nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒12‒09
nineteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Eliciting Demand Information through Cheap Talk: An Argument in Favour of Price Regulations By Frisell, Lars; Lagerlöf, Johan N.M.
  2. Market Power in Price-Regulated Power Industries By M. Soledad Arellano; Pablo Serra
  3. Consumer price behaviour in Luxembourg: evidence from micro CPI data By Patrick Lünnemann; Thomas Mathä
  4. Are loyalty-rewarding pricing schemes anti-competitive? By Caminal, Ramón; Claici, Adina
  5. Optimal Delegation By Alonso, Ricardo; Matouschek, Niko
  6. Advertising, Competition and Entry in Media Industries By Claude Crampes; Carole Haritchabalet; Bruno Jullien
  7. Advertising and Conspicuous Consumption By Daniel Krähmer
  8. Equilibrium and Efficiency in the Tug-of-War By Kai A. Konrad; Dan Kovenock
  9. Bialouts in a Common Market: A Strategic Approach By Ela Glowicka
  10. The pricing behaviour of firms in the euro area : new survey evidence By S. Fabiani; M. Druant; I. Hernando; C. Kwapil; B. Landau; C. Loupias; F. Martins; T. Mathä; R. Sabbatini; H. Stahl; A. Stokman
  11. Consumer Benefits from Increased Competition in Shopping Outlets: Measuring the Effect of Wal-Mart By Jerry Hausman; Ephraim Leibtag
  12. Subsidizing Technological Innovations in the Presence of R&D Spillovers By Carsten Helm; Anja Schöttner
  13. Link-save trading and pricing of contingent claims By Katsiaryna Kaval; Ilya Molchanov
  14. Heterogeneity in Consumer Price Stickiness: A Microeconometric Investigation By Fougère, Denis; Le Bihan, Hervé; Sevestre, Patrick
  15. Labour Pooling in R&D Intensive Industries By Gerlach, Heiko A.; Roende, Thomas; Stahl, Konrad O.
  16. Equilibrium Data Sets and Compatible Utility Rankings By Yves Balasko; Mich Tvede
  17. Optimal Procurement When Both Price and Quality Matter By Asker, John; Cantillon, Estelle
  18. The Measure and Regulation of Competition in Telecommunications Markets By Marcel Boyer
  19. VoIP Regulation in Canada By Marcel Boyer; Catherine Mercier

  1. By: Frisell, Lars; Lagerlöf, Johan N.M.
    Abstract: A firm must decide whether to launch a new product. A launch implies considerable fixed costs, so the firm would like to assess downstream demand before it decides. We study under which conditions a potential buyer would be willing to reveal his willingness to pay under different pricing regimes. We show that the firm's welfare - as well as consumers' - may be higher with a commitment to linear pricing than when pricing is unrestricted. That is, if informational asymmetries are significant, price regulations such as the Robinson-Patman Act may be endorsed by all parties.
    Keywords: cheap talk; incomplete information; price discrimination; price regulations; Robinson-Patman Act
    JEL: D82 L11 L42
    Date: 2005–11
  2. By: M. Soledad Arellano; Pablo Serra
    Abstract: This paper analyzes market power in price-regulated power industries. We derive market equilibrium under different assumptions (perfect competition, monopoly, Cournot, etc.), with and without free entry. We show that when peak-load pricing is used, producers can exercise market power by increasing the share of peaking technology in the generation portfolio, compared to the welfare-maximizing configuration. In this framework natural measure of market power is the length of time that peaking technology plants operate beyond their operational time in the welfare maximizing solution. We show that when there is free entry with an exogenous fixed entry cost that is later sunk, more intense competition results in higher welfare but fewer firms.
    Date: 2005
  3. By: Patrick Lünnemann; Thomas Mathä
    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
    Date: 2005–11
  4. By: Caminal, Ramón; Claici, Adina
    Abstract: Many economists and policy analysts seem to believe that loyalty-rewarding pricing schemes, like frequent flyer programs, tend to reinforce firms' market power and hence are detrimental to consumer welfare. The existing academic literature has supported this view to some extent. In contrast, we argue that these programs are business stealing devices that enhance competition, in the sense of generating lower average transaction prices and higher consumer surplus. This result is robust to alternative specifications of the firms' commitment power and demand structures, and is derived in a theoretical model whose main predictions are compatible with the sparse empirical evidence.
