nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒10‒04
nineteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Succession Rules and Leadership Rents By Kai A. Konrad; Stergios Skaperdas
  2. Gatekeeping in Health Care By Kurt R. Brekke; Robert Nuscheler; Odd Rune Straume
  3. Structural Separation and Access in Telecommunications Markets By Paul de Bijl
  4. Innovation in Enterprise Clusters:Evidence from Dutch Manufacturing By Bert Diederen; Pierre Mohnen; Franz Palm; Wladimir Raymond; Sybrand Schim van der Loeff
  5. Participation Games: Market Entry, Coordination and the Beautiful Blonde By Anderson, Simon P; Engers, Maxim
  6. Vertical Integration and Technology: Theory and Evidence By Acemoglu, Daron; Aghion, Philippe; Griffith, Rachel; Zilibotti, Fabrizio
  7. Perfect Competition in a Bilateral Monopoly (In honor of Martin Shubik) By Pradeep Dubey; Dieter Sondermann
  8. Can Rivalry Increase Price? By Christian Roessler
  9. Stylised features of price setting behaviour in Portugal: 1992 - 2001 By Mónica Dias; Daniel Dias; Pedro D. Neves
  10. The pricing behaviour of Italian firms: new survey evidence on price stickiness By Silvia Fabiani; Angela Gattulli; Roberto Sabbatini
  11. Firms’ investment decisions in response to demand and price uncertainty. By Catherine Fuss; Philip Vermeulen
  12. An empirical analysis of price setting behaviour in the Netherlands in the period 1998-2003 using micro data By Nicole Jonker; Carsten Folkertsma; Harry Blijenberg
  13. Price setting behaviour in Spain: stylised facts using consumer price micro data By Luis J. Álvarez; Ignacio Hernando
  14. Consumer price behaviour in Italy - evidence from micro CPI data By Giovanni Veronese; Silvia Fabiani; Roberto Sabbatini
  15. Do decreasing hazard functions for price changes make any sense? By Luis J. Álvarez; Pablo Burriel; Ignacio Hernando
  16. Time-dependent versus state-dependent pricing - a panel data approach to the determinants of Belgian consumer price changes By Luc Aucremanne; Emmanuel Dhyne
  17. Price setting behaviour in Spain: evidence from micro PPI data. By Luis J. Álvarez; Pablo Burriel; Ignacio Hernando
  18. How frequently do consumer prices change in Austria? Evidence from micro CPI data. By Josef Baumgartner; Ernst Glatzer; Fabio Rumler; Alfred Stiglbauer
  19. Price setting in the euro area: some stylized facts from individual consumer price data. By Emmanuel Dhyne; Luis J. Álvarez; Hervé Le Bihan; Giovanni Veronese; Daniel Dias; Johannes Hoffmann; Nicole Jonker; Patrick Lünnemann; Fabio Rumler; Jouko Vilmunen

  1. By: Kai A. Konrad; Stergios Skaperdas
    Abstract: Leaders compensate supporters not just for performing their duties but also in order to preempt an overthrow by the same supporters. We show how succession rules affect the power of leaders relative to supporters as well as the resources expended on possible succession struggles. We compare two regimes of leadership succession: the conclave regime and the divide-et-impera regime which differ with respect to the role of supporters of the previous leader once the new leader takes power. The leadership rent is higher and supporters receive a lower compensation in the divide-et-impera regime, as supporters have to fight harder for succession to avoid the grim outcome of loss. A leader, then, would like to induce the divide-et-impera regime even when every supporter has veto power over his leadership.
    Keywords: political leadership, political support, political survival, successorship
    JEL: D72 D74 H50 N40
    Date: 2005
  2. By: Kurt R. Brekke; Robert Nuscheler; Odd Rune Straume
    Abstract: We study the competitive effects of restricting direct access to secondary care by gatekeeping, focusing on the informational role of general practitioners (GPs). In the secondary care market there are two hospitals choosing quality and specialisation. Patients, who are ex ante uninformed, can consult a GP to receive an (imperfect) diagnosis and obtain information about the secondary care market. We show that hospital competition is amplified by higher GP attendance but dampened by improved diagnosing accuracy. Therefore, compulsory gatekeeping may result in excessive quality competition and too much specialisation, unless the mismatch costs and the diagnosing accuracy are sufficiently high. Second-best price regulation makes direct regulation of GP consultation redundant, but will generally not implement first-best.
