nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒01‒29
nineteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Mixing Media with Two-Part Tariffs By Hoernig, Steffen; Valletti, Tommaso
  2. Does a Platform Owning Monopolist Want Competition? By Andras Niedermayer
  3. Do Consumers Buy Less of a Taxed Good? By Hans Jarle Kind; Marko Köthenbürger; Guttorm Schjelderup
  4. Speculative Contracts By Eliaz, Kfir; Spiegler, Ran
  5. Portfolio diversification and internalization of production externalities through majority voting By Crès, Hervé; Tvede, Mich
  6. The Effects of Cartelization on Product Design By Haan, Marco A.; Toolsema, Linda A.
  7. Market Structure and Competitive Conditions in the Arab GCC Banking System By Al-Muharrami, Saeed; Matthews, Kent; Khabari, Yusuf
  8. The Subsidiarity Bias in Regulation By Jean-Jacques Laffont; Jerome Pouyet
  9. Demand for Mobile Internet: Evidence from a Real-World Pricing Experiment By Maija Gao; Ari Hyytinen; Otto Toivanen
  10. What Happiness Research Can Tell Us About Self-Control Problems And Utility Misprediction By Alois Stutzer; Bruno S. Frey
  11. Price Setting Behaviour: Micro Evidence on Slovakia By Coricelli, Fabrizio; Horváth, Roman
  12. The Circulation of Ideas: Firms Versus Markets By Hellmann, Thomas F; Perotti, Enrico C
  13. Does it pay to be socially responsible? Evidence from Spanish retail banking sector By Callado-Muñoz, Francisco J; Utrero-González, Natalia
  14. Consumers' immediate memory for prices By VANHUELE, Marc; LAURENT, Gilles; DREZE, Xavier
  15. A Model of Partial Regulation in the Maritime Ferry Industry By Angela S. Bergantino; Etienne Billette de Villemeur; Annalisa Vinella
  16. When Do More Patents Reduce R&D? By Robert M. Hunt
  17. Competing for Talents By Damiano, Ettore; Li, Hao; Suen, Wing
  18. Spatial Externalities and Empirical Analysis: The case of Italy By Giuseppe De Arcangelis; Giordano Mion
  19. The Role of Advertising in Commercial Banking By Örs, Evren

  1. By: Hoernig, Steffen; Valletti, Tommaso
    Abstract: We consider a media market where consumers mix content offered by different firms and firms charge two-part tariffs. As compared to pure linear pricing (pay-per-view), firms make higher profits, while consumers are worse off and the allocation is not first-best. We also consider flat subscription fees and show that they make mixing unattractive. Both two-part tariffs and pay-per-view Pareto-dominate flat fees.
    Keywords: combinable products; flat fees; pay-per-view; two-part tariffs
    JEL: L13 L82
    Date: 2006–01
  2. By: Andras Niedermayer
    Abstract: We consider a software vendor selling both a monopoly platform (e.g. operating system) and an application that runs on this platform. He may face competition by an entrant in the applications market. Consumers are heterogeneous in their preferences for both the platform and the applications. They first buy the platform and then the applications. Their utility over the horizontally differentiated applications is known only after they bought the platform. In equilibrium the platform seller can be better off with a competitor in the applications market for three reasons. First, the platform vendor makes more profits with his platform. Second, the competitor’s entry serves as a credible commitment to lower prices for applications. Third, higher ex ante expectations of product diversity lead to a higher demand for his application. Competition may be profit enhancing even if the first two effects are absent, i.e. the product diversity effect can be sufficient. The model also gives an answer to the much debated question why Microsoft prices MS Office significantly higher than its operating system.
    Keywords: Two-sided markets; platforms; entry; complementary goods; price commitment; product diversity; Microsoft
    JEL: D41 D43 L13 L86
    Date: 2005–12
  3. By: Hans Jarle Kind; Marko Köthenbürger; Guttorm Schjelderup
    Abstract: This paper shows that consumers may buy more of a taxed good if it is sold by a two-sided platform firm. Two-sided platform industries serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry (newspapers/magazines and advertisers), banking (cardholder and merchant), and the software industry (users and application developers). The paper compares ad-valorem and specific taxes and shows that they may have opposite effects on quantities sold, and that the ad-valorem tax - the most commonly used tax throughout the OECD - has effects on prices and quantities not previously recognized.
