nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒01‒24
38 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. The market for melons: Cournot competition with unobservable qualities By Argenton, Cédric
  2. Sequential communication with ex post participation constraints By Ambec, S.
  3. The Competitive Role of the Transmisión System in Price-regulated Power Industries By M. Soledad Arellano; Pablo Serra
  4. Technology Timing and Pricing In the Presence of an Installed Base By Qiu_Hong Wang; Kai-Lung Hui
  5. Tying, bundling and collusion. By David Spector
  6. Monopoly Extraction of an Exhaustible Resource with Two Markets By Fischer, Carolyn; Laxminarayan, Ramanan
  7. The pricing behaviour of Italian firms: new survey evidence on price stickiness By Silvia Fabiani; Angela Gattulli; Roberto Sabbatini
  8. Micro Evidence on the Adjustment of Sticky-Price Goods: It's How Often, Not How Much By Götte, Lorenz; Minsch, Rudolf; Tyran, Jean-Robert
  9. Time-Varying Pass-Through from Import Prices to Consumer Prices: Evidence from an Event Study with Real-Time Data By Amstad, Marlene; Fischer, Andreas M
  10. Competitive equilibrium with asymmetric information : the arbitrage characterization. By Lionel de Boisdeffre
  11. Who Pays for Energy Efficiency Standards? By Fischer, Carolyn
  12. Strategic Information Disclosure: The Case of Multi-Attribute Products with Heterogeneous Consumers By V. Joseph Hotz; Mo Xiao
  13. Preventing Monopoly or Discouraging Competition? The Perils of Price-Cost Tests for Market Power in Electricity By Brennan, Timothy
  14. Externalities, Communication and the Allocation of Decision Rights By Bester, Helmut
  15. Unionization Structure, Licensing and Innovation By Arijit Mukherjee; Enrico Pennings
  16. Producers bargaining over a quality standard By Argenton, Cédric
  17. Consumption Commitments and Employment Contracts By Andrew Postlewaite; Larry Samuelson; Dan Silverman
  18. Overconfidence, Subjective Perception and Pricing Behavior By Pierpaolo Benigno; Anastasios Karantounias
  19. Connecting People By M. Ali Choudhary
  20. Sunk Prices And Salesforce Competition By Alejandro Corvalán; Pablo Serra
  21. Can intertemporal choice experiments elicit time preferences for consumption? By Robin Cubitt; Daniel Read
  22. Network Asymmetries and Access Pricing in Cellular Telecommunications By Viktória Kocsis
  23. Network Externality and Commercial Software Piracy By Sougata Poddar
  24. How Licensing Resolves Hold-Up: Evidence from a Dynamic Panel Data Model with Unobserved Heterogeneity By Siebert, Ralph; von Graevenitz, Georg
  25. Market Failures in Real-Time Metering: A Theoretical Look By Brennan, Timothy
  26. How to control market power of activity centres? A theoretical model showing the advantages of implementing competition within organizations By Samuel Cruz Alves Pereira; Pedro Cosme Costa Vieira
  27. Location in a vertically differentiated industry By Emmanuele, BACCHIEGA; Antonio, MINNITI
  28. How Strong Buyers Spur Upstream Innovation By Inderst, Roman; Wey, Christian
  29. Information, habits, and consumption behavior - evidence from micro data By Mika Kuismanen; Luigi Pistaferri
  30. Pricing behavior and the comovement of productivity and labor: evidence from firm-level data By Domenico J. Marchetti; Francesco Nucci
  31. "Vertical Market Power" as Oxymoron: Getting Convergence Mergers Right By Brennan, Timothy
  32. U.S. Antitrust and EU Competition Policy: Where has the Former Been, Where is the Latter Going? By Stephen Martin
  33. Inattentive Producers By Reis, Ricardo
  34. Social Network Theory, Broadband and the World Wide Web By Daniel Sgroi
  35. Product Quality Selection and Firm Survival. Evidence from the British Automobile Industry, 1895-1970. By Yuanyuan Peng
  36. Network Competition and Entry Deterrence By Calzada, Joan; Valletti, Tommaso
  37. Diritti televisivi, oligopolio ed intervento antitrust nella Pay-TV: il caso Telepiu'-Stream By Nicola MATTEUCCI
  38. Endogenous Technical Change, Spillovers, and Market Structure By Stefan Behringer

  1. By: Argenton, Cédric (Dept. of Economics, Stockholm School of Economics)
    Abstract: We study a model of asymmetric information in which two firms produce given qualities of the same good at possibly different, constant marginal costs. They compete in quantities on a market where buyers only observe the average quality supplied. The model is a generalization of the standard Cournot duopoly, which corresponds to the special case where the two qualities are equal. When deciding on its own output, each firm has to take into account its effect not only on market supply but also on the average quality. When the quality differential is large, the firms’ output levels are not always strategic substitutes, and there can be no, one, or two pure-strategy equilibria. When both firms are active in equilibrium, the high-cost firm's market share is bigger than the low-cost firm's if the quality differential is sufficiently large to compensate for the former’s cost handicap. This effect may lead consumers to prefer two producers of unequal qualities to two identical firms producing the (unweighted) average quality.
