nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒09‒11
twelve papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Market Power and Technological Bias: The Case of Electricity Generation By Paul Twomey; Karsten Neuhoff
  2. Tying and entry deterrence in vertically differentiated markets By Eugen Kovac
  3. Endogenous preemption on both sides of a market By Gueth,Werner; Mueller,Wieland; Potters,Jan
  4. Bootstrapping Hedonic Price Indices: Experience From Used Cars Data By Michael Beer
  5. Accessibility to R&D and Patent Production By Gråsjö, Urban
  6. The Economics of Shame: Evolutionary Dynamics for Large Populations in Games with Multiple Backward Induction Equilibria By Tomer Wexler
  7. Price elasticity estimates for tobacco and other addictive goods in India By Rijo M. John
  8. The impact of competition on unilateral incentives to innovate By Nadja Trhal
  9. Preferences Between Continuous Streams of Events By Charles M. Harvey; Lars Peter Østerdal
  10. Sequential vs. Single-Round Uniform-Price Auctions By Claudio Mezzetti; Aleksandar Pekec; Ilia Tsetlin
  11. Sunk Costs and Real Options in Antitrust By Pindyck, Robert S.
  12. How Do House Prices Affect Consumption? Evidence From Micro Data By John Y. Campbell; João F. Cocco

  1. By: Paul Twomey; Karsten Neuhoff
    Abstract: It is difficult to elminated all market power in electricity markets and it is therefore frequently suggested that some market power should be tolerated: extra revenues contribute to fixed cost recovery, facilitate investment and increase security of supply. This suggestion implicitly assumes all generation technologies benefit equally from market power. We assess a mixture of conventional and intermittent generation, eg coal plants and wind power. If all output is sold in the spot market, then intermittent generation benefits less from market power than conventional generation. Forward contracts or option contracts reduce the level of market power but bias against intermittent generators persists.
    Keywords: market power, technology choice, electricity markets, intermittent output, forward and option contracting
    JEL: D42 D43 L12 L13 Q42
    Date: 2005–08
  2. By: Eugen Kovac
    Abstract: This paper analyzes tying and bundling as an entry deterrence tool. It shows that a multi-product firm can defend its monopoly position in one market via tying even when it does not have market power in another market. This is shown on a model with two complementary goods, each of which is vertically differentiated and in which consumers’ preferences for the goods are positively correlated. Some possible ways of defending against entry deterrence, and implications for competition policy, are discussed.
    Keywords: Industrial organization, vertical differentiation, anti-trust policy, entry deterrence, foreclosure, tying, bundling.
    JEL: L11 L12 L13 L41
    Date: 2005–08
  3. By: Gueth,Werner; Mueller,Wieland; Potters,Jan (Tilburg University, Center for Economic Research)
    Abstract: We study a market in which both buyers and sellers can decide to preempt and set their quantities before market clearing. Will this lead to preemption on both sides of the market, only one side of the market, or to no preemption at all? We find that preemption tends to be asymmetric in the sense that it is restricted to only one side of the market (buyers or sellers).
    Keywords: preemption;endogenous timing
    JEL: C72 D43 L11
    Date: 2005
  4. By: Michael Beer (Department of Quantitative Economics)
    Abstract: Every hedonic price index is an estimate of an unknown economic parameter. It depends, in practice, on one or more random samples of prices and characteristics of a certain good. Bootstrap resampling methods provide a tool for quantifying estimation errors. Following some general reflections on hedonic elementary price indices, this paper proposes a case-based and a model-based bootstrap approach for estimating confidence intervals for hedonic price indices. Empirical results are obtained for a data set on used cars in Switzerland. A semi-logarithmic model is fit to monthly samples serving as the input to different index formulae. Finally, bootstrap confidence intervals are estimated for Jevons-type hedonic elementary price indices.
    Keywords: hedonic regression; hedonic price indices; bootstrap methods; confidence intervals; used cars
    JEL: C43 C15 E31 L62
    Date: 2005–07–22
  5. By: Gråsjö, Urban (Jönköping International Business School, Jönköping, Sweden and University of Trollhättan/Uddevalla.)
    Abstract: The main purpose in this paper is to study to what extent accessibility to R&D can explain patent production. Therefore a knowledge production function is estimated both on aggregated level and for different industrial sectors. The output of the knowledge production is the number patent applications in Swedish municipalities from 1994 to 1999. In order to account for the importance of proximity, the explanatory variables are expressed as accessibilities to university and company R&D. The total accessibility is then decomposed into local, intra-regional and inter-regional accessibility to R&D. As often is the case with R&D outputs, the regional distribution of patents is highly skewed with influential outliers. The estimations are therefore conducted with quantile regressions. The main results on aggregated level indicate that high accessibility (local) to company R&D has the greatest positive effects on patent production. The effects are statistically significant for municipalities with a patent production corresponding to the median and to quantiles above the median. Local accessibility to university R&D is only of importance for certain industrial sectors and not on aggregated level. There is also evidence that intra-regional accessibility to company R&D affects patent production positively. A conclusion is that concentrated R&D investments in companies situated in municipalities with a high patenting activity would not only gain the municipalities themselves, but also the patent production in other municipalities in the functional region.
