nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒11‒19
24 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Unexploited Connections Between Intra- and Inter-temporal Allocation By Thomas F. Crossley; Hamish W. Low
  2. Vertical Integration, Collusion Downstream, and Partial Market Foreclosure By Pedro Mendi;
  3. Advertising, Pricing & Market Structure in Competitive Matching Markets By Edner Bataille; Benoit Julien
  4. Two at the Top: Quality Differentiation in Markets with Switching Costs By Thomas Gehrig; Rune Stenbacka
  5. Advertising and Price Signaling of Quality in a Duopoly with Endogenous Locations By Philippe Bontems; Valérie Meunier
  6. Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets By Xavier Gabaix; David Laibson
  7. Constrained Pricing of Monopolies with Endogenous Participation By Eugenio Miravete; Gabriel Basaluzzo
  8. Financing of Media Firms: Does Competition Matter? By Hans Jarle Kind; Tore Nilssen; Lars Sørgard
  9. Pricing Discretion and Price Regulation in Competitive Industries By Alberto Iozzi; Roberta Sestini
  10. Recent Developments in the Economics of Price Discrimination By Mark Armstrong
  12. Competition Policy and Innovation By Peter Møllgaard; Jo Lorentzen
  13. Self-)Regulation of a Natural Monopoly via Complementary Goods - the Case of F/OSS Business Models By Markus Pasche
  15. Switching Costs, Firm Size, and Market Structure By Simon Loertscher; Yves Schneider
  16. Dominant Firms, Barriers to Entry Capital and Entry Dynamics By Willi Semmler; Mika Kato
  17. The Economics of Fairness, Reciprocity and Altruism – Experimental Evidence and New Theories By Ernst Fehr; Klaus M. Schmidt
  19. A bargaining model for finite n-person multi-criteria games By Luisa Monroy; Amparo M. Mármol; Victoriana Rubiales
  20. Information Exchange, Market Transparency and Dynamic Oligopoly By Per Baltzer Overgaard; Peter Møllgaard
  21. Linking Strategic Interaction and Bargaining Theory. The Harsanyi - Schelling Debate on the Axiom of Symmetry By Alessandro Innocenti
  22. Antitrust Analysis for the Internet Upstream Market: a BGP Approach By Alessio D’Ignazio; Emanuele Giovannetti
  23. Precio del agua y relocalización del recurso en la economía andaluza. Una aproximación desde un modelo de equilibrio general aplicado By M. Alejandro Cardenete; G.J.D. Hewings; E. Velázquez
  24. Banks and Innovation: Microeconometric Evidence on Italian Firms By Luigi Benfratello; Fabio Schiantarelli; Alessandro Sembenelli

  1. By: Thomas F. Crossley; Hamish W. Low
    Abstract: This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.
    Keywords: elasticity of intertemporal substitution, Euler equation estimation, demand systems
    JEL: D91 E21 D12
    Date: 2005–09
  2. By: Pedro Mendi (Facultad de Ciencias Económicas y Empresariales Universidad de Navarra);
    Abstract: This paper proposes a model where an upstream monopolist sells an input to a downstream industry, which may alternatively acquire a perfect substitute for the monopolist's input from a competitive industry. By vertically integrating with a downstream firm, the upstream monopolist may charge a wholesale price above marginal cost, even if the competitive industry is as efficient as the monopolist. This result was not obtained under vertical separation. Furthermore, provided that the number of downstream firms is not too high, the range of values of the discount factor that sustain the monopoly price in the downstream market is enlarged by the introduction of the marked-up wholesale price.
    JEL: L42 L12
    Date: 2005–11
  3. By: Edner Bataille (California State University-Bakersfield); Benoit Julien (Australian Graduate School of Management, University of New South Wales)
    Abstract: This paper develops a model of pricing and advertising in a matching environment with capacity constrained sellers. Sellers' expenditure on directly informative advertising attracts consumers only probabilistically. Consumers who happen to observe advertisements randomize over the advertised sellers using symmetric mixed strategies. Equilibrium prices and profit maximizing advertising levels are derived and their properties analyzed, including the interplay of prices and advertising with the market structure. The model generates a unimodal (inverted U-shape) relationship between both, individual and industry advertising level, and market structure. The relationship results from a trade off between a price effect and a market structure-matching effect. We find that the decentralized market has underprovision of advertising, both for individual sellers and industry wide, and that entry is excessive relative to the efficient level. We present a quantitative analysis to highlight properties of the models and to demonstrate the extent of inefficiency.
