nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒12‒01
seventeen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Durable-Goods Monopoly with Varying Cohorts By Simon Board
  2. "Download for Free" - When Do Providers of Digital Goods Offer Free Samples? By Anette Boom
  3. Consumption Dynamics, Asset Pricing, and Welfare Effects under Information Processing Constraints By Yulei Luo
  5. Endogenous Managerial Contract By Marcello D'Amato; Riccardo Martina; Salvatore Piccolo
  6. Externalities, Communication and the Allocation of Decision Rights By Helmut Bester
  7. Consumer price behaviour in Luxembourg - evidence from micro CPI data By Patrick Lünnemann; Thomas Y. Mathä
  8. Monopolization through acquisitions in a differentiated product industry By Emilie Dargaud
  9. Optimal Auction Design For Multiple Objects with Externalities By Vasiliki Skreta; Nicolas Figueroa
  10. Social status and crime By Emrah Arbak
  11. Contracting with Repeated Moral Hazard and Private Evaluations By William Fuchs
  12. Capacity Choice Counters the Coase Conjecture By Thomas Wiseman; R. Preston McAfee
  17. Tournaments, Individualized Contracts and Career Concerns By Alexander K. Koch; Eloïc Peyrache

  1. By: Simon Board
    Keywords: mechanism design, pricing, optimal stopping
    JEL: C73 D82 L12
    Date: 2005
  2. By: Anette Boom (Freie Universität Berlin)
    Abstract: In a monopoly setting where consumers cannot observe the quality of the product we show that free samples which are of a lower quality than the marketed digital goods are used together with high prices as signals for a superior quality if the number of informed consumers is small and if the difference between the high and the low quality is not too small. Social welfare is higher, if the monopolist uses also free samples as signals, compared to a situation where he is restricted to pure price signalling. Both, the monopolist and consumers benefit from the additional signal.
    Keywords: Digital Goods, Free Samples, Multi-dimensional Signalling
    JEL: D21 D82 L15
    Date: 2004–09
  3. By: Yulei Luo (Economics Princeton University)
    Keywords: Rational Inattention, Optimal Control under Imperfect Observations, Consumption Dynamics, Risk Premium
    JEL: C61 D81 E21
    Date: 2005
  4. By: Sergio Aquino de Souza
    Abstract: This paper investigates the consequences of ignoring price heterogeneity on the estimation of markups using micro-data. I show that ignoring output price heterogeneity yields markup estimates severely biased towards one regardless of competitiveness levels. To do so, I set up an econometric model that assumes monopolistic competition and a CES demand function in a differentiated product market. This model controls for unobserved price heterogeneity and is easy to estimate since OLS is applicable. Using data from Colombian plants, the differentiated product model reveals markup estimates considerably higher than one, rejecting the hypothesis of competitive markets.
    JEL: L11 D21 D24
    Date: 2005
  5. By: Marcello D'Amato (Università di Salerno, CSEF and CEPR); Riccardo Martina (Università di Napoli Federico II and CSEF); Salvatore Piccolo (Università di Salerno, CSEF and Northwestern University,)
    Abstract: The relationship between managerial incentives and product market competition is studied in an imperfectly competitive industry where two managerial .rms, compete by setting quantities. Owners simultaneously choose between two contractual regimes: a cost-based and a profit-based one, while privately informed managers perform an cost-reducing activity and choose quantities. We characterize the incentive properties of alternative managerial remuneration schemes owners may use to control managers.behavior and we study the equilibrium relationship between owners’ and managers’ choices, efficiency and market competition. It is showed that a competing-contracts effect, at play under profit target, may induce firm owners not to select the constrained efficient allocation in the pre-specified set of contracts. Moreover, under profit-based schemes a pure agency effect, at play directly through information rents, drives a positive impact of competition on managerial effort. As a result an inverted-U shaped relationship between product market competition, managerial effort and agency costs obtains, thus leading to marginal costs convex with respect to a measure of competition.
