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on Microeconomics |
| By: | Anthony Ziegelmeyer; Katinka Pantz |
| Abstract: | This paper experimentally investigates the interdependence between market competition and endogenously emerging inter-firm collaboration. We restrict attention to arrangements resulting from bilateral collaboration agreements that typically characterize real world applications in which the activity concerned is a core activity of the partnering firms and risk sharing, contract enforcement and protection of proprietory knowledge are central issues. We rely on a baseline model by Goyal and Joshi (2003) which formalizes the strategic formation of collaborative networks between firms that are competing on the same product market. This model predicts strategically stable patterns of inter-firm collaboration which are empirically observed but have been ruled out in the previous theoretical literature. In a two-stage game, firms decide to form bilateral collaboration links, whose formation is costly but reduces marginal production costs, before they compete in quantity on the market. We report the results of a series of experiments. The first experiment is designed as a straightforward theory-test simulating a one-shot interaction. We manipulate the cost of link formation in different treatments. Our data almost perfectly match the predictions for both stages whenever the link formation costs are extreme and the predicted networks symmetric (empty or complete networks). In the case of intermediate link formation costs where the predicted networks are asymmetric, subjects rarely form asymmetric networks. When they do, observed and predicted quantities are less in accordance than for symmetric networks. Collusion cannot account for the observed behavior. In our second experiment we reject the conjecture that these findings are driven out by experience in a setting in which we increase the implemented number of repetitions of the two-stage game. Finally, in our third experiment we reduce the complexity of the setting by transforming the original two-stage game into a one-stage game where the formation of inter-firm networks directly determines firms’ payoffs. These are derived from assumed equilibrium market outputs on the here absent competition stage. In this case, observed networks coincide with the predicted ones indicating that experimental subjects’ limited capacity to foresee the outcomes of the market stage may be driving the earlier discrepancies. |
| Keywords: | Endogenous formation of networks; Cournot competition; Collusion; Experiments |
| JEL: | D85 C92 D43 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:esi:discus:2005-38&r=mic |
| By: | Aitor Ciarreta (Universidad del País Vasco); Maria Paz Espinosa (Universidad del País Vasco) |
| Keywords: | supply function competition, electricity market |
| JEL: | L11 L13 L51 |
| Date: | 2005–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200518&r=mic |
| By: | Fumiko Hayashi |
| Abstract: | Pricing in two-sided markets has not been fully understood yet. Especially, investigations of how competition in these markets affects the price structure or levels are still underway. This paper takes the payment card industry as an example of two-sided markets and examines whether two networks’ competition lowers one of the prices in the industry, merchant discount fees, and if it does, how much it lowers equilibrium merchant fees compared with the fee set by a monopoly network. If some cardholders hold only one card and the other cardholders hold two different cards, whether network competition lowers the fees and by how much the fees will be lowered depends on various factors, such as the share of multihoming cardholders in the total cardholder base, the merchants’ transactional benefit, each network’s net transactional benefit to its card users, the difference in the two networks’ cardholder bases, and the share of cardholders in the total customer base. Numerical examples with various parameter values suggest that typically, if the share of multihoming cardholders is 20 percent or less, networks can act as if they are monopolies; and if the share is around 50 percent, the average equilibrium merchant fee is reduced from the monopolistic merchant fee by 25 percent. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkpw:psrwp05-04&r=mic |
| By: | Isamu Matsukawa (Musashi University) |
| Abstract: | This paper investigates the long-run effects of average revenue regulation on an electricity transmission monopolist who applies a two- part tariff comprising a variable congestion price and a non-negative fixed access fee. A binding constraint on the monopolistfs expected average revenue lowers the access fee, promotes transmission investment, and improves consumer surplus. In a case of any linear or log-linear electricity demand function with a positive probability that no congestion occurs, average revenue regulation is allocatively more efficient than a Coasian two-part tariff if a positive access fee under average revenue regulation is lower than that under a Coasian two-part tariff. |