    Keywords: Advertising, pricing, market structure, endogenous matching, asymmetric information, efficiency.
    JEL: B21 C72 C78 D40 D43 D61 D83 J41 L11 M37
    Date: 2005–11–15
  4. By: Thomas Gehrig (Universität Freiburg); Rune Stenbacka (Swedish School of Economics, Helsinki)
    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: quality choice; switching costs; poaching; natural oligopoly
    JEL: D43 L15
    Date: 2005–10
  5. By: Philippe Bontems (Université des Sciences Sociales de Toulouse); Valérie Meunier (University of Aarhus)
    Abstract: We analyze a two-sender quality-signaling game in a duopoly model where goods are horizontally and vertically dierentiated. While locations are chosen under quality uncertainty, firms choose prices and advertising expenditures being privately informed about their types. We show that pure price separation is impossible, and that dissipative advertising is necessary to ensure existence of separating equilibria. Equilibrium refinements discard all pooling equilibria and select a unique separating equilibrium. When vertical differentiation is not too high, horizontal differentiation is maximum, the high-quality firm advertises, and both firms adopt prices that are distorted upwards (compared to the symmetric-information benchmark). When vertical differentiation is high, firms choose identical locations and ex post, only the high-quality firm obtains positive profits. Incomplete information and the subsequent signaling activity are shown to increase the set of parameters values for which maximum horizontal differentiation occurs.
    Keywords: advertising; location choice; quality; incomplete information; multi-sender signaling game
    JEL: D43 L15
    Date: 2005–11
  6. By: Xavier Gabaix; David Laibson
    Abstract: Bayesian consumers infer that hidden add-on prices (e.g. the cost of ink for a printer) are likely to be high prices. If consumers are Bayesian, firms will not shroud information in equilibrium. However, shrouding may occur in an economy with some myopic (or unaware) consumers. Such shrouding creates an inefficiency, which firms may have an incentive to eliminate by educating their competitors' customers. However, if add-ons have close substitutes, a "curse of debiasing" arises, and firms will not be able to profitably debias consumers by unshrouding add-ons. In equilibrium, two kinds of exploitation coexist. Optimizing firms exploit myopic consumers through marketing schemes that shroud high-priced add-ons. In turn, sophisticated consumers exploit these marketing schemes. It is not possible to profitably drive away the business of sophisticates. It is also not possible to profitably lure either myopes or sophisticates to non-exploitative firms. We show that informational shrouding flourishes even in highly competitive markets, even in markets with costless advertising, and even when the shrouding generates allocational inefficiencies.
    JEL: D00 D60 D80 L00
    Date: 2005–11
  7. By: Eugenio Miravete; Gabriel Basaluzzo (Economics University of Pennsylvania)
    Abstract: We present a flexible model of monopoly nonlinear pricing with endogenous participation decisions of heterogeneous consumers. We use computing intensive methods to fit the solution of this model to many nonlinear tariffs offered by incumbent monopolists in several early local U.S. cellular telephone markets. For each market, numerical solutions of two–point boundary problems identify the marginal cost, average price sensitivity of demand, marginal consumer type, and indexing parameters governing the distribution of the two-dimensional type components. The sources of identification are the position, shape, and allowance of free minutes that defines each tariff offered by monopolists as well as a measure of market penetration in each cellular market during the first and last quarter of monopoly regime. We use the distribution of these structural parameters across markets and time to evaluate the magnitude of the inefficient provision of goods due to asymmetric information, the importance of bunching of different consumer types, and the empirical relevance of random participation constraints. We use these structural parameters to provide a first performance comparison —profits and welfare— of nonlinear tariffs relative to linear, optimal two-part, Coasian marginal cost-plus fixed fee, and flat tariffs. We furthermore evaluate the potential welfare gains of alternative policies such as implementing a universal service requirement or allowing a second identical cellular telephone carrier. Finally, we also conduct a descriptive analysis of the sample variation of all structurally identified variables conditional on the observable characteristics of markets and cellular carriers
    Keywords: Nonlinear Pricing; Random Participation;Bucket Tariffs; Quantity Underprovision; Nonlinear vs. Restricted Pricing; Universal Service; Divestiture
    JEL: C63 D43 D82
    Date: 2005–11–11
  8. By: Hans Jarle Kind (Norwegian School of Economics and Business Administration); Tore Nilssen (University of Oslo); Lars Sørgard (Norwegian Competition Authority)
    Abstract: This paper analyses how competition between media firms influences the way they are financed. In a setting where monopoly media firms choose to be completely financed by consumer payments, competition may lead the media firms to be financed by advertising as well. The closer substitutes the media firms’ products are, the less they rely on consumer payment and the more they rely on advertising revenues. If media firms can invest in programming, they invest more the less differentiated the media products are perceived to be.