    Keywords: generations competing contracts, cost-target, managerial firms, profit-target, product market competition, vertical hierarchies, X-inefficiency
    JEL: D82 L13 L22
    Date: 2005–11–01
  6. By: Helmut Bester (Free University Berlin, Dept. of Economics, Boltzmannstr. 20, D-14195 Berlin, Germany.
    Abstract: This paper views authority as the right to undertake decisions that impose externalities on other members of the organization. When only decision rights can be contractually assigned to one of the organization’s stakeholders, the optimal assignment minimizes the resulting inefficiencies by giving control rights to the party with the highest stake in the organization’s decisions. Under asymmetric information, the efficient allocation of authority depends on the communication of private information. In the case of multiple decision areas, divided control rights may enhance organizational efficiency unless there exist complementarities between different decisions.
    Keywords: Authority, Decision Rights, Externalities, Incomplete Contracts, Imperfect Information, Theory of the Firm
    JEL: D23 D82 L22 P14
    Date: 2005–11
  7. By: Patrick Lünnemann (Banque centrale du Luxembourg, Département Monétaire, Economique et Statistique, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.); Thomas Y. Mathä (Banque centrale du Luxembourg, Département Monétaire, Economique et Statistique, 2, Boulevard Royal, L-2983 Luxembourg, Luxembourg.)
    Abstract: This paper uses micro-level price data and analyses the behaviour of consumer prices in Luxembourg. We find that the median duration of consumer prices is roughly 8 months. The median durations of energy and unprocessed food are about 1.5 and 5 months, while prices of services typically change fewer than once a year. For some product types, such as non-energy industrial goods and processed food, a relatively large share of the observed price changes is reverted afterwards. With the exception of services, individual prices do not show signs of downward rigidity. On average, price decreases are as large as price increases. Price changes are determined both by state- and time-dependent factors. Accumulated price and wage inflation, wage adjustment due to indexation, the cash changeover and a larger number of competitors increase the probability of a price change, while pricing at attractive pricing points and price regulation have the opposite effect.
    Keywords: Price setting, consumer prices, rigidity, wage indexation, sales.
    JEL: E31 C23 C41
    Date: 2005–11
  8. By: Emilie Dargaud (GATE CNRS)
    Abstract: This article analyzes the incentive to merge in a context of price competition with horizontal product differentiation. In contrast to the results obtained by Kamien and Zang (1990), we show that merged equilibria can appear in this game. Moreover monopolization of the industry occurs with a high number of firms.
    Keywords: Mergers, Oligopoly, Cooperative game
    JEL: L10 L11 L20
    Date: 2005–11
  9. By: Vasiliki Skreta; Nicolas Figueroa
    Keywords: Optimal Auctions, Multiple Objects, Externalities, Mechanism Design
    JEL: D44 C7 C72
    Date: 2005
  10. By: Emrah Arbak (GATE CNRS)
    Abstract: We consider a large population of agents choosing either to engage in a criminal activity or working. Individuals feel varying degrees of selfreproach if they commit criminal acts. In addition, they are concerned with their social status in society, based on others’ perceptions of their values. In making their decisions, individuals weigh both the material and social risks of being a criminal and a worker. We find that introducing social status concerns may induce multiple equilibria. We also consider the implications of intragroup and intergroup interactions in an economy with two classes of earning abilities. Typically, there is more crime in the low ability group and increasing punishment reduces crime, but the opposite may also be true.
    Keywords: Crime, Social identity, Asymmetric information, Behavioral game theory
    JEL: C72 D82 K42 Z13
    Date: 2005–11
  11. By: William Fuchs (University of Chicago)
    Abstract: A repeated moral hazard setting in which the Principal privately observes the Agentfs output is studied. It is shown that there is no loss from restricting the analysis to contracts in which the Agent is supposed to exert effort every period, receives a constant efficiency wage and no feedback until he is fired. The optimal contract for a finite horizon is characterized, and shown to require burning of resources. These are only burnt after the worst possible realization sequence and the amount is independent of both the length of the horizon and the discount factor (ƒÂ). For the infinite horizon case a family of fixed interval review contracts is characterized and shown to achieve first best as ƒÂ ¨ 1. The optimal contract when ƒÂ << 1 is partially characterized. Incentives are optimally provided with a combination of efficiency wages and the threat of termination, which will exhibit memory over the whole history of realizations. Finally, Tournaments are shown to provide an alternative solution to the problem.