    Keywords: two-sided markets, ad-valorem taxes, specific taxes
    JEL: D40 D43 H21 H22 L13
    Date: 2005
  4. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: We propose to view action-contingent contracts as bets, motivated by different prior beliefs between the contracting parties (rather than, say, as an instrument for overcoming moral hazard problems). Such differences in prior beliefs may arise from inherent biases such as over-optimism. Menus of contingent contracts that arise in principal-agent relationships are thus interpreted as a consequence of the principal's attempt to screen the agent's prior belief. Thus, an employer may offer his worker to choose between fixed-wage and profit-sharing schemes, in order to screen the worker's degree of optimism. We present a model of bilateral contracting which captures these ideas, characterize the optimal menu and apply it to a number of economic settings.
    Keywords: menus; non-common priors; speculative trade
    JEL: D42 D82 L12
    Date: 2006–01
  5. By: Crès, Hervé; Tvede, Mich
    Abstract: In absence of markets for externalities, the authors look for governances and conditions under which majority voting among shareholders is likely to give rise to efficient internalization. The central and natural role played by a governance of stakeholders is underlined and benchmarked.
    Keywords: Production externalities; majority voting; portfolio diversification; general equilibrium; stakeholder governance; mean voter
    JEL: D21 D52 D71 G39
    Date: 2006–01–25
  6. By: Haan, Marco A.; Toolsema, Linda A. (Groningen University)
    Abstract: We consider the following model. First, two firms choose locations on a Hotelling line. Second, they play a repeated price-setting game, in which they may be able to collude. Transportation costs are quadratic. We show that if firms collude in the location stage, they choose locations that coincide with the social optimum, provided that the discount factor is high enough. If the discount factor is lower, the firms locate further apart. Furthermore, we show that if firms choose locations non-cooperatively, they both locate in the middle of the line, again provided that the discount factor is high enough. If the discount factor is lower, the firms locate further apart. Thus, with the possibility of a price cartel and a discount rate that is sufficiently high, Hotelling?s principle of minimum differentiation is restored.
    Date: 2005
  7. By: Al-Muharrami, Saeed; Matthews, Kent (Cardiff Business School); Khabari, Yusuf
    Abstract: This paper investigates the market structure of Arab GCC banking industry during the years of 1993 to 2002 using the most frequently applied measures of concentration k-bank concentration ratio (CRk) and Herfindahl-Hirschman Index (HHI) and evaluates the monopoly power of banks over the ten years period using the "H statistic" by Panzar and Rosse. The results show that Kuwait, Saudi Arabia and UAE have moderately concentrated markets and are moving to less concentrated positions. The measures of concentration also show that Qatar, Bahrain and Oman are highly concentrated markets. The Panzar-Rosse H-statistics suggest that banks in Kuwait, Saudi Arabia and the UAE operate under perfect competition; banks in Bahrain and Qatar operate under conditions of monopolistic competition; and we are unable to reject monopolistic competition for the banking market in Oman.
    Keywords: GCC countries; Concentration; Market structure; Competition; Panzar-Rosse model; k-bank concentration ratio (CR<i>k</i>) and Herfindahl-Hirschman Index (HHI)
    JEL: G21 L1 D40
    Date: 2006–01
  8. By: Jean-Jacques Laffont (IDEI and GREMAQ (UMR 5603 CNRS), Universite des Sciences Sociales, Place Anatole-France,); Jerome Pouyet (CERAS-ENPC (URA 2036 CNRS), 28 rue des Saint Peres, 75007 Paris, France.)
    Abstract: We study the choice of the regulatory structure when a regulated firm engages in different activities for different countries. Under decentralization each activity is regulated independently and the contracts offered to the firm suffer from two oppos- ite distortions with respect to centralization: the competition between regulatory authorities forces them to offer too high-powered incentive contracts; however, be- cause the ownership structure of the firm is dispersed across the countries, each regulator does not fully internalize the effect of his regulation on the firm's rent and contracts tend to be too low-powered. When the activities of the firm are suf- ficiently substitutable we show that decentralization always leads to an inefficient drift of the regulatory contracts towards fixed-price contracts. Nonetheless, when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups, then decentralization of the regulat- ory powers may be preferred to centralization as competition between regulatory authorities eradicates their discretionary power.