    Keywords: Cournot competition; quality; duopoly; asymmetric information; Nash equilibrium
    JEL: D43 D82 L13 L15
    Date: 2005–12–30
  2. By: Ambec, S.
    Abstract: The paper examines the implementation of Bayesian allocation rules that satisfy non-negative ex post payoffs for one player in a two-players bilateral asymmetric information setting. It focuses on sequential mechanisms in which players communicate in turn among themselves. First, it shows that, under general conditions, any such allocation rule can be equivalently implemented by a sequential mechanism. Second, when allocation rules are negotiated ex ante, the order matters. The player who communicates first must have bargaining power of unbouded ex post payoffs. ...French Abstract : L'article examine l'implmentation des rgles d'allocation Bayesiennes qui satisfont la contrainte de gains ex post non-ngatifs pour un joueur dans le cadre d'un modle de deux joueurs avec information asymtrique bilatrale. Nous montrons que, sous des conditions gnrales, ces allocations peuvent tre implmentes par un mcanisme squentiel dans lequel les joueurs se communiquent leur information l'un aprs l'autre. De plus, lorsque les rgles d'allocation sont ngocies ex ante, l'ordre est important : le joueur qui communique le premier doit avoir le pouvoir de ngociation ou des gains ex post non-bornes.
    JEL: D23 D82
    Date: 2005
  3. By: M. Soledad Arellano; Pablo Serra
    Abstract: This note shows how the transmission system can enhance competition in price-regulated power industries, thus extending earlier findings reported in the literature for deregulated industries. In the context of a two-technology, price-regulated power industry, we show that the interconnection of two markets initially supplied by a different monopoly reduces market power and raises welfare. We also show that the capacity of the transmission line plays a key role in determining whether market equilibrium lies closer to competition or monopoly.
    Date: 2005
  4. By: Qiu_Hong Wang (Department of Information Systems, National University of Singapore); Kai-Lung Hui (Department of Information Systems, 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: 2005–12–28
  5. By: David Spector
    Abstract: Tying a good produced monopolistically with a complementary good produced in an oligopolistic market in which there is room for collusion can be profitable if some buyers of the oligopoly good have no demand for the monopoly good. The reason is that a tie makes part of the demand in the oligopolistic market out of the reach of the tying firm's rivals, which decreases the profitability of deviating from a collusive agreement. Tying may thus facilitate collusion. It may also allow the tying firm to alter market share allocation in the collusive oligopolistic market.
    Date: 2006
  6. By: Fischer, Carolyn (Resources For the Future); Laxminarayan, Ramanan (Resources For the Future)
    Abstract: Although much has been written about the implications of monopoly power for the rate of extraction of natural resources, the specific case in which the resource can be sold in two markets with different elasticities of demand has escaped notice. We find that a monopolist facing two markets with differing iso-elastic demand schedules extracts more rapidly than the social planner, whether or not arbitrage prevents price discrimination between markets. This analysis is relevant in the case of many resources — such as natural gas used for power generation and household heating, or petroleum used for making plastics and as fuel.