    Keywords: coupons; price commitment; repeat purchases; switching costs
    JEL: D43 L13
    Date: 2005–11
  5. By: Alonso, Ricardo; Matouschek, Niko
    Abstract: We analyse the optimal delegation of decision rights by a uninformed principal to an informed but biased agent. When the principal cannot use message-contingent transfers, she offers the agent a set of decisions from which he can choose his preferred one. We fully characterize the optimal delegation set for general distributions of the state space and preferences with arbitrary continuous state-dependent biases. We also provide necessary and sufficient conditions for particular delegation sets to be optimal. Finally, we show that the optimal delegation set takes the form of a single interval if the agent's preferences are sufficiently similar to the principal's.
    Keywords: decision rights; delegation; mechanism design
    JEL: D82 L23
    Date: 2005–10
  6. By: Claude Crampes; Carole Haritchabalet; Bruno Jullien
    Abstract: This paper presents a model of media competition with free entry when media operators are financed both from advertisers and customers. The relation between advertising receipts and sales receipts, which are both complementary and antagonist, is different if media operators impose a price or a quantity to advertisers. When consumers dislike advertising, media operators are better off setting an advertising price than an advertising quantity. We establish a relationship between the equilibrium levels (advertising and entry) and the advertising technology. In particular, media operators’ profit is not affected by the introduction of advertising when they impose advertising quantities and when advertising exhibits constant returns to scale in the audience size. Under constant or increasing returns to scale in the audience size, we find an excessive level of entry and an insufficient level of advertising.
    Keywords: media, advertising, free entry, two-sided markets
    JEL: L13 L82
    Date: 2005
  7. By: Daniel Krähmer (Freie Universität Berlin, Institut für Wirtschaftstheorie, Boltzmannstr. 20, 14195 Berlin, Germany, +49-(0)30-83855223,
    Abstract: The paper formalizes the intuition that brands are consumed for image reasons and that advertising creates a brand’s image. The key idea is that advertising informs the public of brand names and creates the possibility of conspicuous consumption by rendering brands a signalling device. In a price competition framework, we show that advertising increases consumers’ willingness to pay and thus provide a foundation, based on optimization behavior, for persuasive approaches to advertising. Moreover, an incumbent might strategically overinvest in advertising to deter entry, there might be too much advertising, and competition might be socially undesirable.
    Keywords: Advertising, Entry Deterrence, Brands, Conspicuous Consumption, Bertrand Competition, All-Pay Auction
    JEL: L12 L15 M37
    Date: 2005–08
  8. By: Kai A. Konrad; Dan Kovenock
    Abstract: We characterize the unique Markov perfect equilibrium of a tug-of-war without exogenous noise, in which players have the opportunity to engage in a sequence of battles in an attempt to win the war. Each battle is an all-pay auction in which the player expending the greater resources wins. In equilibrium, contest effort concentrates on at most two adjacent states of the game, the "tipping states", which are determined by the contestants' relative strengths, their distances to final victory, and the discount factor. In these states battle outcomes are stochastic due to endogenous randomization. Both relative strength and closeness to victory increase the probability of winning the battle at hand. Patience reduces the role of distance in determining outcomes. Applications range from politics, economics and sports, to biology, where the equilibrium behavior finds empirical support: many species have developed mechanisms such as hierarchies or other organizational structures by which the allocation of prizes are governed by possibly repeated conflict. Our results contribute to an explanation why. Compared to a single-stage conflict, such structures can reduce the overall resources that are dissipated among the group of players.