    Keywords: incentives, decentralization, regulation
    JEL: D72 H41 H70 L20
  9. By: Maija Gao; Ari Hyytinen; Otto Toivanen
    JEL: L11 D12
    Date: 2005–01–11
  10. By: Alois Stutzer; Bruno S. Frey
    Abstract: Neoclassical economic theory rules out systematic errors in consumption choice. According to the basic view, individuals know what they choose. They are able to predict how much utility an activity or a good produces for them now and in the future and they can maximize their utility. This implies that behavior reveals consistent preferences. This approach makes it impossible to detect and understand sub-optimal consumption decisions, due to problems of self-control and the misprediction of utility. We propose the economics of happiness as a methodological approach to study these phenomena. Based on proxy measures for experienced utility, it is, in principle, possible to directly address whether some observed behavior is sub-optimal and is therefore reducing a person’s well-being. We discuss recent evidence on smoking and eating habits, TV viewing and commuting choice.
    Keywords: adaptation, individual decision-making, revealed preference, self-control, subjective well-being, utility misprediction
    JEL: D00 D11 D12 D84 D91 I12 I31
    Date: 2006–01
  11. By: Coricelli, Fabrizio; Horváth, Roman
    Abstract: The paper provides an empirical analysis of price setting behaviour in Slovakia, using large micro-level dataset covering about 57% of Slovak CPI for the period 1997-2001. The novelty of the paper is the analysis of a country characterized by nearly double-digit inflation and undergoing massive changes in market structure during the process of transition and accession to the EU. Several empirical findings stand out. Similarly to results on advanced market economies, we find that price changes are infrequent and sizeable. Moreover, the relationship between frequency and size of price changes is highly non-linear. Product-specific inflation is typically highly persistent. We find that market structure is an important determinant of pricing behaviour. The dispersion of prices is higher while persistence is lower in the non-tradable sectors, suggesting that higher competition in goods markets is not conducive to lower persistence. An important implication is that increasing market competition brought about by entry in the EU will not necessarily lead to lower persistence. By contrast, the increasing share of services in consumption will reduce persistence. Our results, together with the finding that the frequency of price changes depends negatively on the price dispersion and positively on the individual inflation, seems consistent with predictions of Calvo’s staggered price model.
    Keywords: inflation; inflation persistence; price dispersion; price stickiness; staggered price models
    JEL: D40 E31
    Date: 2006–01
  12. By: Hellmann, Thomas F; Perotti, Enrico C
    Abstract: We describe new ideas as incomplete concepts for which the innovator needs feedback from agents with complementary skills. Once shared, ideas may be stolen. We compare how different contractual environments support invention and implementation. Markets, as open exchange systems, are good for circulation and thus elaboration, but may fail to reward idea generation. Firms, as controlled idea exchange systems, can reward idea generation but can do so only by restricting their circulation. This identifies a basic trade-off between protecting the rights of invention and the best implementation of ideas. An environment that allows ideas to cross firm boundaries enhances the rate of innovation and creates a symbiotic relationship between markets and firms.
    Keywords: firms; ideas; innovation
    JEL: D83 L22 M13 O31
    Date: 2006–01
  13. By: Callado-Muñoz, Francisco J; Utrero-González, Natalia
    Abstract: This paper presents a theoretical and empirical analysis of strategic competition in retail banking when some of the financial firms are non-profit organisations that invest in social activities. Banking literature about competition is fairly large, but the strategic interaction between profit maximizing and non profit maximizers has not been extensively analysed except for Purroy and Salas (1999). In this paper, a completely different approach is taken. An adaptation of Hotelling’s two stage model of spatial competition is developed to take into account consumer perceptions respect to the two different types of financial institutions. The empirical analysis confirms that consumers take into account other features different from the price, such as social contribution or closer service to make a deposit or mortgage decision. These conclusions are of interest in the debate about a firm’s social or ethical activities. It is shown that if consumers value social activities, firms can improve their results by behaving socially responsible.
    Keywords: Strategic competition; Hotelling´s model; Spanish banking; Corporate social responsibility
    JEL: D83 G21 D21
    Date: 2006–01
  14. By: VANHUELE, Marc; LAURENT, Gilles; DREZE, Xavier
    Abstract: In this article, the authors examine the cognitive mechanics involved in keeping prices in short-terme memory for subsequent recall. Consumers code and store prices verbally, visually, and in terms of their magnitude. The encoding used influences immediate recall performance. The memorability of prices depends on their verbal length, usualness and overall magnitude. They find that the performance of consumers recall prices better than what previous digit span studies with simple numbers have suggested.