| Keywords: | congestion pricing; electric power transmission; two-part tariff; average revenue regulation; Coasian two-part tariff |
| JEL: | L |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpio:0512009&r=mic |
| By: | Heritiana Ranaivoson (MATISSE) |
| Abstract: | Product diversity is a long-debated issue in economics. We remind that mainly two questions have been given answers : (a) To which extent does the market provide diversity ? (b) Why should this diversity be promoted ? The first one stands out as the core of most articles on product diversity, whereas the second one is more evoked than really deepened. However, the economic analysis of product diversity stands out as a paradox. Actually, the definition of diversity itself has been somewhat forgotten. We try to give ways to overcome this absence so that product diversity can eventually be concretely assessed. |
| Keywords: | Product diversity, theory of consumer choice, monopolistic competition. |
| JEL: | D11 D43 L13 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:r05083&r=mic |
| By: | Uwe Dulleck (Department of Economics, Johannes Kepler University Linz, Austria); Rudolf Kerschbamer (Department of Economics, University of Innsbruck, Austria) |
| Abstract: | This article studies the use of different distribution channels as an instrument of price discrimination in credence goods markets. In credence goods markets, where consumers do not know which quality of the good or service they need, price discrimination proceeds along the dimension of quality of advice offered. High quality advice and appropriate treatment is provided to the most profitable market segment only. Less profitable consumers are induced to demand a treatment without a serious diagnosis. If consumers differ in the probabilities of needing different treatments some consumers are potentially overtreated. By contrast, under heterogeneity in the valuations of a successful intervention some consumers are potentially undertreated. Our results help to explain the casual observation that in the early phase of the IT industry only low quality equipment was distributed via warehouse sellers while today it is quite common to see high quality equipment at discounters. |
| Keywords: | Price Discrimination; Distribution Channels; Credence Goods; Experts; Discounters |
| JEL: | L15 D82 D40 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2005_08&r=mic |
| By: | Rohde,Kirsten I.M. (METEOR) |
| Abstract: | An example shows that for sophisticated consumers with changing preferences it can be perfectly rational not to seize arbitrage opportunities in markets without frictions. |
| Keywords: | financial economics and financial management ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005053&r=mic |
| By: | QIU-HONG WANG (National University of Singapore); KAI-LUNG HUI (National University of Singapore) |
| Abstract: | This study relaxes the conventional assumption in the literature of new product introduction that all consumers possess nothing at the beginning of the game. We generalize consumers’ utility function to a market in the presence of an installed base and characterize its specific properties pertaining to various market contexts with different consumer heterogeneity and technology improvement. In such a general setting, we investigate various feasible combinations of timing, pricing and product line strategies that the seller can employ in a two-period game for selling the new product to consumers with different purchase history and heterogeneous preference on product quality. Our subgame-perfect- equilibrium results suggest that other than the upgrade policy, the seller can maximize her profits via intertemporal price discrimination, or delayed introduction, or pooling pricing, depending on the characteristics of market structure and technology improvement. Without the concern about cost, social welfare directly depends on whether the seller can sustain her monopoly power facing the mutual cannibalization between the old and new products and the mutual arbitrage between the heterogeneous consumers. |
| Keywords: | New product introduction, intertemporal price discrimination, delayed product introduction, installed base, upgrade policy |
| JEL: | L |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpio:0512011&r=mic |
| By: | Alberto Martin |
| Abstract: | Dubey and Geanakoplos (2002) have recently developed a theory of competitive pooling, which incorporates adverse selection and signaling into general equilibrium. By recasting the Rothschild-Stiglitz model of insurance in this framework, they find that a separating equilibrium always exists and is unique. We prove that their uniqueness result is not a consequence of the framework, but rather of their definition of refined equilibria. When other types of perturbations are used, the model allows for many pooling allocations to be supported as such: in particular, this is the case for pooling allocations that Pareto dominate the separating equilibrium. |