    Keywords: winner-take-all, all-pay auction, tipping, multi-stage contest, dynamic game, preemption, conflict, dominance
    JEL: D72 D74
    Date: 2005
  9. By: Ela Glowicka
    Abstract: Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional costreducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm. <br> <br> <i>ZUSAMMENFASSUNG - (Bail-out in gemeinsamen Märkten: Ein strategischer Ansatz) <br> Die Regierungen der EU gewähren staatliche Beihilfe zur Rettung und Umstrukturierung von Unternehmen in Schwierigkeiten. In einem internationalen asymmetrischen Cournot-Duopol werden die Wohlfahrtseffekte und die Konsequenzen solcher Beihilfe für die Marktstruktur analysiert. Grundannahme ist ein gemeinsamer Markt, auf dem Verbraucher aus zwei Ländern zusammenkommen. <br>Es wird gezeigt, dass die optimale Beihilfe positiv ist, auch wenn der Marktaustritt einer Firma nicht verhindert werden kann. Der Grund hierfür ist ein strategischer Effekt, der die effizientere Firma zu einer zusätzlichen kostenreduzierenden Maßnahme veranlasst. Wird der Marktaustritt verhindert, sind Allokations- und Produktionseffizienzen geringer, und der einzige aufholende Teilnehmer ist die gerettete Firma.</i>
    Keywords: subsidies, asymmetric oligopoly, exit, European Union
    JEL: F13 L13 L52
    Date: 2005–11
  10. By: S. Fabiani (Banca d’Italia); M. Druant (Banque Nationale de Belgique); I. Hernando (Banco de España); C. Kwapil (Oesterreichische Nationalbank); B. Landau (European Central Bank); C. Loupias (Banque de France); F. Martins (Banco de Portugal); T. Mathä (Banque centrale du Luxembourg); R. Sabbatini (Banca d’Italia); H. Stahl (Deutsche Bundesbank); A. Stokman (De Nederlandsche Bank)
    Abstract: This study investigates the pricing behaviour of firms in the euro area on the basis of surveys conducted by nine Eurosystem national central banks. Overall, more than 11,000 firms participated in the survey. The results are very robust across countries. Firms operate in monopolistically competitive markets, where prices are mostly set following mark-up rules and where price discrimination is a common practice. Our evidence suggests that both time- and state-dependent pricing strategies are applied by firms in the euro area: around one-third of the companies follow mainly time-dependent pricing rules while two-thirds use pricing rules with some element of state-dependence. Although the majority of firms take into account a wide range of information, including past and expected economic developments, about one-third adopts a purely backward-looking behaviour. The pattern of results lends support to the recent wave of estimations of hybrid versions of the New Keynesian Phillips Curve. Price stickiness arises both at the stage when firms review their prices and again when they actually change prices. The most relevant factors underlying price rigidity are customer relationships - as expressed in the theories about explicit and implicit contracts - and thus, are mainly found at the price changing (second) stage of the price adjustment process. Finally, we provide evidence that firms adjust prices asymmetrically in response to shocks, depending on the direction of the adjustment and the source of the shock: while cost shocks have a greater impact when prices have to be raised than when they have to be reduced, reductions in demand are more likely to induce a price change than increases in demand.
    Keywords: price setting, nominal rigidity, real rigidity, inflation persistence, survey data.
    JEL: E30 D40
    Date: 2005–11
  11. By: Jerry Hausman; Ephraim Leibtag
    Abstract: Consumers often benefit from increased competition in differentiated product settings. In this paper we consider consumer benefits from increased competition in a differentiated product setting: the spread of non-traditional retail outlets. In this paper we estimate consumer benefits from supercenter entry and expansion into markets for food. We estimate a discrete choice model for household shopping choice of supercenters and traditional outlets for food. We have panel data for households so we can follow their shopping patterns over time and allow for a fixed effect in their shopping behavior. We find the benefits to be substantial, both in terms of food expenditure and in terms of overall consumer expenditure. Low income households benefit the most.
    JEL: D1 D3 D4 D6
    Date: 2005–12
  12. By: Carsten Helm (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Anja Schöttner (School of Business and Economics, Humboldt University Berlin)
    Abstract: We analyze a situation where a principal wants to induce firms to produce an output, e.g. electricity from renewable energy sources. Firms can undertake non-contractible investments to reduce production costs of the output. Parts of these investments spills over and also reduce production costs of the other firm. Comparing the general price subsidy and an innovation tournament, we find that the principal's expected cost of implementing a given expected output are always higher under the tournament, even though this scheme may lead to more innovation.
