare increase, while the consumer surplus decreases, as the consumers network becomes denser. These results are reverse when search costs are high.
    Keywords: Networks, local externalities, non-sequential search
    Date: 2005–06
  2. By: Meh, Césaire A.; Quadrini, Vincenzo
    Abstract: This Paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology. The investment risk cannot be fully insured with optimal contracts because shocks are private information. We show that the presence of investment risks leads to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We also show that the availability of state-contingent (optimal) contracts – compared to simple debt contracts – brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make possible the use of these contracts have important welfare consequences.
    Keywords: Aggregate Capital; Asymmetric Information; optimal contracts
    JEL: D58 D82 E20
    Date: 2004–12
  3. By: Erlenmaier, Ulrich; Gersbach, Hans
    Abstract: In this Paper, we design democratic constitutions that can transcend the shortcomings of the unanimity rule. The constitution embeds the unanimity rule in a set of virtue-supporting principles: (a) broad packages with many public projects (bundling) are allowed, but can only be proposed once in a legislative term; (b) the person who designs the package is also taxed at the highest proposed rate; and (c) subsidies are forbidden. We show that such democratic constitutions can yield efficient public project provision.
    Keywords: amendment rules; bundling; constitutions; provision of public projects; unanimity rule
    JEL: D62 D70 H40
    Date: 2004–12
  4. By: Spagnolo, Giancarlo
    Abstract: Leniency programmes (or policies) reduce sanctions against cartel members that self-report to the Antitrust Authority. We focus on their ability to directly deter cartels and analogous criminal organizations by undermining internal trust, increasing individual incentives to ‘cheat’ on partners. Optimally designed ‘courageous’ leniency programmes reward the first party that reports sufficient information with the fines paid by all other parties, and with finitely high fines achieve the first best. ‘Moderate’ leniency programmes that only reduce or cancel sanctions, as implemented in reality, may also destabilize and deter cartels by (a) protecting agents that defect (and report) from fines; (b) protecting them from other agents’ punishment; and (c) increasing the riskiness of taking part to a cartel.
    Keywords: amnesty; antitrust; cartels; collusion; competition policy; corruption; immunity; law enforcement; leniency; oligopoly; organized crime; repeated games; risky cooperation; whistleblowers
    JEL: L13 L44
    Date: 2004–12
  5. By: Heidhues, Paul; Köszegi, Botond
    Abstract: We develop a model in which a profit-maximizing monopolist with uncertain cost of production sells to loss-averse, yet rational, consumers. We first introduce (portable) techniques for analysing the demand of such consumers, and then investigate the monopolist’s pricing strategy. Compared to lower possible purchase prices, paying a higher price in the firm’s pricing distribution is assessed by consumers as a loss, decreasing demand for the firm’s product. We provide conditions under which a firm with continuously distributed marginal cost responds by (locally) eliminating this ‘comparison effect’ and choosing a discrete price distribution; that is, prices are ‘sticky’. Price stickiness is more likely to obtain when the cost distribution has high density, the price responsiveness of demand is low, or consumers are likely to purchase. Whether or not prices are sticky, the monopolist wants to at least mitigate the comparison effect, leading to countercyclical mark-ups. On the other hand, if consumers expect to buy the product, they experience a loss if they end up not consuming it, increasing their willingness to pay for it. Thus, despite the tendency toward price stability, there are also circumstances in which a firm with unchanging cost offers random ‘sales’ to increase customers’ expectation to consume, attracting more demand at high prices.
    Keywords: (seemingly) Predatory pricing; countercyclical markups; kinked demand curve; monopoly pricing; price stickiness; promotions; reference-dependent utility; sales
    Date: 2005–01
  6. By: Gersbach, Hans; Schmutzler, Armin
    Abstract: We examine how globalization affects firms’ incentives to provide general worker training. We consider a three-stage game. In stage 1, firms invest in productivity-enhancing training. In stage 2, they can make wage offers for each others’ workers. Finally, Cournot competition takes place. When two product markets become integrated, that is, replaced by a market with greater demand and more firms, training by each firm increases, provided the two markets are sufficiently small. When barriers between large markets are eliminated, training is reduced. Integration increases welfare if it does not reduce training. However, for large parameter regions, welfare falls if integration reduces training. We also show that opening markets to countries with publicly funded training or cheap, low-skilled labour can threaten apprenticeship systems.
