nep-mic New Economics Papers
on Microeconomics
Issue of 2005‒12‒14
seventeen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Rational Participation Revolutionizes Auction Theory By Ronald M. Harstad
  2. Reserve prices in auctions as reference points By Stephanie Rosenkranz; Patrick W. Schmitz
  3. Efficiency of Competition in Insurance Markets with Adverse Selection By Giuseppe, DE FEO; Jean, HINDRIKS
  4. Sequential Equilibria in Bayesian Games with Communication By Dino Gerardi; Roger B. Myerson
  5. Comparison between minimum purchase, quantity flexibility contracts and spot procurement in a supply chain By Xavier Brusset
  6. Risky Arbitage, Asset Prices, and Externalities By Cuong Le Van; Frank H. Page, Jr.; Myrna Wooders
  7. Lecture Notes in Microeconomic Theory: The Economic Agent By Ariel Rubinstein
  8. Quantum Games Have No News For Economics By David K Levine
  9. Optimal Nonlinear Taxation of Income and Savings in a Two Class Economy By Craig Brett; John A. Weymark
  10. William S. Vickrey By Ronald M. Harstad
  11. Output subsidies and quotas under uncertainty and firm heterogeneity By Bernardo Moreno Jiménez; José Luis Torres Chacón
  12. Timing Games with Informational Externalities By Dinah Rosenberg; Eilon Solan; Nicolas Vieille
  13. Portfolio choice when managers control returns By Egil Matsen
  14. Information in tournaments under limited liability By Jörg Budde
  15. The Response of Prices, Sales, and Output to Temporary Changes in Demand By Adam Copeland; George Hall
  16. Managing Unilateral Market Power in Electricity By Frank A. Wolak
  17. Networks of Manufacturers and Retailers By Ana, MAULEON; José, SEMPERE-MONERRIS; Vincent, VANNETELBOSCH

  1. By: Ronald M. Harstad (Department of Economics, University of Missouri-Columbia)
    Abstract: Potential bidders respond to a seller's choice of auction mechanism for a common-value or affiliated-values asset by endogenous decisions whether to incur a participation cost (and observe a private signal), or forego competing. Privately informed participants decide whether to incur a bid-preparation cost and pay an entry fee, or cease competing. Auction rules and information flows are quite general; participation decisions may be simultaneous or sequential. The resulting revenue identity for any auction mechanism implies that optimal auctions are allocatively efficient; a nontrivial reserve price is revenue-inferior for any common-value auction. Optimal auctions are otherwise contentless: any auction that sells without reserve becomes optimal by adjusting any one of the continuous, spanning parameters, e.g., the entry fee. Seller.s surplus-extracting tools are now substitutes, not complements. Many econometric studies of auction markets are seen to be flawed in their identification of the number of bidders.
    Keywords: Optimal Auctions, Endegenous Bidder Participation, Affiliated-Values, Common-Value Auctions, Surplus-Extracting Devices
    JEL: D44 D82 C72
    Date: 2005–12–07
  2. By: Stephanie Rosenkranz; Patrick W. Schmitz
    Abstract: We consider second-price and first-price auctions in the symmetric independent private values framework. We modify the standard model by the assumption that the bidders have reference-based utility, where a publicly announced reserve price has some influence on the reference point. It turns out that the seller’s optimal reserve price is increasing in the number of bidders. Also in contrast to the standard model, we find that secret reserve prices can outperform public reserve prices, and that setting the optimal reserve price can be more valuable for the seller than attracting additional bidders.
    Keywords: Auction theory; reference-dependent utility; reserve prices
    JEL: D44 D81 D82
    Date: 2005–09
  3. By: Giuseppe, DE FEO; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad when there is adverse selection; Using the dual theory of choice under risk, we are able to fully characterize both the competitive and the monopoly market outcomes. When they are two types of risk, the monopoly dominates competition if and only if competition leads to market unravelling. When there are a continuum of types the efficiency of competition is less trivial. In effect monopoly is shown to provide better insurance but at the cost of driving out some agents from the market. Performing simulation for differnt distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. The reason is that the monopolist can exploit its market power to relax the incentive constraints
    Keywords: monopoly; competition; non-expected utility; insurance; adverse selection
    JEL: G22
    Date: 2005–07–15
  4. By: Dino Gerardi (Cowles Foundation, Yale University); Roger B. Myerson (Dept. of Economics, University of Chicago)
    Abstract: We study the effects of communication in Bayesian games when the players are sequentially rational but some combinations of types have zero probability. Not all communication equilibria can be implemented as sequential equilibria. We define the set of strong sequential equilibria (SSCE) and characterize it. SSCE differs from the concept of sequential communication equilibrium (SCE) defined by Myerson (1986) in that SCE allows the possibility of trembles by the mediator. We show that these two concepts coincide when there are three or more players, but the set of SSCE may be strictly smaller than the set of SCE for two-player games.
