nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒06‒27
eleven papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Political renegotiation of regulatory contracts By Cecile Aubert; Jean- Jacques Laffont
  2. Switching Costs, Consumers' Heterogeneity and Price Discrimination in the Mobile Communications Industry By Nicoletta Corrocher; Lorenzo Zirulia
  3. R&D Networks with Heterogenous Firms By Lorenzo Zirulia
  4. Externalities of social capital : the role of values, norms and networks By Butter, Frank A.G. den; Mosch, Robert H.J.
  5. The Influence of Information Externalities on the Value of Reputation Building - An Experiment By Gary E. Bolton; Axel Ockenfels
  6. Are Durable Goods Consumers Forward Looking? Evidence from College Textbooks By Judith Chevalier; Austan Goolsbee
  7. Determinants of Vertical Integration: Finance, Contracts, and Regulation By Daron Acemoglu; Simon Johnson; Todd Mitton
  8. Pricing and matching under duopoly with imperfect buyer mobility By Massimo A. De Francesco
  9. Work incentives and household love: Sequential contracting with altruistic individuals and moral hazard By Cecile Aubert
  10. The pricing of gasoline grades and the third law of demand By R. Morris Coats; Gary M. Pecquet; Leon Taylor
  11. Efficiency in Optimal Auctions with Common Uncertainty By Lester M.K. Kwong

  1. By: Cecile Aubert (Universite Paris Dauphine, Eurisco); Jean- Jacques Laffont (IDEI, Toulouse)
    Abstract: Governmental contracts may be renegotiated after political changes. Current governments can anticipate this and strategically distort contracts to influence renegotiation outcomes. In this sequential common agency game, the initial contract impacts elements of the renegotiation process: outside options (a `leverage' effect), and the beliefs of the new government through partial information revelation (a `strategic' effect). We characterize the optimal initial contract, as a function of political stability, time preference, and profits appropriation by the initial government. It always entails either full separation or strategic, partial, information revelation. Last, institutional rules imposing immediate payments to the firm help limit output distortions.
    Keywords: Renegotiation, Political uncertainty, Regulation.
    JEL: D82 L51 D73
    Date: 2005–06–15
  2. By: Nicoletta Corrocher (CESPRI, Università Bocconi, Milano); Lorenzo Zirulia (CESPRI, Università Bocconi, Milano)
    Abstract: In this paper we develop a formal model that captures some basic features of competition in the mobile communications service industry. In a model of oligopolistic competition with price discrimination and switching costs, we study the role of firms’ installed base of consumers in providing the incentives to offer contracts for a new class of consumers with a lower willingness to pay. The model predicts that there exists an inverse relationship between the share of the leader in the market of consumers with high willingness to pay and its share in the market of consumers with low willingness to pay. This implies that market shares converge. If firms collude in the introduction of new contracts, convergence is milder. This result is consistent with the empirical evidence related to the mobile communications industry in different European countries, where we observe a convergence in market shares driven by the superior ability of followers to acquire new customers, who typically have lower willingness to pay as compared with early adopters.
    Keywords: Switching costs; Price discrimination; Mobile communications
    JEL: L13 L96
    Date: 2005–05
  3. By: Lorenzo Zirulia (CESPRI, Università Bocconi, Milano)
    Abstract: This paper models the formation of R&D networks in an industry where firms are technologically heterogenous, extending previous work by Goyal and Moraga (2001). While remaining competitors in the market side, firms share their R&D efforts on a pairwise base, to an extent that depends on their technological capabilities. First, we consider a four firms’ industry. In the class of symmetric networks, the complete network is the only pairwise stable network, although not necessarily profit or social welfare maximizing. Then, we extend the analysis to asymmetric structures in a three firms’ industry. Only the complete and the partially connected networks are possibly stable, but which network is stable depends on the level of heterogeneity and technological opportunities. The complete and partially connected networks are also the possible welfare and aggregate profit maximizing networks, but social and private incentives do not generally coincide. Finally, we consider the notion of strongly stable networks, where all the possible deviations by coalitions of agents are allowed. It turns out that in the four firms’ case, the complete network is very rarely strongly stable, while in the three firms’ case the partially connected network where two firms in different technological group are linked is, for a large subset of the parameter space, the only strongly stable network.
    Keywords: Strategic alliances; Networks; Research and development; Technological complementarities
    JEL: D21 D43
    Date: 2005–05
  4. By: Butter, Frank A.G. den (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Mosch, Robert H.J.
    Abstract: The economic perspective on values and norms shows that they may bring about externalities for the society as a whole. This possibility of market failure provides a good reason for the government to follow closely the developments in values and norms, and the resulting behaviour in communities and networks. It justifies the initiative of Prime Minister Balkenende to organise the debate on these matters in the Netherlands (and, under the Dutch EU-presidency, in Europe). Networks can be associated both with positive (Putnam type) and with negative (Olson type) externalities. This paper discusses the various influences of values, norms and networks on socio-economic welfare and provides empirical evidence on these relationships. The focus of our own empirical analysis is on the Netherlands. Trust as part of social capital, and the role that values, norms and networks play as co-ordination mechanism, form important aspects both in the theoretical and in the empirical analysis. It appears that there has been no obvious decrease in these aspects of social capital in the Netherlands. It contrasts the findings of Putnam for the US.