    Keywords: media; advertising; two-sided markets
    JEL: L22 L82 L86 M37
    Date: 2005–06
  9. By: Alberto Iozzi (Universita degli Studi di Roma); Roberta Sestini (University of Rome I; Universita D'Annunzio)
    Abstract: Price capped firms enjoy a large degree of pricing discretion, which may damage captive customers and have adverse effects on the development of competition when regulated firms also operate in competitive industries. We study two alternative regulatory approaches to limit such a discretion. The first one places a fixed upper limit to the prices charged in captive markets; the other constrains the captive prices relatively to the price asset in the more competitive markets. We refer to the former approach as the Absolute regime, and to the latter as the Relative regime. We analyse the effects on prices, competition, and welfare stemming from the two regimes in a simple model where the regulated firm faces competition by a competitive fringe in some of the markets it serves. We find that the Relative regime is not much more effective in protecting captive customers since captive prices may be identical under both regimes. Moreover, since it makes more costly to the incumbent regulated firm to reduce its competitive price, this is weakly higher than under the Absolute regime. However, this is also the reason why the Relative regime turns out to be more pro-competitive: the total output supplied by competitors and/or the number of firms entering the potentially competitive market might be enhanced under this rule. The effects on aggregate welfare are ambiguous. We provide some evidence that the Relative regime is more likely to positively affect consumers' surplus and social welfare the more efficient is the competitive fringe.
    Keywords: price regulation, pricing discretion, competition
    JEL: L13 L50
    Date: 2005–04–04
  10. By: Mark Armstrong (University College London)
    Abstract: This paper selectively surveys the recent literature on price discrimination. The focus is on three aspects of pricing decisions: the information about customers available to firms; the instruments firms can use in the design of their tariffs; and the ability of firms to commit to their pricing plans. Developments in marketing technology mean that firms often have access to more information about individual customers than was previously the case. The use of this information might be restricted by public policy towards customer privacy. Where it is not restricted, firms may be unable to commit to the use they make of the information. With monopoly supply, an increased ability to engage in price discrimination will boost profit unless the firm cannot commit to its pricing policy. With competition, the effects of price discrimination on profit, consumer surplus and overall welfare depend on the kinds of information and/or instruments available to firms. The paper investigates the circumstances in which price discrimination causes all prices (and hence profit) to fall.
    Keywords: Price discrimination, oligopoly, dynamic pricing
    JEL: L
    Date: 2005–11–11
  11. By: Xavier Fageda (University of Barcelona)
    Abstract: This paper develops a model of airline competition. The model is based on a demand and pricing equation system, which is estimated for the Spanish airline market. The empirical implementation of the equation system relies on a simultaneous rather than a consecutive procedure. I test the explanatory power of alternative oligopoly models with capacity constraints. In addition, I analyze the degree of density economies. Results show that Spanish airlines conduct is less competitive than the Cournot solution. I also find evidence that thin routes can be considered as natural monopolies.
    Keywords: Oligopoly, Air Transportation, Multiple Equation Models
    JEL: L
    Date: 2005–11–16
  12. By: Peter Møllgaard (Copenhagen Business School); Jo Lorentzen (Human Sciences Research Council, Cape Town, South Africa)
    Abstract: We briefly review the rationale behind technological alliances and provide a snapshot of their role in global competition, especially insofar as it is based around intellectual capital. They nicely illustrate the increased importance of horizontal agreements and thus establish the relevance of the topic. We move on to discuss the organisation of industries in a dynamic context and draw out consequences for competition policy. We conclude with an outlook on the underlying tensions between technology alliances, competition policy, and industrial policy.
    Keywords: competition policy; innovation; alliances; industrial policy
    JEL: L4 L5 O31
  13. By: Markus Pasche (University of Jena, Faculty of Economics)
    Abstract: The paper investigates the optimal regulation of a (software) firm which acts as a natural monopolist, who also offers a complementary good (IT services) on a competitive market. It is shown that a first-best-regulation accompanyied with an optimal taxation schedule in order to compensate the losses is equivalent to a cross-subsidisation of the software by the complementary good. This is the same result as in business models with Free/Open Source Software (F/OSS). Even if a price of zero for F/OSS does not reflect the use of resources for software development, the price system in F/OSS related markets leads to a welfare improving allocation. F/OSS license models can be seen as institutional arrangements which mimick a social planner.