| Keywords: | Competitive pooling, insurance, adverse selection, signalling, refined equilibrium, separating equilibrium |
| JEL: | D4 D5 D41 D52 D81 D82 |
| Date: | 2003–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:917&r=mic |
| By: | Ekaterina Goldfain; Eugen Kovac |
| Abstract: | We analyze innovation race in a moral hazard setting. We develop a model in which two competing entrepreneurs work independently on the same project. The entrepreneurs do not possess any wealth of their own and their research is financed by a venture capitalist. The project, if successful, generates a prize, which is to be shared between the winning entrepreneur and the venture capitalist. The venture capitalist cannot observe the allocation of funds he provides, which creates a moral hazard problem. We compare a competitive setting with a benchmark case where the venture capitalist finances only one entrepreneur. We show that the venture capitalist can increase the efficiency of research (hence, his own expected profit from investments) and alleviate the moral hazard problem if he finances both entrepreneurs. This conclusion is unambiguous, when the entrepreneurs are at the same (the last) stage of R&D. It holds for a reasonably large range of parameters, when the entrepreneurs are at different stages of R&D. |
| Keywords: | venture capital, moral hazard, optimal contract, innovation race |
| JEL: | G32 G34 O31 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse37_2005&r=mic |
| By: | Ron Borzekowski; Raphael Thomadsen; Charles Taragin |
| Abstract: | This paper examines the relationship between competition and price discrimination in the market for mailing lists. More specifically, we examine whether sellers are more likely to segregate consumers by offering a menu of quality choices (second-degree price discrimination) and/or offering different prices to readily identifiable groups of consumers (third-degree price discrimination) in more competitive markets. We also examine how the fineness with which consumers are divided corresponds to the level of competition in the market. ; The dataset includes information about all consumer response lists derived from mail order buyers (i.e. lists derived from catalogs) available for rental in 1997 and 2002. Using industry classifications, we create measures of competition for each list. We then use these measures to predict whether given lists utilize discriminatory pricing strategies. ; Our results indicate that lists facing more competition are more likely to implement second-degree and third-degree price discrimination, and when implementing second-degree price discrimination, to offer menus with more choices. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-56&r=mic |
| By: | Adam Copeland; George Hall |
| 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. |
| JEL: | D21 D42 E22 E23 L11 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11870&r=mic |
| By: | Yuzhe Zhang |
| Abstract: | In this paper I develop continuous-time methods for solving dynamic principal-agent problems in which the agent’s privately observed productivity shocks are persistent over time. I characterize the optimal contract as the solution to a system of ordinary differential equations, and show that, under this contract, the agent’s utility converges to its lower bound—immiseration occurs. I also show that, unlike in environments with i.i.d. shocks, the principal would like to renegotiate with the agent when the agent’s productivity is low—it is not renegotiation-proof. I apply the theoretical methods I have developed and numerically solve this (Mirrleesian) dynamic taxation model. I find that it is optimal to allow a wedge between the marginal rate of transformation and individuals’ marginal rate of substitution between consumption and leisure. This wedge is significantly higher than what is found in the i.i.d. case. Thus, using the i.i.d. assumption is not a good approximation quantitatively when there is persistence in productivity shocks. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:640&r=mic |
| By: | Henry Saffer |
| Abstract: | In this paper social interaction is modeled as a consumer good. Social interaction may provide an externality in the form of social capital, but the primary reason that individuals engage in social interaction is that these activities directly yield utility. It is important to note that some measures of social interaction show declines while many do not. A model of household production is employed to derive the demand for social interaction. The model shows that the demand for social interaction is a function of its price, the price of other goods and income. The role of children and marriage in social interaction can also be explained in the model. The theory is tested with data from the General Social Survey (GSS) and the results show that social interaction can be explained as the consequence of utility maximizing behavior by individuals. Increases in education generally increase memberships but reduce visiting with relatives and friends. Increases in income generally increase memberships and some forms of visiting. The model predicts 70 percent, or more, of the time trends in social interaction. These results are in contrast to social capital theorists who have focused on the declines in social interaction and who have attributed these changes to factors such as increased community heterogeneity and increased television viewing. |