    Keywords: consumer behavior; numerical cognition; price memory
    JEL: D10
    Date: 2005–01–01
  15. By: Angela S. Bergantino (University of Bari, Department of Economics, Via C. Rosalba, 53, 70124 Bari (Italy)); Etienne Billette de Villemeur (University of Toulouse, IDEI and GREMAQ, Manufacture des Tabacs, Aile Jean-Jacques Laffont); Annalisa Vinella (University of Toulouse, GREMAQ, Manufacture des Tabacs, Aile Jean-Jacques Laffont)
    Abstract: In this paper, we study how maritime ferry industries should be regulated. This is a fundamental issue in so far as maritime transport between islands and mainland is a service of general interest. We argue that the policy design crucially depends on the goals the collectivity pursues (pure e¢ ciency, fairness) as well as on the relevant industry structure (monopoly, oligopoly). We show that the regulator needs to prevent ine¢ cient crowding out, whenever room exists for access of new providers to former monopolies. By properly allocating tra¢ c across shippers, the regulated firm's budget constraint can then be relaxed. We subsequently shed light on the implications of adopting the territorial continuity principle to boost social fairness. We establish that the incumbent's public service obligations dump the entrant's incentives to provide connections in the low season; conversely, soft competition encourages the entrant to operate in the high season, when it pockets a net rent. As to customers, our model predicts that the islanders, whose consumption is partly subsidized by the non-residents, patronize the incumbent and that liberalization directly benefits the non-residents who switch to the entrant.
    Keywords: Maritime transport; Price and frequency; Partial regulation; Territorial
    JEL: L51 L92 R48
  16. By: Robert M. Hunt
    Date: 2006–01–24
  17. By: Damiano, Ettore; Li, Hao; Suen, Wing
    Abstract: Though individuals prefer to join groups with high quality peers, there are advantages to being high up in the pecking order within a group if higher ranked members of a group have greater access to the group's resources. When two organizations try to attract members from a ¯xed population of heterogeneous agents, how resources are distributed among the members according to their rank a®ects how agents choose between the organizations. Competition between the two organizations has implications for both the equilibrium sorting of agents and the way resources are distributed within each organization. To compete more intensely for the more talented agents, both organizations are selective and give no resources to their low ranks. In both organizations, higher ranks are rewarded with more resources, with a greater rate of increase in the organization that has a lower average quality in equilibrium.
    Date: 2006–01–17
  18. By: Giuseppe De Arcangelis (Dipartimento di Scienze Economiche, Universit`a degli Studi di Bari and CIDEI.); Giordano Mion (Dipartimento di Scienze Economiche, Universit`a degli Studi di Bari, and CORE and CERAS.)
    Abstract: In the last ten years the space issue, i.e. the study of the role played by space in economic phenomena, has attracted a lot of interest from many economic fields. Both the suitability of spatial economics to address questions posed by globalization, and improves in modeling techniques are at the basis of this revolution. The combination of increasing returns, market imperfections, and trade costs creates new forces that, together with factor endowments, determine the distribution of economic activities. These spatial externalities makes agents' location choice highly interdependent, thus allowing to understand the empirical spatial correlation between demand and production previously observed by the market potential literature. Despite their theoretical relevance, there is still little evidence, especially at large scale level, on the effective contribution of this new identified forces to agents' location decisions. The aim of this work is to directly estimate a model of economic geography on some Italian regional data in order to both test the empirical relevance of this theory and try to give a measure of the geographic extent of spatial externalities.
    Keywords: Economic Geography, Spatial Externalities, Market Potential
    JEL: F12 R12 R32
  19. By: Örs, Evren
    Abstract: I use a new Call Reports data item to revisit the role of advertising in US commercial banking. I examine how banks' advertising varies with the deposit market structure and whether bank profitability is influenced by advertising. My analysis addresses the endogeneity of market structure and advertising variables using instrumental variables. I find that banks advertise more with increasing market concentration, whereas banks with larger market shares and size advertise less. I also find that advertising has a positive and economically significant impact on bank profitability. These results suggest that advertising is an important aspect of bank competition.
    Keywords: depository institutions; market structure; non-price competition
    JEL: D40 G21 M37
    Date: 2006–01

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