nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒07‒18
eight papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Robust Monopoly Pricing: The Case of Regret By Dirk Bergemann; Karl Schlag
  2. Advertising on TV: Under- or Overprovision? By Kind, Hans Jarle; Nilssen, Tore; Sørgard, Lars
  3. Denial of Death and Economic Behavior By Wojciech Kopczuk; Joel Slemrod
  4. Social Learning in Market Games By Carlo Altavilla; Luigi Luini; Patrizia Sbriglia
  5. Modeling the effect of Consumer Utility through Personalized Services and Compensating Variance through Greater Product Variety on Increased Spending in Online Advertisements By Avimanyu Datta; Rwitankar Coondoo
  6. Endogenous Timing in a Mixed Triopoly with a Foreign Competitor By Yuanzhu Lu
  7. Pushing the Prize Up, A Few Notes on Al-Qaeda's Reward Structure and the choice of Casualties By Raul Caruso; Andrea Locatelli
  8. R&D investment, Credit Rationing and Sample Selection By Gianfranco Atzeni; Claudio Piga

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Karl Schlag (European University Institute)
    Abstract: We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. The robust version of the problem is distinct in two aspects: (i) the seller minimizes regret rather than maximizes revenue, and (ii) the seller only knows that the true distribution of the valuations is in a neighborhood of a given model distribution. We characterize the robust pricing policy as the solution to a minimax problem for small and large neighborhoods. In contrast to the classic monopoly policy, which is a single deterministic price, the robust policy is always a random pricing policy, or equivalently, a multi-item menu policy. The responsiveness of the robust policy to an increase in risk is determined by the curvature of the static profit function.
    Keywords: Monopoly, Optimal Pricing, Regret, Robustness
    JEL: C79 D82
    Date: 2005–07
  2. By: Kind, Hans Jarle (Norwegian School of Economics and Business Administration); Nilssen, Tore (Dept. of Economics, University of Oslo); Sørgard, Lars (Norwegian Competition Authority)
    Abstract: We consider a model where TV channels transmit advertising, and viewers dislike such commercials. We find that the less differentiated the TV channels’ programs are, the lower is the amount of advertising in equilibrium. Relative to the social optimum, there is underprovision of advertising if TV channels are sufficiently close substitutes. In such a situation, a merger between TV channels may lead to more advertising and thus improve welfare. A publicly owned TV channel can partly correct market distortions, in some cases by having a larger amount of advertising than a private TV channel. It may actually have advertising even in cases where it is wasteful per se
    Keywords: Television industry; Advertising; Public policy; Mixed oligopoly
    JEL: L82 M37
    Date: 2005–05–22
  3. By: Wojciech Kopczuk; Joel Slemrod
    Abstract: We model denial of death and its effect on economic behavior. Attempts to reduce death anxiety and the possibility of denial of mortality-relevant information interact with intertemporal choices and may lead to time-inconsistent behavior and other %u201Cbehavioral%u201D phenomena. In the model, repression of signals of mortality leads to underconsumption for unsophisticated individuals, but forward-sophisticated individuals may over-consume in anticipation of future denial and may seek ways to commit to act according to one%u2019s mortality prospects as currently perceived. We show that the mere possibility of engaging in this kind of denial leads to time-inconsistent but efficient behavior. Refusal to face up to the reality of death may help explain a wide range of empirical phenomena, including the underutilization of tax-advanced inter vivos gifts and inadequate purchase of life insurance.