    Keywords: natural monopoly, regulation, Ramsey pricing, welfare, complementary good, Open Source Software
    JEL: L51 H21
    Date: 2005–11–10
  14. By: Xavier Fageda
    Abstract: In this paper, we analyze how an airline can take advantage of airport dominance of a whole network in a market characterized by short-haul routes and congestion. In order to tackle this issue, we estimate an equation system, which is based on theoretical grounds, for the Spanish domestic market. We find that costs and demand benefits of airport dominance have to do with providing a high flight frequency. Such benefits can damage seriously the effectiveness of competition as long as the competitive status of major airline’s rivals is threatened.
    Keywords: Air Transportation, Multiple Equation Models, Oligopoly.
    JEL: L
    Date: 2005–11–16
  15. By: Simon Loertscher; Yves Schneider
    Abstract: In many markets homogenous goods are sold both by large global firms (“chain stores”) and small local firms. Surprisingly, chain stores often charge higher prices. Examples include hotels, airlines, and coffe shops. We provide a simple model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and change locations with a given probability. Consequently, chain stores insure consumers against switching costs. In equilibrium, chain stores charge higher prices, yet attract more consumers. Profits of local stores and chain stores increase with consumer mobility, but the latter do so faster.
    Keywords: Firm size; switching costs; consumer mobility; market structure
    JEL: D43 L15
    Date: 2005–11
  16. By: Willi Semmler; Mika Kato (Department of Economics Howard University)
    Abstract: Recent literature in Industrial Organization has shown that the threat of entry limits the price setting power of dominant firms and stimulates the incumbents to increase innovations ---both leading to welfare improvements. On the other hand dominant firms as incumbents strive to build up entry preventing capital. In such an environment of heterogeneous firms, we study the dynamics of competition as suggested in an earlier paper by Brock (1983). When dominant firms face a threat of the competitive fringe’s entry in the industry they, therefore, will have an incentive to prevent it. Investing into barriers to entry capital through engaging in production activities with increasing returns and high adjustment cost of investment as well as through advertising, lobbying and patents the dominant firm can create thresholds above which fringe firms cannot induce price competition and stimulate innovations. The dominant firms thus face two types of investment: Entry-deterring investment and investment in physical capital for production activities. Depending on how the competitive fringe responds to the first type of investment, complex dynamics, multiple steady states and thresholds, separating different domains of attraction, may emerge. Since the effectiveness of entry-deterring investment depends in part on regulatory rules set and enforced by antitrust institutions, we show how an antitrust and competition policy can be designed that may prevent the build up of entry preventing capital strengthening incentives for price competition and innovations
    Keywords: entry-deterring investment
    JEL: L1 L4
    Date: 2005–11–11
  17. By: Ernst Fehr (Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland, email:; Klaus M. Schmidt (Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Muenchen, Germany, email:
    Keywords: Behavioural Economics, Other-regarding Preferences, Fairness, Reciprocity, Altruism, Experiments, Incentives, Contracts, Competition
    JEL: C7 C9 D0 J3
    Date: 2005–06
  18. By: Maria Jesus Nieto; Lluis Santamaría
    Abstract: In the current competitive scenario, firms are driven to introduce products with a higher degree of novelty. Consequently, there is a growing need to understand the critical success factors behind radical innovation. Specifically, this work empirically and theoretically analyses the role of different types of collaborative networks in achieving product innovation and, more precisely, the degree of novelty. Using a longitudinal data of Spanish manufacturing firms, our results show that the continuity on the co-operative strategy, the type of partner and the diversity of collaborative networks are critical factors in achieving a higher degree of novelty in product innovation.
  19. By: Luisa Monroy (Universidad de Sevilla); Amparo M. Mármol (Universidad de Sevilla); Victoriana Rubiales (Universidad de Sevilla)
    Abstract: In this paper we consider a multi-criteria game model which allows interactions between players. The problem addressed is considered as a cooperative game in order to achieve consensus solutions which are evaluated with respect to several criteria simultaneously. The main idea consists of analyzing finite multi-criteria n-person games as multi-criteria bargaining games. The notion of Pareto-optimal guaranteed payoffs as a generalization of the maximin values of scalar games is proposed, together with two different solution concepts which can be characterized as the solutions of multi-criteria linear programming problems. A procedure to incorporate additional information about the agents' preferences in order to reach a final consensus is also provided.