| JEL: | Z13 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11881&r=mic |
| By: | Jeffrey R. Campbell |
| Abstract: | This paper develops a simple and robust implication of free entry followed by competition without substantial strategic interactions: Increasing the number of consumers leaves the distributions of producers' prices and other choices unchanged. In many models featuring non-trivial strategic considerations, producers' prices fall as their numbers increase. Hence, examining the relationship between market size and producers' actions provides a nonparametric tool for empirically discriminating between these distinct approaches to competition. To illustrate its application, I examine observations of restaurants' seating capacities, exit decisions, and prices from 224 U.S. cities. Given factor prices and demographic variables, increasing a city's size increases restaurants' capacities, decreases their exit rate, and decreases their prices. These results suggest that strategic considerations lie at the heart of restaurant pricing and turnover. |
| Keywords: | Restaurant management ; Markets |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-05-16&r=mic |
| By: | Marlene Amstad; Andreas M. Fischer |
| Abstract: | This paper analyzes the pass-through from import prices to consumer price index (CPI) inflation in real time. Our strategy follows an event-study approach that compares inflation forecasts before and after import price releases. Inflation forecasts are modeled using a dynamic factor procedure that relies on daily panels of Swiss data. We find strong evidence that monthly import price releases provide important information for CPI inflation forecasts, and that the behavior of updated forecasts is consistent with a time-varying pass-through. The robustness of this latter result is supported by an alternative CPI measure that excludes price components subject to administered pricing as well as by panels capturing difference levels of information breadth. Finally, our empirical findings cast doubt on a prominent role for sticky prices in the low pass-through findings. |
| Keywords: | Consumer price indexes ; Imports - Prices ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:228&r=mic |
| By: | Jean-Marc Bonnisseau (CERMSEM); Elena L. del Mercato (Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Salerno) |
| Abstract: | In the spirit of Smale's work, we consider a pure exchange economy with general consumption sets. We consider the case in which the consumption set of each household is described in terms of an inequality on a function called possibility function. The possibility function represents the restricted consumption possibility on commodity markets. The main innovation comes from the dependency of the possibility function with respect to the individual initial endowment. We prove that, generically, equilibria are finite and they locally depend on the initial endowments in a smooth manner. |
| Keywords: | General economic equilibrium, consumption sets, regular economies. |
| JEL: | C62 D11 D50 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b05085&r=mic |
| By: | Severinov, Sergei; Deneckere, Raymond |
| Abstract: | Technical supplement to the paper forthcoming in Rand Journal of Economics. |
| JEL: | C72 D82 |
| Date: | 2005–12–26 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:severinov-05-12-26-01-26-15&r=mic |
| By: | Ingrid Lo; Stephen G. Sapp |
| Abstract: | Most financial markets allow investors to submit both limit and market orders, but it is not always clear what affects the choice of order type. The authors empirically investigate how the time between order submissions, changes in the state of the order book, and price uncertainty influence the rate of submission of limit and market orders. The authors measure the expected time (duration) between the submissions of orders of each type using an asymmetric autoregressive conditional duration model. They find that the execution of market orders, as well as changes in the level of price uncertainty and market depth, impact the submissions of both best limit orders and market orders. After correcting for these factors, the authors also find differences in behaviour around market openings, closings, and unexpected events that may be related to changes in information flows at these times. In general, traders use more market (limit) orders at times when execution risk for limit orders is highest or the risk of unexpected price movements is highest. |
| Keywords: | Exchange rate; Financial institution; Market structure and pricing |
| JEL: | D4 G1 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-42&r=mic |
| By: | Annabelle Gawer; Rebecca Henderson |
