nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒02‒05
seventeen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  2. Eliciting Demand Information through Cheap Talk: An Argument in Favor of Price Regulations By Lars Frisell; Johann Lagerloef
  3. Prices, capacities and service quality in a congestible Bertrand duopoly By Bruno De Borger; Kurt Van Dender
  4. Binomial R&D Races and Growth By John Hartwick
  5. Sticky Prices in the Euro Area: a Summary of New Micro Evidence By L. J. Álvarez; E. Dhyne; M. Hoeberichts; C. Kwapil; H. Le Bihan
  6. The Boundaries of the Platform: Vertical Integration and Economic Incentives in Mobile Computing By Boudreau, Kevin
  7. Different Policy Objectives of the Road Pricing Problem – a Game Theory Approach By Dusica Joksimovic; Erik T. Verhoef; Michiel Bliemer
  8. COORDINATION THROUGH DE BRUIJN SEQUENCES By Olivier Gossner; Penélope Hernández
  9. A market game approach to differential information economies By Guadalupe Fugarolas; Carlos Herves Beloso; Emma Moreno Garcia; Juan Pablo Torres-Martinez
  10. Water - Spatial Network Pricing By Yuri Yegorov
  11. The Median Voter and the Median Consumer: Local Private Goods and Residential Sorting By Joel Waldfogel
  12. The Determinants of Merger Waves By Klaus Gugler; Dennis C. Mueller; B. Burçin Yurtoglu
  17. Strategic Monopolization: Kamien and Zang Revisited By Granier, L.

  1. By: Ioana Chioveanu (Universidad de Alicante)
    Abstract: I construct a model in which an oligopoly first invests in persuasive advertising in order to induce brand loyalty to consumers who would otherwise buy the cheapest alternative on the market, and then competes in prices. Despite ex-ante symmetry, at equilibrium, there is one firm which chooses a lower advertising level, while the remaining ones choose the same higher advertising. For the endogenous profile of advertising expenditure, there are a family of pricing equilibria with at least two firms randomizing on prices. The setting offers a way of modelling homogenous product markets where persuasive advertising creates subjective product differentiation and changes the nature of subsequent price competition. The pricing stage of the model can be regarded as a variant of the Model of Sales by Varian (1980) and the two stage game as a way to endogenize consumers heterogeneity raising a robustness question to Varian¿s symmetric setting.
    Keywords: oligopoly, advertising, price dispersion, brand loyalty
    JEL: D21 D43 L11 L13 M37
    Date: 2005–11
  2. By: Lars Frisell (Sveriges Riksbank); Johann Lagerloef (Department of Economics, Royal Holloway, University of London)
    Abstract: A firm must decide whether to launch a new product. A launch implies considerable fixed costs, so the firm would like to assess downstream demand before it decides. We study under which conditions a potential buyer would be willing to reveal his willingness to pay under different pricing regimes. We show that the firm’s welfare — as well as consumers’ — may be higher with a commitment to linear pricing than when pricing is unrestricted. That is, if informational asymmetries are significant, price regulations such as the Robinson-Patman Act may be endorsed by all parties.
    Keywords: Price regulations, price discrimination, incomplete information, cheap talk, Robinson-Patman Act
    JEL: D82 L11 L42
    Date: 2005–08
  3. By: Bruno De Borger; Kurt Van Dender
    Abstract: We study the duopolistic interaction between congestible facilities that supply perfect substitutes. Firms are assumed to make sequential decisions on capacities and prices. Since the outcomes directly affect consumers’ time cost of accessing or using a facility, the capacity sharing rule is endogenous. We study this two-stage game for different firm objectives and compare the duopoly outcomes with those under monopoly and at the social optimum. For the symmetrical duopoly outcome, our findings include the following. First, for profit maximizing firms both capacity provision and service quality are distorted under duopoly: they are below the socially optimal levels. This contrasts with the monopoly outcome, where pricing and capacity provision are such that the monopolist does provide the socially optimal level of service quality. Second, duopoly prices are lower than monopoly prices, but higher than in the social optimum. Hence, while price competition between duopolists yields benefits for consumer, capacity competition is harmful. Third, price-capacity competition implies that higher capacity costs may lead to higher profits for both facilities. Finally, if firms care about output as well as profits, this mainly affects pricing behavior; strategic interactions in capacities are much less affected. Finally, we explore the conditions under which symmetrical and asymmetrical duopoly equilibria arise and when they are stable.
    Date: 2005–08
  4. By: John Hartwick (Queen\'s University)
    Abstract: In each period, we have an R&D race among N competitive R&D firms, each with probability π of discovering a successful new technique for producing an intermediate good used in producing the economy's final consumption good. The winner of a race earns a monopoly profit over a generally uncertain interval. Each R&D firm faces distinctive "lottery" and "duration" uncertainty in each period. Numerical examples illustrate the growth behavior of the economy linked to the R&D sector.