    Keywords: exhaustible resources, monopoly, markets, price discrimination
    JEL: D42 Q3
  7. By: Silvia Fabiani (Banca d'Italia); Angela Gattulli (Banca d'Italia); Roberto Sabbatini (Banca d'Italia)
    Abstract: This study examines price setting behaviour of Italian firms on the basis of the results of a survey conducted by Banca d’Italia in early 2003 on a sample of around 350 firms belonging to all economic sectors. Prices are mostly fixed following standard mark-up rules, although customer-specific characteristics have a role, in particular in manufacturing and services where price discrimination across customers matters. Rival prices mostly affect price-setting strategies in industrial firms. In reviewing their prices, firms follow either statedependent rules or a combination of time and state-dependent ones. Concerning the frequency of price adjustments, a considerable degree of stickiness emerges both at the stage in which firms evaluate their pricing strategies and the stage in which they actually implement the price change. In 2002 most firms changed their price only once. Three alternative explanations of nominal rigidity are ranked highest by the firms interviewed: explicit contracts, tacit collusive behaviour and the perception of the temporary nature of the shock. Prices respond asymmetrically to shocks, depending on the direction of the adjustment (positive vs negative) and the source of the shock (demand vs supply). Real rigidities – captured by the degree of market competition, customers’ search costs, the sensitivity of profits to changes in demand – play an important role in determining this asymmetry. Moreover, whereas cost shocks impact more when prices have to be raised than when they have to be reduced, demand decreases are more likely to induce a price change than demand increases.
    Keywords: nominal rigidity, real rigidity, price-setting, inflation persistence, survey data.
    JEL: E30 D40
    Date: 2004–07
  8. By: Götte, Lorenz; Minsch, Rudolf; Tyran, Jean-Robert
    Abstract: We use a unique panel data set to analyse price setting in restaurants in Switzerland 1977-93, for items known to have sticky prices. The macroeconomic environment during this time period allows us to examine how firms adjust prices at low (0%) and fairly high (7%) inflation. Our results indicate that firms strongly react to inflation in the timing of their price adjustment: hazard of price changes is increasing with time and becomes steeper at higher inflation rates. However, we find little evidence that the amount by which they change the price responds to the inflation rate.
    Keywords: inflation; nominal inertia; sticky prices
    JEL: B49 D21 E30 E31
    Date: 2005–12
  9. By: Amstad, Marlene; Fischer, Andreas M
    Abstract: This paper analyzes the pass-through from import prices to CPI inflation in real time. Our strategy follows an event-study approach, which compares inflation forecasts before and after import price releases. Inflation forecasts are modelled 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 behaviour of updated forecasts is consistent with a time-varying pass-through. The robustness of this latter result is underpinned in two ways: an alternative CPI measure that excludes price components subject to administered pricing and as well as panels capturing different levels of information breadth. Besides implying a time-varying pass-through, our empirical findings cast doubt on a prominent role of sticky prices for the low pass-through findings.
    Keywords: common factors; daily panels; pass-through
    JEL: E52 E58
    Date: 2005–12
  10. By: Lionel de Boisdeffre (INSEE (CREST) et CERMSEM)
    Abstract: In a general equilibrium model of incomplete nominal-asset markets and adverse selection, Cornet-De Boisdeffre [3] introduced refined concepts of " no-arbitrage " prices and equilibria, which extended to the asymmetric information setting the classical concepts of symmetric information. In subsequent papers [4, 5], we generalized standard existence results of the symmetric information literature, as demonstrated by Cass [2], for nominal assets, or Geanakoplos-Polemarchakis [8], for numeraire assets, and showed that a no-arbitrage condition characterized the existence of equilibrium, in both asset structures, whether agents had symmetric or asymmetric information. We now introduce the model with arbitrary types of assets and a weaker concept of " pseudo-equilibrium " consistent with asymmetric information, to which we extend a classical theorem of symmetric information models with real assets. Namely, we show that the existence of a pseudo-equilibrium is still guaranteed by a no-arbitrage condition, under the same standard conditions with symmetric or asymmetric information.
    Keywords: General equilibrium, asymmetric information, arbitrage, inference, existence of a pseudo-equilibruim.
    JEL: D52
    Date: 2005–12
  11. By: Fischer, Carolyn (Resources For the Future)
    Abstract: Policies to promote energy efficiency in household appliances have different impacts, depending on the structure of market supply. If provision is perfectly competitive, markets will offer the variety of energy efficiency levels that consumers demand. However, if producers can price discriminate, using energy intensity to help segment consumer demand, consumers of low-end appliances are offered too little energy efficiency so that high-end consumers can be charged more for efficient appliances. Minimum energy efficiency standards can then improve welfare. We also consider average intensity standards, energy prices, and innovation and identify important differences in their effects on energy intensity, welfare, and consumers, depending on market structures. To evaluate the role for policy, one must know not only how consumers value energy efficiency in their decisionmaking, but also how producers respond to those values.