    Keywords: general worker training; globalization; human capital; oligopoly; turnover
    JEL: D42 L22 L43 L92
    Date: 2005–01
  7. By: Hoernig, Steffen
    Abstract: The European Union will be introducing a Europe-wide patent, the so-called Community Patent. Its aim is to foster innovative activity, but strategic effects between firms competing in R&D have not been considered in the official discourse. We show that, even if these are taken into account, the Community Patent will increase innovative activity and welfare. On the other hand, if the decision of participating in R&D is considered, then this increased R&D will be concentrated into fewer firms. Furthermore, we show that existing asymmetries between countries and firms are bound to increase.
    Keywords: community patent; participation in R&D; R&D race
    JEL: L52 O34
    Date: 2005–01
  8. By: Hoppe, Heidrun C.; Ozdenoren, Emre
    Abstract: The paper offers a new theoretical framework to examine the role of intermediaries between creators and users of new inventions. We find that uncertainty about the profitability of investing in new inventions generates a basis for intermediation. An intermediary may provide an opportunity to economize on a critical component of efficient investment decisions - the expertise to sort `profitable' from `unprofitable' inventions. Our findings may help explain the surge in university patenting and licensing since the Bayh-Dole Act of 1980. The study also identifies several limitations to the potential efficiency of intermediation in innovation.
    Keywords: innovation; Intermediation; market microstructure; matching; patent licensing; uncertainty
    JEL: D40 D80 L12 L13 O32
    Date: 2005–02
  9. By: Canoy, Marcel; van der Ploeg, Frederick; van Ours, Jan C
    Abstract: The tensions between books and book markets as expressions of culture and books as products in profit-making businesses are analysed and insights from the theory of industrial organisation are given. Governments intervene in the market for books through laws concerning prices of books, grants for authors and publishers, a lower value-added tax, public libraries and education in order to stimulate the diversity of books on offer, increase the density of retail outlets and to promote reading. An overview of the different ways by which countries differ in terms of market structures and government policies is given. Particular attention is paid to retail price maintenance. Due to differences between European countries it is not a good idea to harmonise European book policies. Our analysis suggests that the book market seems quite able to invent solutions to specific problems of the book trade and that, apart from promoting reading, there is little need for government intervention.
    Keywords: authors; books; diversity; internet; libraries; monopolistic competition; publishers; retail price maintenance; subsidies
    JEL: D40 D60 L10 L40 Z11
    Date: 2005–02
  10. By: Brocas, Isabelle; Carrillo, Juan D
    Abstract: We analyse an agency model where one individual decides how much evidence he collects. We assume that he has free access to information, but all the news acquired becomes automatically public. Conditional on the information disclosed, a second individual with conflicting preferences undertakes an action that affects the payoff of both agents. In this game of incomplete but symmetric information, we show that the first individual obtains rents due to his superior ability to decide whether to collect or forego evidence, i.e., due to his control in the generation of (public) information. We provide an analytical characterization of these rents, that we label ‘rents of public ignorance’. They can be interpreted as, for example, the degree of influence that a chairman can exert on a committee due exclusively to his capacity to decide whether to keep discussions alive or terminate them and call a vote. Last, we show that similar insights are obtained if the agent decides first how much private information he collects and then how much of this information he transmits to the other agent.
    Keywords: experimentation; incomplete and symmetric information; information control; informational rents; learning; optimal stopping rule; principal-agent; public ignorance
    JEL: D82
    Date: 2005–02
  11. By: Gehrig, Thomas; Stenbacka, Rune
    Abstract: We explore the effects of switching costs on the subgame perfect quality decisions of oligopolists with repeated price competition. We establish a strong strategic quality premium. We show that competition for the establishment of customer relationships will eliminate low-quality firms in period 1 and that low-quality firms can survive only based on poaching profits. The equilibrium configuration is characterized by an agglomeration of two providers of top-quality as soon as switching cost heterogeneity is sufficiently significant. We demonstrate a finiteness property, according to which the two top-quality firms dominate the market with a joint market share exceeding 50%.