    Keywords: binomial R&D race, growth
    JEL: O41 O31
    Date: 2004–09
  5. By: L. J. Álvarez; E. Dhyne; M. Hoeberichts; C. Kwapil; H. Le Bihan
    Abstract: This paper presents original evidence on price setting in the euro area at the individual level. We use micro data on consumer (CPI) and producer (PPI) prices, as well as survey information. Our main findings are: (i) prices in the euro area are sticky and more so than in the US; (ii) there is evidence of heterogeneity and of asymmetries in price setting behaviour; (iii) downward price rigidity is only slightly more marked than upward price rigidity and (iv) implicit or explicit contracts and coordination failure theories are important, whereas menu or information costs are judged much less relevant by firms.
    Keywords: Price setting; Price stickiness; consumer prices; Producer prices; survey data
    JEL: C25 D40 E31
    Date: 2005–12
  6. By: Boudreau, Kevin
    Abstract: Research on the organization of systems industries generally takes the boundaries of platforms to be exogenously-determined artifacts, given by the nature of technology. This paper studies whether platform boundaries are responsive to economic incentives by studying variation in platform boundaries in competing systems in mobile computing. Using detailed descriptive evidence and systematically collected databases of integration patterns, I find that platform boundaries in this industry could be understood as established in response to three primary goals: 1) to consolidate control around assets that conferred the power to regulate production in the system as a whole; 2) to integrate economic activities that risked coordination problems; 3) to open platform boundaries in response to interactions with market competition.
    Keywords: Platforms, systems competition, vertical integration, theory of the firm, information technology,
    Date: 2006–01–13
  7. By: Dusica Joksimovic; Erik T. Verhoef; Michiel Bliemer
    Abstract: Using game theory we investigate a new approach to formulate and solve optimal tolls with a focus on different policy objectives of the road authority. The aim is to gain more insight into determining optimal tolls as well as into the behavior of users after tolls have been imposed on the network. The problem of determining optimal tolls is stated and defined using utility maximization theory, including elastic demand on the travelers’ side and different objectives for the road authority. Game theory notions are adopted regarding different games and players, rules and outcomes of the games played between travelers on the one hand and the road authority on the other. Different game concepts (Cournot, Stackelberg and monopoly game) are mathematically formulated and the relationship between players, their payoff functions and rules of the games are defined for very simplistic cases. The games are solved for different scenarios and different objectives for the road authority, using the Nash equilibrium concept. Using the Stackelberg game concept as being most realistic for road pricing, a few experiments are presented illustrating the optimal toll design problem subject to different pricing policies considering different objectives of the road authority. Results show different outcomes both in terms of optimal tolls as well as in payoffs for travelers. There exist multiple optimal solutions and objective function may have a non- continuous shape. The main contribution is the two-level separation between of the users from the road authority in terms of their objectives and influences.
    Date: 2005–08
  8. By: Olivier Gossner (Paris-Jourdan Sciences Économiques); Penélope Hernández (Universidad de Alicante)
    Abstract: Let µ be a rational distribution over a finite alphabet, and ( ) be a n-periodic sequences which first n elements are drawn i.i.d. according to µ. We consider automata of bounded size that input and output at stage t. We prove the existence of a constant C such that, whenever , with probability close to 1 there exists an automaton of size m such that the empirical frequency of stages such that is close to 1. In particular, one can take , where and .
    Keywords: Coordination, complexity, De Bruijn sequences, automata
    Date: 2005–02
  9. By: Guadalupe Fugarolas; Carlos Herves Beloso; Emma Moreno Garcia; Juan Pablo Torres-Martinez (Department of Economics PUC-Rio)
    JEL: C72 D51 D82
    Date: 2005–12
  10. By: Yuri Yegorov
    Abstract: The paper addresses an important issue of pricing mechanisms is spatially distributed systems with losses, with an application to water supply system. When losses from delivery are high, the asymmetry of spatial location of consumers plays an important role, which is captured by the model. The goal is to compare the efficiency from alternative market structures for water supply. The model can be applied for channels aimed on water redistribution. In particular, the model can be relevant for analysing different market structures, equilibrium water pricing and efficiency for the planned channels. Potential application can be planned channel between river Ebro (Spain) and communities Valencia and Murcia. While this paper is purely theoretical, it addresses the issues that are still little understood at administrative level. Water market as described is a necessity, but it will not emerge spontaneously and it requires appropriate legislative preparation. Mathematical model is designed in terms of densities and flows of corresponding economic variables.