    Keywords: energy efficiency, appliance, standards, price discrimination
    JEL: Q40 Q55 Q58 O3
  12. By: V. Joseph Hotz; Mo Xiao
    Abstract: We examine the incentives for firms to voluntarily disclose otherwise private information about quality attributes of differentiated products. In particular, we focus on the case of differentiated products with multiple attributes and consumers that are heterogeneous in their preferences over these attributes. We show that there exist certain configurations of consumer preferences under which a firm producing a high-quality product, even with zero costs of disclosure, may choose not to reveal the quality of its product. This failure of firms to voluntarily disclose the quality of their products will arise when providing consumers with more information results in more elastic demands for these products, which, in turn, triggers more intensive price competition and leads to lower prices and profits for all firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory.
    JEL: L15 L5
    Date: 2006–01
  13. By: Brennan, Timothy (Resources For the Future)
    Abstract: Allegations of market power in wholesale electricity sales are typically tested using price-cost margins. Such tests are inherently suspect in markets - such as electricity - that are subject to capacity constraints. In such markets, prices can vary with demand while quantity, and thus cost measure, remain fixed. Erroneous conclusions are more likely when the proxy for marginal cost is the average operating cost of the marginal plant. Measured this way, Lerner indexes are consistent with competitive behavior. Using this proxy to cap wholesale prices, as the U.S. Federal Energy Regulatory Commission has proposed, would discourage entry by making it impossible for peak power suppliers to recover capital costs. The wholesale electricity sector may be susceptible to market power. But a preferable (if not unproblematic) test for market power would look not at prices but output, i.e., whether individual generators withheld energy that would have been profitable to supply at prevailing prices.
    Keywords: market power, electricity, peak load pricing
    JEL: D42 L11 L51 L94
  14. By: Bester, Helmut
    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; imperfect information; incomplete contracts; theory of the firm
    JEL: D23 D82 L22 P14
    Date: 2005–12
  15. By: Arijit Mukherjee (University of Nottingham and The Leverhulme Centre for Research in Globalisation and Economic Policy, UK); Enrico Pennings (Faculty of Economics, Erasmus Universiteit Rotterdam, the Netherlands)
    Abstract: Taking technological differences between firms as given, we show that the technologically advanced firm has a stronger incentive for technology licensing under a decentralized unionization structure than with centralized wage setting. Furthermore, We show that, in presence of licensing, the incentive for innovation may also be stronger under decentralized unions. Unions have a clear preference for centralization only if productivity improvements are relatively small.
    Keywords: Licensing; downstream market; upstream market; innovation; welfare
    JEL: D43 L13 O34
    Date: 2005–12–06
  16. By: Argenton, Cédric (Dept. of Economics, Stockholm School of Economics)
    Abstract: We study an asymmetric information model in which two firms are active on a market where buyers only observe the average quality supplied. Quantities and cost structures are exogenously given and firms compete in quality. Before choosing their qualities, they bargain over a perfectly enforcable minimum quality standard. The bargaining outcome is given by the Kalai-Smorodinsky (KS) solution. Agreement on a binding standard is possible only if the firms are sufficiently similar with respect to their production costs. The agreed-upon standard is decreasing in the high-cost producer's cost of production. Yet, it first increases then decreases with the low-cost producer's cost of production, showing that the latter's bargaining position can be enhanced by seemingly adverse cost changes.
    Keywords: asymmetric information; minimum quality standard; duopoly; bargaining; free riding.
    JEL: D43 D82 L13 L15
    Date: 2005–12–30
  17. By: Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, University of Wisconsin-Madison); Dan Silverman (Department of Economics, University of Michigan)
    Abstract: We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment.
    Keywords: Unemployment, consumption commitments, optimal contracts
    JEL: D21 D31 D81
    Date: 2001–12–01
  18. By: Pierpaolo Benigno; Anastasios Karantounias
    Abstract: We study the implications of a particular form of irrationality on the pricing behavior of firms in a monopolistic-competitive market with incomplete information. We assume that firms are overconfident, meaning that they over-estimate their abilities to understand the correct model of the economy. However, we allow firms to obtain information by paying a fixed cost. We find two important implications: i) overconfident firms are less inclined to acquire information; ii) prices might exhibit excess volatility driven by non-fundamental disturbances. We use our model to match some facts related to recent empirical evidence on disaggregated price data for the US economy.