    Keywords: innovations; patents; R&D; knowledge production functions
    JEL: C30 O31 O33 O34
    Date: 2005–08–12
  6. By: Tomer Wexler
    Abstract: This work follows “Evolutionary dynamics and backward induction” (Hart [2000]) in the study of dynamic models consisting of selection and mutation, when the mutation rate is low and the populations are large. Under the assumption that there is a single backward induction (or subgame perfect) equilibrium of a perfect information game, Hart [2000] proved that this point is the only stable state. In this work, we examine the case where there are multiple backward induction equilibria.
    Date: 2005–09
  7. By: Rijo M. John (Indira Gandhi Institute of Development Research)
    Abstract: The tax base of tobacco in India is found to be heavily depended on about fifteen percent of the tobacco users who represent cigarettes smokers. Non-cigarette tobacco products used by the majority of tobacco users are largely out of the tax net. Analysis of the price elasticity of various tobacco products would bring out the potential of tax as an instrument to control tobacco use of any kind. In this context, this paper examines how the demand for a variety of tobacco products and addictive goods such as pan and alcohol respond to changes in prices. The spatial variations of prices that are obtained from a cross section of 120,000 households spread across the country have been used for this purpose. Estimates of price elasticities showed that the own price elasticity estimates of various addictive goods in India ranged between -0.5 to -1.0 with bidis, leaf tobacco and alcohol having elasticities close to unity, cigarettes being the least price elastic of all. As against the general notions regarding the complementarity between cigarettes and alcohol, our study nds that these are substitutes at least in urban India. We also observed that, over a five year period, the addictive goods such as bidis and leaf tobacco in India have become slightly more price responsive while elasticity of cigarettes and pan have stabilized. With some assumptions, it is shown that taxes on cigarettes can be raised nearly 2.5 times the current level while that of bidis can be raised tenfold without any fall in revenue.
    Keywords: Tobacco, Bidi, Cigarette, Alcohol, Consumption, Elasticity, India
    JEL: C31 D12 H21 I18 R22
    Date: 2005–08
  8. By: Nadja Trhal
    Abstract: We investigate the impact of the degree of competition in a Cournot market on one firm's unilateral incentives to invest in R&D. Applying comparative static analyses we get different predictions depending on the magnitude of the innovation efficiency parameter alpha. Even inner solutions arose. For alpha->1 the comparative statics predicate that incentives to invest in R&D are strongest in a monopoly whereas for smaller alpha the optimal market structure for unilateral innovation varies depending on the cost level.
    Keywords: innovation incentives; market structure; Cournot competition
    JEL: D4 L1 O31
    Date: 2005–08–29
  9. By: Charles M. Harvey (Department of Decision and Information Sciences, University of Houston); Lars Peter Østerdal (Department of Economics, University of Copenhagen)
    Abstract: Cost-benefit and health policy studies often model a consequence occurring over time as a continuous stream of events. Such a consequence is measured by the rates at which events occur or by the states that occur, and the value of the consequence is measured by an integral. This paper presents a foundation for such models. It defines conditions on preferences between consequences that are equivalent to an integral value function having a discounting function and an intertemporal equity function.
    Keywords: discounting; equity; continuous time; value function; evaluation
    JEL: D90 H43 I31
    Date: 2005–08
  10. By: Claudio Mezzetti; Aleksandar Pekec; Ilia Tsetlin
    Abstract: We study sequential and single-round uniform-price auctions with affiliated values. We derive symmetric equilibrium for the auction in which k1 objects are sold in the first round and k2 in the second round, with and without revelation of the first-round winning bids. We demonstrate that auctioning objects in sequence generates a lowballing effect that reduces first-round revenue. Thus, revenue is greater in a single-round, uniform auction for k = k1 + k2 objects than in a sequential uniform auction with no bid announcement. When the first-round winning bids are announced, we also identify two informational effects: a positive effect on second-round price and an ambiguous effect on first-round price. The expected first-round price can be greater or smaller than with no bid announcement, and greater or smaller than the expected price in a single-round uniform auction. As a result, total expected revenue in a sequential uniform auction with winning- bids announcement can be greater or smaller than in a single-round uniform auction.
    Keywords: Multi-Unit Auctions; Sequential Auctions; Uniform-Price Auction; Affiliated Values; Information Revelation
    JEL: D44 D82
    Date: 2005–08
  11. By: Pindyck, Robert S.
    Abstract: Sunk costs play a central role in antitrust economics, but are often misunderstood and mismeasured. I will try to clarify some of the conceptual and empirical issues related to sunk costs, and explain their implications for antitrust analysis. I will be particularly concerned with the role of uncertainty. When market conditions evolve unpredictably (as they almost always do), firms incur an opportunity cost when they invest in new capital, because they give up the option to wait for the arrival of new information about the likely returns from the investment. This option value is a sunk cost, and is just as relevant for antitrust analysis as the direct cost of a machine or a factory.
    Keywords: Sunk costs, real options, investment decisions, antitrust, entry barriers, market power, mergers,
    Date: 2005–07–29
  12. By: John Y. Campbell; João F. Cocco
    Abstract: Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households' consumption decisions. Rising house prices may stimulate consumption by increasing households' perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters. This finding is consistent with heterogeneity in the wealth effect across these groups. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions.
    JEL: D1 G1
    Date: 2005–08

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