    Keywords: natural oligopoly; poaching; quality choice; switching costs
    JEL: D43 L15
    Date: 2005–04
  12. By: Battaglini, Marco
    Abstract: We characterize the optimal renegotiation-proof contract in a dynamic Principal-Agent model in which the type of the agent may change stochastically over time. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation-proof even if types are highly correlated. The marginal benefit of having some pooling of types in the first period is not monotonic in their persistence level, but the equilibrium level of pooling is non-decreasing in persistence; and, for any level persistence, it is always optimal to partially screen the types by offering a menu of choices to the agent. Despite the non-linearity of the problem, the optimal equilibrium allocation is unique.
    Keywords: contract theory; dynamic contracts; regulation; renegotiation
    JEL: D42 L51
    Date: 2005–04
  13. By: Anderson, Kym; Wood, Danielle
    Abstract: To what extent can the future price of icon wines be anticipated from information available at the time of their initial sale by wineries? Using a hedonic model we show that weather variables and changes in production techniques, along with the age of the wine, have significant power in explaining the secondary market price variation across different vintages of each of three icon Australian red wines. The results have implications for winemakers in determining the prices they pay for grapes and charge for their wines, and for consumers/wine investors as a guide to the prospective quality of immature icon wines.
    Keywords: hedonic pricing model; investment under certainty; wine quality
    JEL: C23 D12 D44 D80 G12
    Date: 2005–05
  14. By: Reis, Ricardo A.M.R.
    Abstract: This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behaviour implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using US aggregate and microeconomic data generally supports these predictions.
    Keywords: bounded rationality; consumption; excess sensitivity; excess smoothness; hand-to-mouth consumers; inattentiveness
    JEL: D1 D8 D9 E2
    Date: 2005–05
  15. By: Dennis W. Carlton; Michael Waldman
    Abstract: This paper investigates the role of product upgrades and consumer switching costs in the tying of complementary products. Previous analyses of tying have found that a monopolist of one product cannot increase its profits and reduce social welfare by tying and monopolizing a complementary product if the initial monopolized product is essential, where essential means that all uses of the complementary good require the initial monopolized product. We show that this is not true in durable-goods settings characterized by product upgrades, where we show tying is especially important when consumer switching costs are present. In addition to our results concerning tying our analysis also provides a new rationale for leasing in durable-goods markets. We also discuss various extensions including the role of the reversibility of tying as well as the antitrust implications of our analysis.
    JEL: L0 L1 L4
    Date: 2005–06
  16. By: Norman, Peter; Fang, Hanming
    Abstract: Comparing monopoly bundling with separate sales is relatively straightforward in an environment with a large number of goods. In this paper we show that results that are similar to the asymptotic results can be obtained in the more realistic case with a given finite number of goods provided that the distributions of valuations are symmetric and log-concave.
    JEL: L11 L12
    Date: 2005–06–10
  17. By: Alexis Belianin (International College of Economics & Finance ICEF , . Higher School of Economics); Marco Novarese (Centre for Cognitive Economics - Università del Piemonte Orientale)
    Abstract: This paper reports a novel cross-cultural public goods game experiment played in real time through Internet. Web-based software was used to compare the contributions to public good of different groups of participants: mixed, consisting of both Italians (students in law and economics) and Russians (students in economics), as well as all-Italian and all-Russian groups. This setup allows for testing for a number of effects, including participants’ awareness of the group composition in terms of nationality and gender of group members; possibility of coordination of one’s strategy during a cheap talk session organized before some of the games was used as an additional control. Our results show that the degree of cooperation is rather high, but does not vary significantly with nationalities of the group members, while communication tends to enhance contributions to public goods. A notable difference between the subjects representing the two nations is an overly strong and increasing cooperativeness of the Russian female participants in contrast to that of the Russian men, as well as the Italians.
    JEL: C9
    Date: 2005–06–01
  18. By: Pedro Rey Biel (University College London)
    Abstract: We perform a further experiment to check the robustness of the main result in Rey Biel (2005) to sequential play. We find that Equilibrium predictions work even better when the same games are played sequentially: 85% of first movers choose the Equilibrium strategy and 85% of second movers best respond to the action taken by first movers. We conclude by identifying constant sum games as a class of games where experimental subjects' choices coincide with theory predictions and we argue that in such games distributional and reciprocal preferences do not influence subjects' decisions.
    Keywords: Experiments, Constant Sum Games, Best Response
    JEL: C72 C91 D81
    Date: 2005–06–08

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