    JEL: D4 D8 E3
    Date: 2006–01
  19. By: M. Ali Choudhary (University of Surrey)
    Abstract: This paper presents a model in which firms invest on their customer-networks to maintain current and future profits. The model is used to illustrate how the costs of maintaining networks and uncertainties about the customer-networks reduce the importance of making investments on the customer-based. Empirical evidence provides support for the theory.
    Keywords: Network costs, Uncertainty, Pricing
    JEL: D43 D80 L11
    Date: 2004–07
  20. By: Alejandro Corvalán; Pablo Serra
    Abstract: This work analyses those industries in which the role of salespersons is to poach clients from rival firms. This is done with a three-stage model where firms decide successively if they enter the market or not, what price to set, and how many salespersons they hire. It is assumed that each consumer is obliged to contract a service unit, but can do so with any firm. The firms can freely choose the price, but must charge same rates to all clients. Under these assumptions it is shown that the possibility of poaching rivals’ clients reduces the intensity of price competition.
    Date: 2005
  21. By: Robin Cubitt (School of Economics, University of Nottingham); Daniel Read (Durham Business School, University of Durham)
    Abstract: The paper considers the problems of interpreting subjects’ responses to laboratory intertemporal choice and matching tasks that arise from (i) the existence of capital markets outside the laboratory; (ii) the distinction between observable income and unobservable consumption. It distinguishes between three approaches to these problems that are identifiable in the literature: the straightforward view; the separation view; and the censored data view. It shows that none of these is fully satisfactory and discusses the resulting implications for intertemporal decision-making experiments.
    Keywords: Discount rates; elicitation of time preferences; intertemporal decision-making experiments
    JEL: C90 C91 D90 D91 D11 D12
    Date: 2005–07
  22. By: Viktória Kocsis (Corvinus University of Budapest)
    Abstract: Network shares and retail prices are not symmetric in the telecommunications market with multiple bottlenecks which give rise to new questions of access fee regulation. In this paper we consider a model with two types of asymmetry arising from different entry timing, i.e. a larger reputation for the incumbent and lower cost of servicing for the entrant as a result of more advanced technology. As a result firms have divergent preferences over the access fee. In case of linear and non-linear prices the access fee might still act as the instrument of collusion, but only if a side-payment is permitted which is generally welfare decreasing. Moreover, in contrast with the European regulatory framework, the access fee on the basis of termination cost might not necessarily be a socially preferable solution.
    Keywords: cost asymmetry; brand loyalty; imperfect competition; network interconnection; access fee
    JEL: L11 L13 L51 L96
    Date: 2005–09–16
  23. By: Sougata Poddar (Department of Economics, National University of Singapore)
    Abstract: Contrary to the earlier findings under end-users piracy where the existence of strong network externality was shown to be a reason for allowing limited piracy, we find when the piracy is commercial in nature the optimal policy for the original software developer is to protect its product irrespective of the strength of network externality in the software users market.
    Keywords: Copyright violations, Commercial/Retail piracy, Network externality, Quality
    JEL: D23 D43 L13 L86
  24. By: Siebert, Ralph; von Graevenitz, Georg
    Abstract: This paper is a study of licensing in a patent thicket. In a patent thicket licensing allows firms to avoid hold-up. It will have different effects on firms' R&D incentives depending on whether firms license existing or future patents. Building on a model of a patent portfolio race, firms' choice between these types of licensing contracts is modelled. We find that firms' relationships in product markets and technology space jointly determine the type of licensing contract chosen. We derive several hypotheses and test these. Using data from the semiconductor industry a dynamic panel data model with unobserved heterogeneity and a lagged dependent variable is estimated. A new method suggested by Wooldridge (2005) is employed to estimate a random effects probit model using conditional ML. The hypotheses derived from the theory are confirmed. Based on our results we argue that licensing raises welfare in the patent thicket.