    Keywords: gatekeeping, imperfect information, quality competition, product differentiation, price regulation
    JEL: D82 I11 I18 L13
    Date: 2005
  3. By: Paul de Bijl
    Abstract: This paper presents a basic framework to assess whether structural (vertical) separation is desirable. It is discussed within the setting of fixed telecommunications markets. From an economist’s perspective, the key question that underlies the case for structural separation is: is there a persistent bottleneck? The obvious candidate is the ‘local loop’, or local access network. If yes then it makes sense to compare the costs and benefits of structural separation. The framework provides a set of options that the regulator can use strategically, by using the threat of a break-up to influence an incumbent’s competitive stance in the wholesale market.
    JEL: L12 L40 L51 L96
    Date: 2005
  4. By: Bert Diederen; Pierre Mohnen; Franz Palm; Wladimir Raymond; Sybrand Schim van der Loeff
    Abstract: This paper explores the aggregation problem and illustrates its relevance using data for the Netherlands from the third Community Innovation Survey (CIS3), and production and financial statistics. It compares the results of an innovation output equation that was estimated using data on enterprises (bedrijfseenheid), domestic enterprise clusters (onderneming), and those enterprise clusters with foreign inward or outward investments. <P>Cette étude aborde et illustre un problème d’agrégation qui peut se poser dans les études d’innovation. Les données utilisées sont celles de la troisième enquête innovation aux Pays-Bas, qui sont jumelées aux statistiques de la production et aux données financières des sociétés. Nous comparons les résultats de l’estimation d’une équation d’innovation, obtenus tour à tour à partir de données au niveau des entreprises (bedrijfseenheid), des grappes d’entreprises domestiques (onderneming), et des grappes d’entreprises ayant des filiales à l’étranger ou contenant des filiales de firmes étrangères installées aux Pays-Bas.
    Keywords: innovation, aggregation, innovation, agrégation
    JEL: D21 O33 O52
    Date: 2005–09–01
  5. By: Anderson, Simon P; Engers, Maxim
    Abstract: We find the Nash equilibria for monotone n-player symmetric games where each player chooses whether to participate. Examples include market entry games, coordination games, and the bar-room game depicted in the movie 'A Beautiful Mind'. The symmetric Nash equilibrium involves excessive participation (a common property resource problem) if participants’ payoffs are decreasing (in the number of participants), and insufficient participation if payoffs are increasing. With decreasing payoffs there can be many equilibria, but with increasing payoffs there are only three. Some comparative static properties of changing one player’s participation payoffs are counter-intuitive, especially with more than two players.
    Keywords: common property resource problem; comparative statics; coordination; market entry; mixed strategy equilibrium; Nash equilibrium
    JEL: C72 D43 L13
    Date: 2005–09
  6. By: Acemoglu, Daron; Aghion, Philippe; Griffith, Rachel; Zilibotti, Fabrizio
    Abstract: This paper investigates the determinants of vertical integration. We first derive a number of predictions regarding the relationship between technology intensity and vertical integration from a simple incomplete contracts model. Then, we investigate these predictions using plant-level data for the UK manufacturing sector. Most importantly, and consistent with theory, we find that the technology intensities of downstream (producer) and upstream (supplier) industries have opposite effects on the likelihood of vertical integration. Also consistent with theory, both these effects are stronger when the supplying industry accounts for a large fraction of the producer's costs. These results are generally robust and hold with alternative measures of technology intensity, with alternative estimation strategies, and with or without controlling for a number of firm and industry-level characteristics.