    Keywords: R&D spillovers, tournaments, subsidies, moral hazard
    JEL: Q55 D82 H23 D43
    Date: 2005–11
  13. By: Katsiaryna Kaval (University of Glasgow); Ilya Molchanov (University of Bern)
    Abstract: Transaction costs involved while trading several assets may be described using bid-ask spread of the asset prices. We assume that the prices of several assets may be linked, so that transactions involving several assets have prices that are not necessarily equal to the sums of (bid or ask) prices of the individual assets. The family of possible price combinations forms a convex (random) set which changes in time and is called the set-valued price process. It is shown that the necessary and sufficient condition for no arbitrage is the existence of a martingale selection, i.e. a martingale that takes values in the set-valued price process. Examples and applications to option pricing are discussed.
    Keywords: bid-ask spread; multiple assets; price process; set-valued process; transaction costs
    JEL: G
    Date: 2005–11–29
  14. By: Fougère, Denis; Le Bihan, Hervé; Sevestre, Patrick
    Abstract: This paper examines heterogeneity in price stickiness using a large, original, set of individual price data collected at the retail level for the computation of the French CPI. For that purpose, we estimate at a very high level of disaggregation competing-risks duration models that distinguish between price increases, price decreases and product replacements. The main findings are the following: i) cross-product and cross-outlet-type heterogeneity is pervasive, both in the shape of the hazard function and in the impact of covariates; ii) at the product-outlet type level, the baseline hazard function of a price spell is non-decreasing; iii) there is strong evidence of state dependence, especially for price increases.
    Keywords: duration models; hazard function; heterogeneity; sticky prices
    JEL: C41 E31
    Date: 2005–10
  15. By: Gerlach, Heiko A.; Roende, Thomas; Stahl, Konrad O.
    Abstract: We investigate firms' incentives to locate in the same region to gain access to a large pool of skilled labour. Firms engage in risky R&D activities and thus create stochastic product and implied labour demand. Agglomeration in a cluster is more likely in situations where the innovation step is large and the probability for a firm to be the only innovator is high. When firms cluster, they tend to invest more and take more risk in R&D compared to spatially dispersed firms. Agglomeration is welfare-maximizing, because expected labour productivity is higher and firms choose a more efficient, technically diversified portfolio of R&D projects at the industry level.
    Keywords: agglomeration; labour pooling; R&D
    JEL: L13 O32 R12
    Date: 2005–10
  16. By: Yves Balasko (Paris-Jourdan Sciences Économiques (PSE)); Mich Tvede (Department of Economics, University of Copenhagen)
    Abstract: Sets consisting of finite collections of prices and endowments such that total resources are constant, or collinear, or approximately collinear, can always be viewed as subsets of some equilibrium manifold. The additional requirement that such collections of price-endowment data are compatible with some individual preference rankings is reduced to the existence of solutions to some set of linear inequalities and equalities. This characterization enables us to give simple proofs of the contractibility of the set whose elements are finite equilibrium data collections compatible with given individual preference rankings and the path-connectedness of the set made of finite equilibrium data set.
    JEL: D11 D12 D51
    Date: 2005–11
  17. By: Asker, John; Cantillon, Estelle
    Abstract: A buyer seeks to procure a good characterized by its price and its quality from suppliers who have private information about their cost structure (fixed cost + marginal cost of providing quality). We solve for the optimal buying mechanism, i.e. the procedure that maximizes the buyer’s expected utility, and discuss its properties. Many of the properties of the optimal buying mechanism when information is one-dimensional (Laffont and Tirole, 1987; Che, 1993) no longer hold when we introduce private information about the fixed costs. We compare the performance of the optimal scheme to that of buying procedures used in practice, namely a quasilinear scoring auction and negotiation. Specifically, we characterize an upper bound to what a quasilinear scoring auction and negotiation can achieve, and compare the performance of these procedures numerically. Quasilinear scoring auctions are able to extract a good proportion of the surplus from being strategic. Negotiation does less well. In fact, our results suggest that negotiation does worse than holding a simple scoring auction where the buyer reveals his preference.