| Abstract: | This paper draws on a detailed history of Intel's strategy with respect to the complementary markets for microprocessors to explore the usefulness of the current theoretical literature for explaining behavior. We find that as the literature predicts, Intel invests heavily in these markets, both through direct entry and through subsidy. We also find, again consistent with the literature, that the firm's entry decisions are shaped by the belief that it does not have either the capabilities or the resources to enter all possible markets, and thus that it believes it is critical to encourage widespread entry. As several authors have pointed out, this imperative places the firm in a difficult strategic position, since it needs to attempt to commit to potential entrants that it will not engage in an ex-post "squeeze", despite the fact that ex post it has very strong incentives to do so. We find that the fact that the complementary markets in which Intel competes are complex, dynamic and multilayered considerably sharpens this dilemma. We explore the ways in which Intel attempts to solve it, highlighting in particular the organizational structure and processes through which they attempt to commit to making money in the markets which they choose to enter while also committing not to making too much. Our results have implications for both our understanding of the dynamics of competition in complements and of the role of organizational structures and processes in shaping competition. |
| JEL: | L0 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11852&r=mic |
| By: | Peters, Michael |
| Abstract: | The paper proves existence of equilibrium in a fairly general version of the pre-marital investment game. The game has discontinuous payoffs, so the method of Reny (1999) is used. Three assumptions are imposed on the matching process that occurs after investments are realized. It must be assortative, it must resolve ties efficiently, and it must not allow externalities. |
| JEL: | C78 |
| Date: | 2005–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:pmicro:peters-05-12-16-12-42-35&r=mic |
| By: | Edward Simpson Prescott; Robert M. Townsend |
| Abstract: | This paper proves the Welfare Theorems and the existence of a competitive equilibrium for the club economies with private information in Prescott and Townsend (2005). The proofs cover lottery economies with a finite number of goods and without free disposal. A mapping based on Negishi (1960) is used. |
| Keywords: | Welfare ; Competition |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:05-11&r=mic |
| By: | Somdeb Lahiri (Institute for Financial Management & Research) |
| Abstract: | In this paper we show that a feasible price allocation pair is a market equilibrium of a discrete market game if and only if it solves a linear programming problem. We use this result to obtain computable necessary and sufficient conditions for the existence of market equilibrium. We assume that the production functions of the profit maximizing agents are discrete concave. |
| Keywords: | discrete concave, existence, market equilibrium, linear programming |
| JEL: | C7 D8 |
| Date: | 2005–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpga:0512005&r=mic |
| By: | Patrick Bolton; Antoine Faure-Grimaud |
| Abstract: | We propose a model of bounded rationality based on time-costs of deliberating current and future decisions. We model an individual decision maker’s thinking process as a thought-experiment that takes time and let the decision maker “think ahead” about future decision problems in yet unrealized states of nature. By formulating an intertemporal, state-contingent, planning problem, which may involve costly deliberation in every state of nature, and by letting the decision-maker deliberate ahead of the realization of a state, we attempt to capture the basic idea that individuals generally do not think through a complete action-plan. Instead, individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise. |
| JEL: | D81 D84 C61 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11867&r=mic |
| By: | Mark Lorenzen; Lars Frederiksen |
| Abstract: | The paper is conceptual, combining project and economic organization literatures in order to explain the organization and management of market-based projects. It dedicates particular focus to projects set up in order to facilitate product innovation through experimentation. It investigates the internal vs. market economies of scale and scope related to projects, as well as the issues of governance, planning and coordination related to reaping such economies. Incorporating transaction cost perspectives as well as considerations of labour markets, the paper explains the management of market-organized innovation projects by virtue of localized project ecologies and local labour markets of leaders and boundary spanners. It illustrates its arguments with a case study of the Recorded Music industry. |
| Keywords: | Project management; product innovation |
| JEL: | L23 O31 L82 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:aal:abbswp:05-23&r=mic |