    Keywords: Finite multi-criteria games. Bargaining games. Multi-criteria analysis
    JEL: C72 C78 C61
    Date: 2005
  20. By: Per Baltzer Overgaard (University of Aarhus); Peter Møllgaard (Copenhagen Business School)
    Abstract: In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role.
    Date: 2005–11
  21. By: Alessandro Innocenti
    Abstract: This paper analyses the early contributions of John Harsanyi and Thomas C. Schelling to bargaining theory. In his work, Harsanyi (1956) draws Nash’s solution to two-person cooperative games from the bargaining model proposed by Zeuthen (1930). Whereas Schelling (1960) proposes a multi-faceted theory of conflict that, without dismissing the assumption of rational behaviour, points out some of its paradoxical consequences. Harsanyi and Schelling’s contrasting views on the axiom of symmetry, as postulated by Nash (1950), are then presented. The analysis of this debate illustrates that, although in the early 1960s two different approaches to link strategic interaction and bargaining theory were proposed, only Harsanyi’s insights were fully developed later. Lastly, the causes of this evolution are assessed.
    Keywords: bargaining, game theory, symmetry
    JEL: B21 B41 C78
    Date: 2005–11
  22. By: Alessio D’Ignazio; Emanuele Giovannetti
    Abstract: In this paper we study concentration in the European Internet upstream access market. Measurement of market concentration depends on correctly defining the market, but this is not always possible as Antitrust authorities often lack reliable pricing and traffic data. We present an alternative approach based on the inference of the Internet Operators interconnection policies using micro-data sourced from their Border Gateway Protocol tables. Firstly we propose a price-independent algorithm for defining both the vertical and geographical relevant market boundaries, then we calculate market concentration indexes using two novel metrics. These assess, for each undertaking, both its role in terms of essential network facility and of wholesale market dominance. The results, applied to four leading Internet Exchange Points in London, Amsterdam, Frankfurt and Milan, show that some vertical segments of these markets are extremely competitive, while others are highly concentrated, putting them within the special attention category of the Merger Guidelines.
    Keywords: Network Industries, Internet, Market Concentration, Essential Facilities, BGP
    JEL: K21 L40 L86 L96
    Date: 2005–11
  23. By: M. Alejandro Cardenete (Universidad Pablo de Olavide); G.J.D. Hewings (Universidad de Illinois); E. Velázquez (Universidad Pablo de Olavide)
    Abstract: El objetivo de este trabajo consiste en analizar los efectos que tendría un incremento en la tarifa del agua del sector agrario sobre la conservación del recurso, la eficiencia en el consumo y la posible relocalización del mismo entre los diferentes sectores productivos. La política tarifaria se aplicará sobre el sector agrario debido, por un lado, al excesivo consumo de agua realizado por dicho sector y, por otro, al bajo precio pagado por ella. La metodología que se utilizará para alcanzar el objetivo propuesto consistirá en un modelo de equilibrio general aplicado (MEGA), previamente diseñado para el análisis de impuestos directos de la economía andaluza (Cardenete y Sancho, 2003), mejorado y ampliado para incluir las emisiones contaminantes y la introducción de impuestos ambientales (André, Cardenete y Velázquez, 2005). Este modelo se modificará para introducir las variaciones en la tarifa del agua que trataremos de analizar mediante la introducción de un impuesto sobre la estructura de producción.
    Keywords: reformas impositivas ambientales, equilibrio general aplicado, precio del agua.
    JEL: D58 H21 H22
    Date: 2005
  24. By: Luigi Benfratello (Università di Torino); Fabio Schiantarelli (Boston College); Alessandro Sembenelli (Università di Torino)
    Abstract: This paper contains a detailed empirical investigation of the effect of local banking development on firms' innovative activities, using a rich data set on innovation at the firm level for a large number of Italian firms over the 90's. There is evidence that banking development affects the probability of process innovation, particularly for small firms and for firms in high(er) tech sectors and in sectors more dependent upon external finance. There is also some evidence that banking development reduces the cash flow sensitivity of fixed investment spending, particularly for small firms, and that it increases the probability they will engage in R&D.
    Keywords: Banks, Financial Development, Innovation, R&D, Investment
    JEL: D24 G21 G38
    Date: 2005–10–30

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