    Keywords: social capital; values and norms; trust; networks; market failure
    JEL: D62 D70 H19
    Date: 2004
  5. By: Gary E. Bolton; Axel Ockenfels
    Abstract: We observe that information externalities arise in sequential equilibrium of the chain store game such that the amount of reputation building among partners differs from that among strangers. No matching effects are predicted for the trust game. Our experiment confirms the qualitative chain store prediction, but information externalities also show up in the trust game.
    Date: 2005–06–15
  6. By: Judith Chevalier; Austan Goolsbee
    Abstract: Popular wisdom holds that publishers revise college textbooks mainly to kill off the secondary market for used books. While this behavior might be profitable if consumers are myopic, uninformed or have high short-run discount rates (that exceed the publishers'), neoclassical authors have noted that it will typically not be profitable if publishers can precommit not to cut prices and if consumers are forward-looking and have similar discount rates as the publishers; the consumer's willingness to pay for new books falls if they know that they cannot resell their used books. Using a large new dataset on all textbooks sold in psychology, biology and economics in the 10 semesters from 1997 to 2001, we estimate a demand system for books to test whether textbook consumers are forward-looking. The data strongly support the view that students are forward-looking with low short-run discount rates and that they have rational expectations of publishers' revision behavior. When the students buy their textbooks, they correctly take into account the probability that they will not be able to resell their books at the end of the semester due to a new edition release. Conditional on faculty assignment behavior, simulation results suggest that students are sufficiently forward-looking that publishers could not raise revenues by accelerating current revision cycles.
    JEL: L2 L6 D9
    Date: 2005–06
  7. By: Daron Acemoglu; Simon Johnson; Todd Mitton
    Abstract: We study the determinants of vertical integration in a new dataset of over 750,000 firms from 93 countries. Existing evidence suggests the presence of large cross-country differences in the organization of firms, which may be related to differences in financial development, contracting costs or regulation. We find cross-country correlations between vertical integration on the one hand and financial development, contracting costs, and entry barriers on the other that are consistent with these "priors". Nevertheless, we also show that these correlations are almost entirely driven by industrial composition; countries with more limited financial development, higher contracting costs or greater entry barriers are concentrated in industries with a high propensity for vertical integration. Once we control for differences in industrial composition, none of these factors are correlated with average vertical integration. However, we also find a relatively robust differential effect of financial development across industries; countries with less-developed financial markets are significantly more integrated in industries that are more human capital or technology intensive.
    JEL: G30 G34 L22 L23
    Date: 2005–06
  8. By: Massimo A. De Francesco
    Abstract: Recent contributions have explored how lack of buyer mobility affects pricing. For example, Burdett, Shi, and Wright (2001) envisage a two-stage game where, once prices are set by the firms, the buyers play a static game by choosing independently which firm to visit. We incorporate imperfect mobility in a duopolistic pricing game where the buyers are involved into a multi-stage game. The firms are shown to have an incentive to give service priority to loyal customers. Under this rationing rule, equilibrium prices converge to their value under perfect buyer mobility as the number of stages of the buyer game increases
    Keywords: Bertrand competition, matching, imperfect mobility, sequential equilibrium, buyerloyalty
    JEL: D43 L13
    Date: 2004–11
  9. By: Cecile Aubert (Universite Paris Dauphine, Eurisco)
    Abstract: When agents caring for -- and thus insuring -- each other, contract with different principals, a common agency-type situation arises even with independent tasks. With public outcomes and sequential contracting, the first principal may be unable to induce effort in equilibrium.
    Keywords: Moral Hazard, Common Agency, Altruism
    JEL: D10 D64 D82
    Date: 2005–06–15
  10. By: R. Morris Coats (Nicholls State University); Gary M. Pecquet (Shenandoah University); Leon Taylor (Tulane University)
    Abstract: Alchian and Allen’s “third law of demand” states that as a fixed cost increases by the same amount for low- and high-quality goods, the ratio of the prices of high- to low-quality goods will fall and the quantity demanded of high quality goods relative to low quality goods will increase. We examine the more general hypothesis by estimating the ratio of the quantities of sales of premium to regular grade gasoline using the ratio of premium to regular prices, controlling for supply and demand factors. We find moderate evidence for the more general hypothesis.
    Keywords: Third Law of Demand, Price Ratios, Gasoline Grades
    JEL: D1 D2 D3 D4
    Date: 2005–06–18
  11. By: Lester M.K. Kwong (Department of Economics, Brock University)
    Abstract: This paper considers optimal auctions where individuals' valuations have both a private and common value component. We show that when the set of potential buyers and seller are symmetrically uninformed regarding the common value component, it may be socially optimal not to resolve this common uncertainty. Under the sufficient conditions provided to generate this outcome, efficiency will be restored in the optimal auction.
    Keywords: Auctions, Efficiency, Common value, Uncertainty
    JEL: D44 D82
    Date: 2005–01

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