    Keywords: Repeated Moral Hazard, Private Monitoring, Efficiency Wages
    JEL: C7 D8
    Date: 2005–11–21
  12. By: Thomas Wiseman; R. Preston McAfee
    Date: 2005
  13. By: Caio Fonseca Ferreira; Elizabeth M. M. Q. Farina
    Abstract: Financial markets have become increasingly integrated throughout the world. Does this mean that local financial institutions are becoming irrelevant? We argue that due to the information asymmetries involved in credit concession and banks' role as monitors the answer is no. Motivated by empirical evidences that show a great dispersion among Brazilian banks' interest spreads, we have developed an imperfect competition model where the need to monitor loans and the heterogeneity of demand for credit create market niches in which it is possible to systematically charge higher interest rates on credit. Bank deposits do not need monitoring; thus the tendency to more intense competition. The difference in the level of competition under which these two services operate can generate an inefficient allocation of resources in the economy, particularly harming less developed areas. Volumes of loans and deposits observed in different Brazilian cities and states support the conclusions of the model.
    JEL: D21 D43 D61
    Date: 2005
  14. By: César Mattos
    Abstract: This article addresses the regulatory changes proposed for the telecommunications sector in Brazil regarding interconnection and unbundling policies. We summarize these policies after the privatization of Telebras, between 1998 and 2005, to be more able to evaluate the reform proposed for 2006, which we divide in nine main topics. They are 1) the adoption of the methodology of long run incremental cost - LRIC - as a parameter for tariff setting in interconnection, 2) the complementar use of a Fully Allocated Pricing mechanism for the sake of distributing common costs, 3) the abandonment, in practice, of the price cap regime, 4) the introduction of ties among interconnection and end user tariffs, 5) the replacement of the current tariff index (the IGP-DI) by the "Índice de Atualização de Tarifas" - Tariff Updating Index" (IST), 6) the new mechanic for the calculus of the discount factor "X", 7) the introduction of the "significative market power" concept, 8) the transition to a full Bill and Keep" system and 9) the effective use of "unbundling".
    JEL: L51 L43 L86
    Date: 2005
  15. By: Arthur Barrionuevo Filho; Cláudio R. Lucinda
    Abstract: In this paper, we aim to investigate the optimum values for the termination rate on mobile networks in Brazil. In order to do so, initially we provide an overview of the legal framework on the subject since the privatization in the beginning of the 90's, as well as a market overview of the telecommunications sector in Brazil. In the second section, we provide a theoretical background on the subject and on the approaches used for the computing these prices, from the Ramsey pricing with network externalities, as used by Ofcom in the setting of termination charges for the United Kingdom, to the ones which use a framework of imperfect competition in the mobile sector, as presented in Wright (2000). The third section carries out a simulation of these approaches for parameter values of the Brazilian case. The fourth section concludes and posits some policy conclusions
    JEL: L14 L51 L52
    Date: 2005
  16. By: Sergio Goldbaum; Fernando Garcia
    Abstract: This paper aims to investigate, using data on both the placing of automobile dealers and automobile demand and supply variables, the effects of new automobile dealers' entry in previously monopoly markets. First, we identify relevant variables which influence the existence and the number of automobile dealers in a geographical area. Then, using an adapted model from Bresnahan e Reiss (1990), we estimate the fixed costs of new auto dealers' entry in monopoly markets. We conclude that the fixed costs of entry of a second automobile dealer do not seem to be significantly higher than the fixed costs of entry of the first one. This conclusion increases the probability that the exclusivity clause present in the concession contracts does not harm the competition in the automobile Brazilian distribution market.
    JEL: L42 L62 L81
    Date: 2005
  17. By: Alexander K. Koch (Royal Holloway, University of London and IZA Bonn); Eloïc Peyrache (HEC School of Management, Paris)
    Abstract: Young professionals typically do not enter into life-long employment relations with a single firm. Therefore, future employers can learn about individuals' abilities from the observable facts regarding earlier work relations. We show that these informational spill-overs have profound implications for organizational design and the resulting optimal incentive contracts. Through the organizational choice and the contracts that it offers individuals, a firm can strategically manipulate the flow of information to future employers and sharpen incentives. Using a simple moral hazard model, we demonstrate that relative performance contracts, such as rank-order tournaments, can be optimal even though the extant explanations for the optimality of such compensation schemes are absent. The paper discusses the distortions that can arise and explores the robustness of the result.
    Keywords: tournaments, reputation, asymmetric learning, relative performance contracts
    JEL: D82 J33 L14 M52
    Date: 2005–11

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