    Keywords: hold-up; incomplete contracts; internal organisation of the firm; investment; R&D; residual rights of control; technology; UK manufacturing; vertical integration
    JEL: L22 L23 L24
    Date: 2005–09
  7. By: Pradeep Dubey (Center for Game Theory, Dept. of Economics, SUNY at Stony Brook and Cowles Foundation, Yale University); Dieter Sondermann (Department of Economics, University of Bonn, Bonn)
    Abstract: We show that if limit orders are required to vary smoothly, then strategic (Nash) equilibria of the double auction mechanism yield competitive (Walras) allocations. It is not necessary to have competitors on any side of any market: smooth trading is a substitute for price wars. In particular, Nash equilibria are Walrasian even in a bilateral monopoly.
    Keywords: Limit orders, double auction, Nash equilibria, Walras equilibria, perfect competition, bilateral monopoly, mechanism design
    JEL: C72 D41 D42 D44 D61
    Date: 2005–09
  8. By: Christian Roessler (University of Melbourne)
    Abstract: Spatially differentiated duopolists set higher-than-monopoly prices at some distances. This is proven in a space of arbitrary dimensionality. But the maximal equilibrium price which may occur in a given space converges to the monopoly price as dimensionality increases. If consumers care about sufficiently many features of the product, monopoly nearly leads to an extreme price and is nearly least efficient.
    Keywords: multidimensional product spaces, duopoly pricing, spatial competition
    JEL: C72 D40 D43 L11 L13
    Date: 2005–09–26
  9. By: Mónica Dias (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal); Daniel Dias (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal); Pedro D. Neves (Banco do Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal; Universidade Católica Portuguesa, Lisbon.)
    Abstract: This paper identifies the empirical stylized features of price setting behaviour in Portugal using the micro-datasets underlying the consumer and the producer price indexes. The main conclusions are the following: 1 in every 4 prices change each month; there is a considerable degree of heterogeneity in price setting practices; consumer prices of goods change more often than consumer prices of services; producer prices of consumption goods vary more often than producer prices of intermediate goods; for comparable commodities, consumer prices change more often than producer prices; price reductions are common, as they account for around 40 per cent of total price changes; price changes are, in general, sizeable; finally, the price setting patterns at the consumer level seem to depend on the level of inflation as well as on the type of outlet.
    Keywords: Price setting; Consumer prices; Producer prices; Frequency of price changes.
    JEL: E31 E32 L11
    Date: 2004–04
  10. By: Silvia Fabiani (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy); Angela Gattulli (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy); Roberto Sabbatini (Research Department, Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy)
    Abstract: This study examines price setting behaviour of Italian firms on the basis of the results of a survey conducted by Banca d’Italia in early 2003 on a sample of around 350 firms belonging to all economic sectors. Prices are mostly fixed following standard mark-up rules, although customer-specific characteristics have a role, in particular in manufacturing and services where price discrimination across customers matters. Rival prices mostly affect pricesetting strategies in industrial firms. In reviewing their prices, firms follow either state-dependent rules or a combination of time and state-dependent ones. Concerning the frequency of price adjustments, a considerable degree of stickiness emerges both at the stage in which firms evaluate their pricing strategies and the stage in which they actually implement the price change. In 2002 most firms changed their price only once. Three alternative explanations of nominal rigidity are ranked highest by the firms interviewed: explicit contracts, tacit collusive behaviour and the perception of the temporary nature of the shock. Prices respond asymmetrically to shocks, depending on the direction of the adjustment (positive vs negative) and the source of the shock (demand vs supply). Real rigidities – captured by the degree of market competition, customers’ search costs, the sensitivity of profits to changes in demand – play an important role in determining this asymmetry. Moreover, whereas cost shocks impact more when prices have to be raised than when they have to be reduced, demand decreases are more likely to induce a price change than demand increases.
    Keywords: Nominal rigidity; real rigidity; Price-setting; Inflation persistence; Survey data.
    JEL: E30 D40
    Date: 2004–04
  11. By: Catherine Fuss (National Bank of Belgium, bd. de Berlaimont 14, 1000 Bruxelles, Belgium.); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany.)