    Keywords: hold-up problem; innovation; licensing; patent race; patent thicket
    JEL: L13 L49 L63
    Date: 2005–12
  25. By: Brennan, Timothy (Resources For the Future)
    Abstract: Restructuring the electricity market may secure efficiencies by moving away from cost-of-service regulation, with typically (but not necessarily) time-invariant prices, and allowing prices to reflect how costs change. Charging "real time" prices requires that electricity use be measured according to when one uses it. Arguments that such real-time metering should be a policy objective promoted by subsidizing meters or delaying restructuring until meters are installed, require more than these potential benefits. They require positive externalities to imply that too few meters would be installed through private transactions. Real-time metering presents no systematic externalities when utilities must serve peak period users, and may present negative externalities under some conditions. Positive externalities are likely when electricity is rationed through blackouts. Real-time metering may or may not increase welfare when peak period wholesale markets are not competitive; one might want to prohibit real-time metering in such situations even if metering itself were costless.
    Keywords: real-time metering electricity restructuring, deregulation, rationing, externalities
    JEL: D45 D62 L11 L94
  26. By: Samuel Cruz Alves Pereira (Faculdade de Economia, Universidade do Porto); Pedro Cosme Costa Vieira (Faculdade de Economia, Universidade do Porto)
    Abstract: One important issue in firms’ governance is how to create incentives so that activity centres can become more efficient. In this paper, we first introduce an agency contract where the salary of the manager of an activity centre that produces an intermediate product is dependent of its performance. Secondly, we add competition within the organization. This latter point is new in the literature. We then develop a "static analysis" comparing a firm that has only one activity centre producing an intermediate product with another firm that has two activity centres producing the same intermediate product, in a context where the technology manifests increasing returns to scale. We conclude that the introduction of internal competition makes the firm globally more efficient, even though it cannot fully explore the existence of increasing returns to scale.
    Keywords: Activity centres, internal market power, firm efficiency
    JEL: M11 M41
    Date: 2006–01
  27. By: Emmanuele, BACCHIEGA; Antonio, MINNITI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We analyze a model of a vertically differentiated duopoly with two regions. These two locations differ for the market size or for the distribution of the willingness to pay for quality of their consumers. Firms sequentially choose to settle in one region and then simultaneously compete in prices, selling their products both on the local market and on the foreigner one. We show that the decision whether to agglomerate or not crucially depends on the extent of regions’ asymmetries, but, counter intuitively, there are parametric configurations in which the model predicts that the leader (the first firm choosing location) settles either in the poorer or in the smaller region, leaving the other one to the follower.. Welfare analysis completes the paper.
    Keywords: Regions; Vertical Differentiation; Oligopoly
    JEL: D43 L13 R12
    Date: 2005–10–15
  28. By: Inderst, Roman; Wey, Christian
    Abstract: We challenge the view that the presence of powerful buyers stifles suppliers' incentives to innovate. Following Katz (1987), we model buyer power as buyers' ability to substitute away from a given supplier and isolate several effects that support the opposite view, namely that the presence of powerful buyers induces a supplier to invest more in cost reduction. In contrast to negotiations with smaller buyers, the outcome of negotiations with large buyers is fully determined by their more valuable alternative supply option. This increases the supplier's incentives to reduce marginal costs, both as the supplier receives a larger fraction of the thereby generated incremental profits and as this makes buyers' alternative supply option less valuable. The latter effect is due to downstream competition between buyers and, as we show, is also stronger the larger and thus the more powerful buyers are.
    Keywords: buyer power; investment incentives; merger
    JEL: D43 L12 L41
    Date: 2005–12
  29. By: Mika Kuismanen (Research Department, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany); Luigi Pistaferri (Stanford University, Department of Economics, 579 Serra Mall, Stanford, CA 94305-6072, U.S.A.)
    Abstract: Most of the empirical literature on consumption behaviour over the last decades has focused on estimating Euler equations. However, there is now consensus that data-related problems make this approach unfruitful, especially for answering policy relevant issues. Alternatively, many papers have proposed using the consumption function to forecast behaviour. This paper follows in this tradition, by deriving an analytical consumption function in the presence of intertemporal non-separabilities, "superior information", and income shocks of different nature, both transitory and permanent. The results provide evidence for durability, and show that people are relatively better at forecasting short-term rather than long-term shocks.
    Keywords: Consumption, Superior Information, Durability, Habit Persistence, Panel Data.