    Date: 2005–08
  11. By: Joel Waldfogel
    Abstract: When a product's product provision entails fixed costs, it will be made available only if a sufficient number of people want it. Some products are produced and consumed locally, so that provision requires not only a large group favoring the product but a large number nearby. Just as one has an incentive to sort into community whose median voter shares his preferences for local public goods, product markets may provide an analogous incentive to sort into a community whose consumers tend to share his preferences in private goods. Using zip code level data on chain restaurants and restaurants overall, this paper documents how the mix of locally available restaurants responds to the local mix of consumers, with three findings. First, based on survey data on chain restaurant patronage, restaurant preferences differ substantially by race and education. Second, there is a strong relationship between restaurants and population at the zip code level, suggesting that restaurants’ geographic markets are small. Finally, the mix of locally available chain restaurants is sensitive to the zipcode demographic mix by race and by education. Hence, differentiated product markets provide a benefit -- proximity to preferred restaurants -- to persons in geographic markets whose customers tend to share their preferences.
    JEL: L1 L8 R3
    Date: 2006–01
  12. By: Klaus Gugler; Dennis C. Mueller; B. Burçin Yurtoglu
    Abstract: One of the most conspicuous features of mergers is that they come in waves, and that these waves are correlated with increases in share prices and price/earnings ratios. We test four hypotheses that have been advanced to explain merger waves: the industry shocks, q-, overvaluation and managerial discretion hypotheses. The first two are neoclassical in that they assume that managers maximize profits, mergers create wealth, and the capital market is efficient. The last two, behavioral hypotheses relax these assumptions in different ways. We test the four hypotheses by estimating models of the amounts of assets acquired by firms, models that identify the characteristics of targets, and estimates of the returns to acquirers’ shareholders. Although some support is found for each of the four hypotheses, most of the evidence favors the two behavioral hypotheses. <br> <br> <i>ZUSAMMENFASSUNG - (Die Determinanten von Fusionswellen) <br> Es ist eines der auffallendsten Merkmale von Unternehmenszusammen-schlüssen, dass sie in Wellen stattfinden und dass diese Wellen mit dem Anstieg der Aktienkurse und des Preis/ Ertragsverhältnisses zusammen hängen. Wir untersuchen vier Hypothesen, die als Erklärung von Unternehmenszusammenschlüssen genannt werden: die der Industrieschocks, die q-Hypothese, die Hypothese der Überbewertung und die Hypothesen des Ermessensspielraums von Managern. Die ersten zwei sind neoklassischer Natur insofern als sie davon ausgehen, dass Manager Gewinne maximieren, Unternehmenszusammenschlüsse Reichtum schaffen und der Kapitalmarkt effizient ist. Die zwei letzteren sind Verhaltenshypothesen, die die neo-klassischen Annahmen (auf unterschiedliche Weise) lockern. Wir untersuchen die vier Hypothesen, indem wir Modellschätzungen der von Unternehmen akquirierten Aktien vornehmen. Dabei werden in den Modellen die Charakteristika der bei Zusammenschlüssen aufgekauften Unternehmen identifiziert und die Rendite für die Aktionäre des aufkaufenden Unternehmens geschätzt. Auch wenn alle vier Hypothesen in gewisser Hinsicht Bestätigung finden, untermauern die meisten Belege die zwei Verhaltenshypothesen.</i>
    Keywords: Mergers waves, managerial discretion, overvaluation
    JEL: G34 L2
    Date: 2006–01
  13. By: Pablo Vázquez (Universidad de Alicante)
    Abstract: Based on two theoretical works, Burgstahler y Dichev (1997) and Zhang (2000), this paper tests an option-style valuation approach whose main prediction is that market value is a convex function of both earnings and book value, where the function depends on the relative values of earnings and book value (ROE). Consistent with the theoretical predictions I find that: (i) given a book value, the market value is an increasing function of earnings; (ii) given a value of earnings, the market value increases with the book value for low-efficiency firms, it is insensitive to the book value for steady-state firms, and decreases with the book value for growth firms; (iii) given a book value (earnings), the market value is a convex function of earnings (book value); (iv) for low-efficiency firms, book value is more powerful in explaining market value than earnings; (v) for steady-state firms, earnings are a significant explanatory variable, and book value adds little incremental explanatory power; and (vi) for growth firms, earnings and book value together explain market value, but earnings are more relevant. Basado en los modelos de valoración tipo opción desarrollados por Burgstahler y Dichev (1997) y Zhang (2000), el presente trabajo tiene por objeto la validación empírica para el caso español de las predicciones que se derivan de ambos modelos en torno a la relación entre el valor de mercado de una empresa y el beneficio y los fondos propios de la misma. En consonancia con las predicciones teóricas, encuentro que (i) dado un nivel de fondos propios, el valor de mercado es una función creciente del beneficio (excepto cuando éste es de signo negativo); (ii) dado un nivel de beneficio, el valor de mercado crece conforme aumentan los fondos propios en empresas de baja eficiencia, es insensible a los fondos propios en empresas en estado estacionario y decrece conforme aumentan los fondos propios en empresas con crecimiento potencial; (iii) dado un nivel de fondos propios (beneficio), el valor de mercado es una función convexa del beneficio (fondos propios); (iv) en empresas de baja eficiencia, el poder explicativo de los fondos propios es superior al del beneficio; (v) en empresas en estado estacionario, el beneficio es la variable dominante; y (vi) en empresas con crecimiento potencial, aún siendo ambas variables relevantes, la relevancia del beneficio es superior.