    Abstract: We estimate the effect of demand and price uncertainty on firms’ investment decisions from a panel of manufacturing firms. Uncertainty measures are derived from firms’ subjective qualitative expectations. They are close to their theoretical counterparts, the variances of future demand and price shocks. We find that demand uncertainty depresses planned and realized investment, while price uncertainty is insignificant. This is consistent with the behavior of monopolistic firms with irreversible capital Caballero, 1991). Further, firms revise their investment plans very little. They may do so in response to new information on sales growth, but not as a result of reduced uncertainty.
    Keywords: investment; uncertainty; real options; survey data; panel data.
    JEL: D21 D24 D81 D92 C23
    Date: 2004–04
  12. By: Nicole Jonker (Corresponding author: De Nederlandsche Bank, Payments Policy Department , P.O. Box 98, 1000 AB Amsterdam,The Netherlands.); Carsten Folkertsma (De Nederlandsche Bank, Research Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Harry Blijenberg (Statistics Netherlands, P.O. Box 4000, 2270 JM Voorburg,The Netherlands.)
    Abstract: In this paper we examine pricing behaviour of retail firms in the Netherlands during 1998-2003 using a large database with monthly price quotes of 49 articles, representing different product types. We have conducted this study in order to gain in sight in the degree of nominal rigidity of consumer prices in the Netherlands. We find that prices of energy and unprocessed food are most flexible, whereas prices of services are stickiest. A multivariate analysis shows that firm size matters with prices being stickiest in small firms and most flexible in large firms and in retail firms consisting of the owners only. Furthermore, we investigate pass-through effects of VAT changes in prices. We find that VAT increases are almost completely passed on to consumers. Finally, there is some evidence indicating that pricing behaviour of retail firms was different during the introduction of the euro than in the period directly preceding it.
    Keywords: Nominal rigidity of prices; frequency of price change; Cox regression.
    JEL: E31 D49 C41
    Date: 2004–11
  13. By: Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain.)
    Abstract: This paper identifies the basic features of the price setting mechanism in the Spanish economy, using a large dataset that contains over 1.1 million price records and covers around 70% of the expenditure on the CPI basket. In particular, the paper identifies differences in the frequency and size of price adjustments across types of products and explores how these general features are affected by certain specific factors: seasonality, the level of inflation, changes in indirect taxation and the practice of using psychological and round prices. We find that prices do not change often but do so by a large amount, although there is a marked heterogeneity across products. Moreover, the high frequency of price reductions suggests that there is no strong downward rigidity. Our evidence also supports the use of time and state-dependent pricing strategies.
    Keywords: Price setting; consumer prices; frequency of price changes.
    JEL: E31 D40 C25
    Date: 2004–11
  14. By: Giovanni Veronese (Corresponding author: Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.); Silvia Fabiani (Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.); Roberto Sabbatini (Bank of Italy, Economic Research Department, Via Nazionale 91, 00184 Roma, Italy.)
    Abstract: This paper investigates the behaviour of consumer prices in Italy by looking at micro data in the attempt to obtain a quantitative measure of the unconditional degree of price rigidity in the Italian economy. The analysis focuses on the monthly frequency of price changes and on the duration of price spells, also with reference to different types of products and outlets. Prices tend to remain unchanged on average for around 10 months; duration is longer for nonenergy industrial goods and services and much shorter for energy products. Price changes are more frequent upward than downward, in larger stores than in traditional ones. When the geographical location of outlets is accounted for, price changes display considerable synchronisation, in particular in the service sector.
    Keywords: Consumer prices; nominal rigidity; frequency of price change.
    JEL: D21 D40 E31
    Date: 2005–03
  15. By: Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain); Pablo Burriel (Banco de España, Alcalá 48, 28014 Madrid, Spain); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain)
    Abstract: A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. Here a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process.
    Keywords: Hazard function; price setting models; heterogeneous agents; mixture models..