    JEL: D11 D12 D82 E21
    Date: 2006–01
  30. By: Domenico J. Marchetti (Banca d'Italia); Francesco Nucci (Universita' di Roma La Sapienza)
    Abstract: Recent contributions have suggested that technology shocks have a negative short-run effect on labor input, contrary to the predictions of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favor of stickyprice models, while others have either augmented flexible-price models in a number of ways or disputed the empirical finding itself. In this paper we estimate a number of alternative measures of TFP growth for a representative sample of Italian manufacturing firms and find a negative impact of productivity shocks on labor input. Furthermore, by relying on the firmlevel reported frequency of price reviews, we find that the contractionary effect is strong for firms with stickier prices, but it is weaker or not significant for firms with more flexible prices, consistently with the prediction of sticky-price models.
    Keywords: Productivity shocks, Labor input, price stickiness
    JEL: D24 E32
    Date: 2004–12
  31. By: Brennan, Timothy (Resources For the Future)
    Abstract: “Vertical market power” is a contradiction in terms because “market power” is essentially horizontal—that is, it depends on relationships of firms within markets. FERC invokes the term to assess “convergence” mergers between electricity generators and natural gas suppliers. It misapplies Department of Justice guidelines for vertical mergers and fails to identify exceptions to a presumption that market power depends only on competitive conditions at any single stage. A three-stage test can assess whether convergence mergers resemble horizontal ones. The key stage is the third- A convergence merger is more problematic the less vertical it is—that is, if the acquiring generator had no prior dealings with the acquired gas supplier. FERC’s analyses in leading convergence merger cases fail this test. Focusing on how convergence mergers facilitate regulatory evasion by linking regulated and unregulated enterprises, and how they reduce the ability to keep proprietary information from competitors, would be more productive approaches.
    Keywords: Vertical mergers, electricity restructuring, vertical integration, convergence, energy regulation
    JEL: L40 L94 L22 D43
  32. By: Stephen Martin (Department of Economics, Krannert School of Management, Purdue University)
    Abstract: The earliest U.S. antitrust laws were adopted after technological changes — most importantly, the development of a national railway network — made the U.S. political union a single economic market. They were adopted with the stated, and no doubt largely sincere, purposes of preventing collusion and strategic entry-deterring behavior. Early application of the antitrust laws relied on a rule of competition to determine whether business conduct was or was not permitted. This has evolved into an explicit evaluation of the impact of businesses practices on consumer welfare, conceived of and measured in an economic sense. EU competition policy was adopted in advance of economic integration. It differed sharply from the traditional policies of the original EC6 member states toward business behavior. It was adopted with the stated, and most likely sincere, purpose of furthering economic integration, and to this end prohibited practices that were seen as distorting competition. Early applications of competition policy, particularly in the European Coal and Steel Community, may have had perverse effects. There are indications of an evolution towards an economic performance standard in the European Union as well.
    Keywords: US antitrust policy, EU competition policy, European Union, Economic governance, regulation
    JEL: L40 L41 L42 L51 L97 L98
    Date: 2005–12
  33. By: Reis, Ricardo
    Abstract: I present and solve the problem of a producer who faces costs of acquiring, absorbing, and processing information. I establish a series of theoretical results describing the producer's behaviour. First, I find the conditions under which she prefers to set a plan for the price she charges, or instead prefers to set a plan for the quantity she sells. Second, I show that the agent rationally chooses to be inattentive to news, only sporadically updating her information. I solve for the optimal length of inattentiveness and characterize its determinants. Third, I explicitly aggregate the behaviour of many such producers. I apply these results to a model of inflation. I find that the model can fit the quantitative facts on post-war inflation remarkably well, that it is a good forecaster of future inflation, and that it survives the Lucas critique by fitting also the pre-war facts on inflation moderately well.
    Keywords: inattentiveness; inflation; pricing under uncertainty; production; sticky information
    JEL: D92 E20 E31
    Date: 2005–12
  34. By: Daniel Sgroi
    Abstract: This paper aims to predict some possible futures for the World Wide Web based on several key network parameters: size, complexity, cost and increasing connection speed thorough the uptake of broadband technology. This is done through the production of a taxonomy specifically evaluating the stability properties of the fully-connected star and complete networks, based on the Jackson and Wolinsky (1996) connections model modified to incorporate complexity concerns. We find that when connection speeds are low neither the star nor complete networks are stable, and when connection speeds are high the star network is usually stable, while the complete network is never stable. For intermediate speed levels much depends upon the other parameters. Under plausible assumptions about the future, we find that the Web may be increasingly dominated by a single intermediate site, perhaps best described as a search engine.