    JEL: D11 D81 D91
    Date: 2005–07
  4. By: Carlo Altavilla; Luigi Luini; Patrizia Sbriglia
    Abstract: The aim of our experiments is to test the effect of different information settings on firms’ behaviour in duopoly price and quantity games. We find that, when players have full information on their rivals’ choices, the imitation rule prevails and such learning behaviour induces more competitive outcomes in the Cournot market designs. By the same token, when information on the average industrial profit is provided, there is evidence of an increase in cooperation, and the majority of players experiment with new strategies when their payoff falls below the average profit (F. Palomino and F. Vega-Redondo, 1999; H. Dixon, 2000)
    Keywords: Learning, Cournot and Bertrand experiments
    JEL: D83 C91
    Date: 2005–05
  5. By: Avimanyu Datta (ICFAI Business School Research Center, Calcutta); Rwitankar Coondoo (ICFAI Business School Research Center, Calcutta)
    Abstract: Extending and combining concepts from consumer surplus of product availability and personalization strategies under privacy concern we made a model to comprehend and justify the reasons for the increase in the spending on online advertisements. We inductively found that with higher capability to sell increased product variety online and with high consumer utility from personalized services, investment in online advertisement will rise with a greater exponential slope and reach the saturation point much later than with lower levels of consumer utility and product variety. First, we linked online advertisement with technology adoption, by using decision-theoretic model to understand the probabilistic outcomes of when a firm decides to wait and observe and when it decides to adopt. Then we tried to comprehend the implications of consumer utility through personalized services and the compensating variance through increased product variety. Considering, that Internet adoption like most technology adoption will follow an S-curve we inductively concluded, along with attached evidences, that spending in online advertisements will follow the same path. The slope, inflection point and the saturation point of the curve will depend on the ability to increase consumer utility through personalization and the consumer variance with increased product variety. Combining the concepts we also stated that a firm is more likely to adopt online advertisement as a media for marketing if these two features are optimized.
    Keywords: Technology adoption, Bayesian function, Online Advertisement, Advertising channels, personalization, consumer surplus, compensating variance, Internet adoption, S-curve
    JEL: C6 D5 D9
    Date: 2005–07–10
  6. By: Yuanzhu Lu (National University of Singapore)
    Abstract: Endogenous order of moves is analyzed in a mixed triopoly with one public firm, one domestic private firm and one foreign private firm. The public firm produces most inefficiently, the foreign private firm produces most efficiently, and the efficiency of the domestic private firm is in between. We consider the observable delay game of Hamilton and Slutsky (1990) in the context of a quantity setting mixed triopoly where firms first choose the timing of choosing their quantities before quantity choice and find subgame perfect Nash equilibria (SPNE). The main result is that the public firm chooses to produce in the last period while the domestic private firm chooses to produce in any period except the last one in such a mixed triopoly, provided that efficiency differential between domestic and foreign private firm is not big.
    Keywords: Mixed Oligopoly; Endogenous Timing; Foreign Competitor; Simultaneous; Sequential; Efficiency Differential
    JEL: C72 D43 H42 L13
    Date: 2005–07–12
  7. By: Raul Caruso (Università Cattolica del Sacro Cuore); Andrea Locatelli (Università Cattolica del Sacro Cuore)
    Abstract: The article aims at suggesting possible conjectures on Al-Qaeda's logic and structure. Even if the organization's secrecy makes any empirical evidence difficult to find, some insight can be provided by economic theory of contests: in this terms, Al-Qaeda can be acknowledged like an agent rewarding a prize (membership) to its clients (cells and would-be cells). Although this principle makes the organization hardly visible and virtually impenetrable, we contend that in the long term such a logic is non-sustainable
    Keywords: Conflict, Al Qaeda, Terrorism, microeconomic theory, prize, contest
    JEL: D7 D74
    Date: 2005–07–12
  8. By: Gianfranco Atzeni (University of Sassari); Claudio Piga (Dept of Economics univ. of Loughborough)
    Abstract: We study whether R&D-intensive firms are liquidity-constrained, by also modeling their antecedent decision to apply for credit. This sample selection issue is relevant when studying a borrower-lender relationship, as the same factors can influence the decisions of both parties. We find firms with no or low R&D intensity to be less likely to request extra funds. When they do, we observe a higher probability of being denied credit. Such a relationship is not supported by evidence from the R&D-intensive firms. Thus, our findings lend support to the notion of credit constraints being severe only for a sub-sample of innovative firms. Furthermore, the results suggest that the way in which the R&D activity is organized may differentially affect a firms’ probability of being credit-constrained.
    Keywords: Bivariate Probit; Innovation; selectivity; in-house R&D.
    JEL: D45 G21 G32 E51
    Date: 2005–06

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