    Keywords: bargaining; differentiated product; multi-attribute auction; multidimensional screening; negotiation; optimal auction; procurement; scoring auction
    JEL: C78 D44 D82 L22 L24
    Date: 2005–10
  18. By: Marcel Boyer
    Abstract: The development of the canadian telecommunications web is significantly influenced by the regulatory framework put in place to oversee the evolution of the web toward a competitive system. This paper has two specific objectives: first, to develop a methodological framework, which will allow a proper characterization of the level of competition in the telecommunications industry, more specifically in the residential local access market and second, to recommend some (significant) changes in the CRTC approach to the regulation of the Canadian Telecommunications industry. I argue that the current approach to the regulation of telecommunications in Canada is likely to generate significant harms to consumers and businesses as well as efficiency losses for the Canadian economy. I conclude that there is a urgent need for a telecommunications regulatory reform, with a stronger accent put on three crucial roles of the telecommunications regulator as the trusted generator of information for the consumers, as the manager of the level playing field conditions, and as the promoter of efficient investment programmes. <P>Le développement du réseau canadien des télécommunications est influencé de façon significative par le cadre réglementaire adopté pour régir l’évolution de ce réseau vers la concurrence. Cet article a deux objectifs principaux : d’une part, développer un cadre méthodologique adéquat pour caractériser le niveau de concurrence dans l’industrie des télécommunications, plus particulièrement du marché des services résidentiels locaux, et, d’autre part, de proposer des changements (importants) au cadre réglementaire actuel. Je montre que le cadre réglementaire actuel peut engendrer des problèmes importants pour les consommateurs et l’industrie ainsi que des pertes d’efficacité pour l’économie canadienne. Il existe un besoin urgent de réformer le cadre réglementaire actuel, en mettant l’accent sur trois rôles essentiels de l’agence de régulation des télécommunications comme fournisseur d’informations aux consommateurs, comme gestionnaire des conditions de concurrence loyale pour toutes les entreprises et comme promoteur de programmes d’investissement efficaces.
    Keywords: competition, regulatory reform, telecommunications , concurrence, réforme de la réglementation, télécommunication
    Date: 2005–11–01
  19. By: Marcel Boyer; Catherine Mercier
    Abstract: The CRTC recently released Regulatory Framework for Voice Communication Services using Internet Protocol (Decision 2005-28), Telecom Decision CRTC 2005-28, setting out the details of the appropriate regulatory regime applicable to the provision of VoIP services. We present a brief overview of Decision 2005-28, we then consider the positions of incumbents and competitors, and finally we comment on the above interventions in light of the economic theory of regulation and the theory of strategic competition. We conclude that the predominant model underlying the positions not only of the CRTC but also of the parties involved, including the firms themselves, both the incumbents and the new entrants, and their respective business consultants, do not stand the test of modern economic theory. <P>Le CRTC a récemment publié la décision Cadre de réglementation régissant les services de communication vocale sur protocole Internet (Décision 2005-28) dans laquelle il fixe les paramètres du régime de réglementation qui régira la fourniture des services VoIP. Nous présentons d’abord un aperçu de la Décision 2005-28 ainsi que les positions des entreprises de services locaux titulaires et des nouveaux concurrents. Finalement, nous commentons ces interventions à la lumière de la théorie économique de la réglementation et de la théorie de la concurrence stratégique. Nous concluons que le modèle dominant sur lequel s’appuient non seulement la position du CRTC, mais également celles des parties intéressées, y compris les entreprises elles-mêmes, les entreprises de services locaux titulaires et les nouveaux concurrents, et leurs conseillers d’affaire, ne résiste pas à l’analyse économique moderne.
    Keywords: regulation, strategic competition, telecommunications, VoIP, concurrence stratégique, réglementation, télécommunication VoIP
    Date: 2005–11–01

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