    Keywords: social network theory, connection speed, broadband, complete network, fully-connected star
    JEL: D85
    Date: 2006–01
  35. By: Yuanyuan Peng (Department of Economics, Florida International University)
    Abstract: This paper proposes an additional determininant of firm survival. Based on a detailed examination of firm survival in the British automobile industry between 1895 and 1970, we conclude that firm’s selection of submarket-defined by quality level-influenced survival. In contrast to findings for the US automobile industry, there is no evidence of first-mover advantage in the market as a whole. However, we do find evidence of first-mover advantage after conditioning on submarket choice.
    Keywords: firm survival, product differentiation, submarket, product quality
    JEL: L11
    Date: 2006–01
  36. By: Calzada, Joan; Valletti, Tommaso
    Abstract: We develop a model of logit demand that extends to a multi-firm industry the traditional duopoly framework of network competition with access charges. Firstly, we show that, when incumbents do not face the threat of entry and compete in prices, they inefficiently establish the reciprocal access charge below cost. This inefficiency disappears if incumbents compete in utilities instead of prices. Secondly, we study how incumbents change their choices under the threat of entry when they determine an industry-wide (non-discriminatory) access charge. We show how incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort upwards the access charges.
    Keywords: entry deterrence; interconnection; telecommunications
    JEL: L41
    Date: 2005–12
  37. By: Nicola MATTEUCCI
    Abstract: Il presente case-study analizza l'evoluzione della pay-TV in Italia. Dopo aver ripercorso le fasi evolutive della sua struttura di mercato, nell'alternanza tra monopolio e duopolio, vengono esaminate le strategie competitive degli operatori, focalizzando l'attenzione sul ruolo giocato dall'accumulo dei diritti televisivi premium e sul loro potenziale di deterrenza e chiusura verticale del mercato. Successivamente vengono esaminati i principali interventi delle autorità antitrust nazionali e comunitarie nella pay-TV (Provv. AGCM n. 8386 del 2000, n. 10716 del 2002, Comm UE n. COMP/M.2876) e ne vengono discusse la logica e l'efficacia in termini di salvaguardia della contendibilità del mercato e del benessere del consumatore, anche alla luce della letteratura teorica di riferimento. Inoltre, attraverso la valutazione del welfare degli assetti di mercato positivi (realizzati) e di quelli normativi (auspicabili), si discutono i punti di maggiore problematicita' del monopolio attualmente vigente nella pay-TV italiana. In sintesi, l'intervento antitrust sin dall'inizio ha lucidamente stilizzato le fondamentali dinamiche competitive della pay-TV italiana, evidenziando il ruolo dei diritti televisivi. Tuttavia, l'analisi antitrust sembra deficitaria nella valutazione delle dinamiche economico-finanziarie degli operatori le quali, anzichŠ essere imputabili all'insostenibilita' della configurazione di mercato duopolistica, sono piuttosto la conseguenza dell'inadeguatezza dei modelli strategici degli operatori. Inoltre, le soluzioni adottate (autorizzazione del merger con condizioni di tipo comportamentale) non sembrano efficaci nel contesto italiano. In esso, per la mancanza di piattaforme di trasmissione concorrenti, il neo-monopolista satellitare fronteggia un basso grado di competizione effettiva e potenziale e la soluzione piu' appropriata sembra essere ancora quella classica e strutturale (proibizione del merger). Piu' in generale, vi Š un'elevata probabilita' che le vicende recenti della pay-TV, assieme alle irrisolte carenze normativo-regolamentari dell'intero settore radiotelevisivo, indirizzino lo sviluppo della TV digitale italiana verso traiettorie tecno-economiche subottimali e mortifichino il potenziale di pluralismo della TV digitale.
    Keywords: TV digitale, diritti televisivi, pay-TV satellitare, verticale forecslosure
    JEL: K21 L41 L42 L82
    Date: 2004–07
  38. By: Stefan Behringer (Economics Department, Frankfurt University)
    Abstract: This paper investigates the effect of spillovers in a model of endogenous technical change resulting from learning or network effects on the existence of a lower bound to market concentration.
    Keywords: Market Structure, spillovers, endogenous technical change
    JEL: L10 D43 D21
    Date: 2005–11

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