    Keywords: Bayesian games, Communication, Communication equilibrium, Sequential communication equilibrium
    JEL: C72 D82
    Date: 2005–12
  5. By: Xavier Brusset (IAG, Université Catholique de Louvain, Louvain la Neuve, Belgium)
    Abstract: When, in a supply chain, a supplier and a buyer have the choice of transaction form to do business, the equilibrium transaction form which emerges is much more constrained than previously envisaged in literature. In this paper, two forms of long-term supply contracts and procurement in the spot market are compared. A capacity constrained service provider and a buyer of such service choose among three different transaction forms: spot procurement, minimum purchase commitment and quantity flexibility contracts. The ultimate demand the buyer has to satisfy and the spot market price of the input she has to purchase from the supplier are exogenous stochastic processes. Complete analytical results and a numerical example are presented. This paper builds upon recent supply chain contract literature by trying to join in one setting problems which up till now were considered in isolation.
    Keywords: contracts, supply chain, statistical decision theory, optimization techniques, transactional relationships
    JEL: L14 L23 C44 C61 C62
    Date: 2005–12–07
  6. By: Cuong Le Van (CNRS, CERMSEM, University of Paris 1); Frank H. Page, Jr. (Department of Finance, University of Alabama); Myrna Wooders (Department of Economics, Vanderbilt University)
    Abstract: We introduce a no-risky-arbitrage price (NRAP) condition for asset market models allowing both unbounded short sales and externalities such as trading volume. We then demonstrate that the NRAP condition is sufficient for the existence of competitive equilibrium in the presence of externalities. Moreover, we show that if all risky arbitrages are utility increasing, then the NRAP condition characterizes competitive equilibrium in the presence of externalities.
    Keywords: Risky arbitrage, competitive equilibria, viable asset prices
    JEL: C62 D50
    Date: 2005–09
  7. By: Ariel Rubinstein
    Date: 2005–12–10
  8. By: David K Levine
    Date: 2005–12–04
  9. By: Craig Brett (Department of Economics, Mount Allison University); John A. Weymark (Department of Economics, Vanderbilt University)
    Abstract: Optimal nonlinear taxation of income and savings is considered in a two-period model with two individuals who only differ in their skill levels. When the government can commit to its second period policy, taxes on savings do not form part of the optimal tax mix. When commitment is not possible, the optimal tax scheme distorts private savings behavior. If the types are separated in period one, the savings of the low- (resp. high-) skilled individual are subsidized (resp. taxed) so as to relax an incentive compatibility constraint. If the types are pooled in period one, it is optimal for at least one type to have savings distorted, with the high-skilled individual facing a lower marginal tax rate on savings than the low-skilled individual.
    Keywords: Asymmetric information, commitment, optimal income taxation, savings taxation, time consistency
    JEL: D82 H21
    Date: 2005–11
  10. By: Ronald M. Harstad (Department of Economics, University of Missouri-Columbia)
    Abstract: Entry for William Vickrey, prepared for the Dictionary of Scientific Biography
    Keywords: Vickrey's Contributions, Vickrey Auction, Public Economics, Asymmetric Information
    JEL: B31 D82
    Date: 2005–12–07
  11. By: Bernardo Moreno Jiménez (Universidad de Málaga); José Luis Torres Chacón (Universidad de Málaga)
    Abstract: This paper studies the relative efficiency of two kinds of regulations, quantity restrictions (quotas) and output subsidies, in an imperfectly competitive market under the existence of two sources of uncertainty: uncertainty in both costs and prices. We find that when the two sources of uncertainty are independently distributed, the output subsidy instrument has comparative advantage over the quantity instrument. However, when we take into account the possibility of correlation between the random components and across firms marginal costs, we find that a positive (negative) correlation tends to favor the quantity (subsidy) instrument. Finally, we show that when the correlation is positive, it is possible to find situations in which the quantity instrument has comparative advantage over the subsidy instrument.