    JEL: C40 D40 E30
    Date: 2005–03
  16. By: Luc Aucremanne (Research Department, National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium); Emmanuel Dhyne (Research Department, National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium and and UMH, Centre de Recherche Warocqué)
    Abstract: Using Logistic Normal regressions, we model the price-setting behaviour for a large sample of Belgian consumer prices over the January 1989 - January 2001 period. Our results indicate that time-dependent features are very important, particularly an infinite mixture of Calvo pricing rules and truncation at specific horizons. Truncation is mainly a characteristic of pricing in the service sector where it mostly takes the form of annual Taylor contracts typically renewed at the end of December. Several other variables, including some that can be considered as state variables, are also found to be statistically significant. This is particularly so for accumulated sectoral inflation since the last price change. Once heterogeneity and the role of accumulated inflation are acknowledged, hazard functions become mildly upward-sloping, even in a low inflation regime. The contribution of the state-dependent variables to the pseudo-R2 of our equations is, however, not particularly important.
    Keywords: Consumer prices; time-dependent pricing; state-dependent pricing; Calvo model; Truncated Calvo model; Taylor contracts.
    JEL: C23 C25 D40 E31
    Date: 2005–03
  17. By: Luis J. Álvarez (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Pablo Burriel (Banco de España, Alcalá 48, 28014 Madrid, Spain.); Ignacio Hernando (Banco de España, Alcalá 48, 28014 Madrid, Spain.)
    Abstract: This paper identifies the basic features of price setting behaviour at the producer level in the Spanish economy using a large dataset containing the micro data underlying the construction of the PPI over the period 1991-1999. It explores how these general features are affected by some specific factors (cost structure, degree of competition, demand conditions, government intervention, level of inflation, seasonality, and the practice of using attractive prices) and presents a comparison of price setting practices at the producer and at the consumer level to ascertain whether the retail sector augments or mitigates price stickiness. We find that prices do not change often but do so by a large amount. The cost structure, proxied by the labour share and the relevance of raw materials, and the degree of competition, proxied by import penetration, affect price flexibility. We also find some evidence that producer prices are more flexible than consumer prices.
    Keywords: Price setting; producer prices; frequency of price changes.
    JEL: E31 D40
    Date: 2005–09
  18. By: Josef Baumgartner (Austrian Institute of Economic Research (WIFO), P.O. Box 91, 1103 Vienna, Austria.); Ernst Glatzer (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.); Fabio Rumler (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.); Alfred Stiglbauer (Oesterreichische Nationalbank, Otto Wagner Platz 3, P.O. Box 61, 1010 Vienna,Austria.)
    Abstract: Based on individual price records collected for the computation of the Austrian CPI, average frequencies of price changes and durations of price spells are estimated to characterize price setting in Austria. Depending on the estimation method, prices are unchanged for 10 to 14 months on average. We find strong heterogeneity across sectors and products. Price increases occur only slightly more often than price decreases. The typical size of a price increase (decrease) is 11 (15) percent. The aggregate hazard function of prices is decreasing with time. Besides heterogeneity across products and price setters, this is due to oversampling of products with a high frequency of price changes. Accounting for unobserved heterogeneity in estimating the probability of a price change with a fixed-effects logit model, we find a positive effect of the duration of a price spell. During the Euro cash changeover the probability of price changes was higher.
    Keywords: Consumer prices; sticky prices; frequency and synchronization of price changes; duration of price spells.
    JEL: C41 D21 E31 L11
    Date: 2005–09
  19. By: Emmanuel Dhyne (Banque Nationale de Belgique, Berlaimont 14, B-1000 Bruxelles.); Luis J. Álvarez; Hervé Le Bihan; Giovanni Veronese; Daniel Dias; Johannes Hoffmann; Nicole Jonker; Patrick Lünnemann; Fabio Rumler; Jouko Vilmunen
    Abstract: This paper documents patterns of price setting at the retail level in the euro area, summarized in six stylized facts. First, the average euro area monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross product heterogeneity - prices of oil and unprocessed food products change very often, while price adjustments are less frequent for processed food, non energy industrial goods and services. Third, cross country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across retailers. Moreover, the frequency of price changes in the euro area is related to several factors, such as seasonality, outlet type, indirect taxation, pricing practices as well as aggregate or product specific inflation.
    Keywords: Pricesetting; consumer price; frequency of price change.
    JEL: E31 D40 C25
    Date: 2005–09

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