    Keywords: Valor de Mercado de la Empresa; Beneficio; Fondos Propios; Opciones reales; Convexidad; Poder Explicativo Adicional Value-Relevance; Earnings; Book Value; Real Options; Convexity; Incremental Explanatory Power.
    Date: 2005–01
  14. By: Santiago J. Rubio (Universitat de València)
    Abstract: In this paper we model the case of an international non-renewable resource monopolist as a differential game between the monopolist and the governments of the importing countries, and we investigate whether a tariff on the resource importations can be advantageous for the importing countries. We find that the results depend crucially on the kind of strategies the importing country governments can play and on whether the monopolist chooses the price or the extraction rate. For a price-setting monopolist it is shown that the importing countries cannot use a tariff to capture monopoly rents if they are constrained to use open-loop strategies, even if the governments sign a tariff agreement. This result is drastically modified if the importing countries in the tariff agreement use Markov (feedback) strategies. For a quantity-setting monopolist the nature of the game changes and an open-loop tariff is advantageous for the importing countries. Moreover, in this case the importing countries in a tariff agreement enjoy a strategic advantage which allows them to behave as a leader.
    Keywords: tariffs, tariff agreements, non-renewable resources, depletion effects, price-setting monopolist, quantity-setting monopolist, differential games, open-loop strategies, linear strategies, Markov-perfect Nash equilibrium, Markov-perfect Stackelberg equilibrium
    JEL: C73 D41 D42 F02 H20 Q38
    Date: 2005–03
  15. By: Santiago J. Rubio (Universitat de València); María Dolores Alepuz (Universitat de València)
    Abstract: In this paper the optimal policy and the stability of a tariff agreement among the importers of a monopolized good that is sold in an integrated market are studied. To analyze the stability, the tariff agreement formation is modelled as a two-stage game. In the first stage each importer decides whether or not to sign the agreement and in the second stage the signatories and non-signatories choose their tariff whereas the monopoly chooses the quantity or the price. The findings show that the optimal policy of the importers depends on which strategic variable is selected by the monopolist but that, on the contrary, this decision has no effects on the level of cooperation that can be reached by a self-enforcing tariff agreement that, in any case, is very low.
    Keywords: foreign monopolies, self-enforcing tariff agreements, integrated markets, rent-shifting hypothesis, prices versus quantities
    JEL: D42 F13
    Date: 2005–12
  16. By: Amparo Nagore (Universitat de València); Joaquín Maudos Villarroya (Instituto Valenciano de Investigaciones Económicas)
    Abstract: This paper presents evidence on the impact of bank-specific, regulatory, institutional, macro and financial development variables on competition in banking, using information at both national and bank level. With this aim, Lerner indices of market power are estimated using a sample of 10,479 annual observations over the period 1995-99 across 58 countries. Results show that although bank-specific characteristics explain a substantial proportion of market power, market structure variables and, above all, the level of financial development also help to explain the differences observed in the levels of banking competition. Regulatory impediments to competition are not significant when controlling for financial development. Este artículo presenta evidencia del impacto que las variables específicas de cada banco, las regulatorias, institucionales, macroeconómicas y de desarrollo financiero ejercen sobre la competencia bancaria, utilizando información tanto a escala nacional como a nivel de empresa. Con este objetivo, se estiman índices de Lerner de poder de mercado utilizando 10.479 observaciones durante el periodo de 1995-99 para una muestra de 58 países. Los resultados muestran que, aunque las características específicas de cada banco explican una parte sustancial del poder de mercado (especialmente el tamaño y la eficiencia), las variables de estructura del mercado, y, sobretodo, el nivel de desarrollo financiero también ayudan a explicar las diferencias observadas en los niveles de competencia bancaria. Las barreras regulatorias a la competencia no son significativas cuando se controla por desarrollo financiero.
    Keywords: banking, market power Banca, poder de mercado
    JEL: G21 D43 L13
    Date: 2005–04
  17. By: Granier, L.
    Abstract: Kamien and Zang (1990 and 1993) give monopolization conditions for static and dynamic acquisition games. Introducing cost heterogeneity in these games, we find enlarged monopolization conditions. Indeed, we show that every industry can be monopolized if cost heterogeneity is large enough.
    JEL: L12 L41
    Date: 2005

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