    Keywords: Cost uncertainty, demand uncertainty, firm heterogeneity, output subsidy and quantity instruments
    JEL: D8 L51
    Date: 2005
  12. By: Dinah Rosenberg; Eilon Solan; Nicolas Vieille
    Date: 2004–11–28
  13. By: Egil Matsen (Norwegian University of Science and Technology (NTNU) and Norges Bank (Central Bank of Norway))
    Abstract: This paper investigates the allocation decision of an investor with two projects. Separate managers control the mean return from each project, and the investor may or may not observe the managers’ actions. We show that the investor’s risk-return trade-off may be radically different from a standard portfolio choice setting, even if managers’ actions are observable and enforceable. In particular, feedback effects working through optimal contracts and effort levels imply that expected terminal wealth is nonlinear in initial wealth allocation. The optimal portfolio may involve very little diversification, despite projects that are highly symmetric in the underlying model. We also show that moral hazard in one of the projects need not imply lower allocation to that project. Expected returns are generally lower than under the first-best, but the optimal contract shifts more of the idiosyncratic risk in the hidden action project to the manager in charge of it. The minimum-variance position of the investor’s (net) terminal wealth would in most cases involve a portfolio shift towards the hidden action project, and there are plausible cases where this would dominate the overall effect on the second-best optimal portfolio when comparing with the first-best.
    Keywords: Portfolio choice, diversification, optimal contracts
    JEL: D81 D82 G11
    Date: 2005–12–07
  14. By: Jörg Budde
    Abstract: The problem of designing tournament contracts under limited liability and alternative performance measures is considered. Under risk neutrality, only the best performing agent receives an extra premium if the liability constraint becomes binding. Under risk aversion, more than one prize is awarded. In both situations, performance measures can be ranked if their likelihood ratio distribution functions differ by a mean preserving spread. The latter result is applied to questions of contest design and more general forms of relative performance payment.
    Keywords: contest, information, likelihood ratio distribution, tournament
    JEL: D82 M52 M54
    Date: 2005–08
  15. By: Adam Copeland (Bureau of Economic Analysis); George Hall (Cowles Foundation, Yale University)
    Abstract: We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks.
    Keywords: automobile pricing, inventories, revenue management, indirect inference
    JEL: D21 D42 E22 E23 L11 L62
    Date: 2005–12
  16. By: Frank A. Wolak (Stanford University)
    Abstract: This paper first describes those features of the electricity supply industry that make a prospective market monitoring process essential to a well-functioning wholesale market. Some of these features are shared with the securities industry, although the technology of electricity production and delivery make a reliable transmission network a necessary condition for an efficient wholesale market. These features of the electricity supply industry also make antitrust or competition law alone an inadequate foundation for an electricity market monitoring process. This paper provides examples of both the successes and failures of market monitoring from several international markets. More than 10 years of experience with the electricity industry restructuring process has shown that market failures are more likely and substantially more harmful to consumers than other market failures because of how electricity is produced and delivered and the crucial role it plays in the modern economy. Wholesale market meltdowns of varying magnitudes and durations have occurred in electricity markets around the world, and many of them could have been prevented if a prospective market monitoring process backed by the prevailing regulatory authority had been in place at the start of the market.
    Keywords: Infrastructure
    Date: 2005–09–01
    Abstract: We study the endogenous formation of networks between manufacturers of differentiated goods and multi-product retailers who interact in a successive duopoly. Joint consent is needed to establish and/or maintain a costly link between a manufacturer and a retailer. We find that only three distribution networks are stable for particular values of the degree of product differentiation and link costs : (i) the non-exclusive distribtion & non-exclusive dealing network in which both retailers distribute both products is stable for intermediate degree of product differentiation and small link costs; (ii) the exclusive distribution & exclusive dealing network in which each retailer distributes a different product is stable for low degrees of product differentiation; (iii) the mixed distribution network in which one retailer distributes both products while the other retailer sells only one is stable for high degrees of product differentiation and large link costs. We show that the distribution networks that maximize social welfare are not necessarily stable. Thus, a conflict between stability and social welfare is likely to occur, even more if the degree of product differentiation is either low or high.
    Keywords: Networks; Retailers; Manufacturers
    JEL: C70 L13 L20 J50 J52
    Date: 2005–06–15

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