nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒02‒12
twenty-two papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Mergers under Asymmetric Information – Is there a Lemons Problem? By Thomas Borek; Stefan Buehler; Armin Schmutzler
  2. Anti-Limit Pricing By Byoung Heon Jun; In-Uck Park
  3. The optimal behaviour of firms facing stochastic costs By Francesco Menoncin; Rosella Nicolini
  4. Switch on the competition; causes, consequences and policy implications of consumer switching costs. By Marc Pomp; Victoria Shestalova; L. Rangel
  5. Switching Costs, Firm Size, and Market Structure By Simon Loertscher; Yves Schneider
  6. Deregulating Network Industries: Dealing with Price-Quality Tradeoffs By Stefan Buehler; Dennis Gaertner; Daniel Halbheer
  7. On The Role of Access Charges Under Network Competition By Stefan Buehler; Armin Schmutzler
  8. Asymmetric Vertical Integration By Stefan Buehler; Armin Schmutzler
  9. Intimidating Competitors – Endogenous Vertical Integration and Downstream Investment in Successive Oligopoly By Stefan Buehler; Armin Schmutzler
  10. Price formation in a sequential selling mechanism By Radosveta Ivanova-Stenzel; Sabine Kröger
  11. Interlocking directorates in Spanish banking in the twentieth century By Francisco J. Pueyo
  12. Competition Policy and Exit Rates: Evidence from Switzerland By Stefan Buehler; Christian Kaiser; Franz Jaeger
  14. Research Joint Ventures, Licensing, and Industrial Policy By Cuihong Fan; Elmar Wolfstetter
  15. Measuring Market Conduct in the Brazilian Cement Industry: a Dynamic Econometric Investigation By Rodrigo M. Zeidan; Marcelo Resende
  16. Price regulation and generic competition in the pharmaceutical market By Dalen, Dag Morten; Strøm, Steinar; Haabeth, Tonje
  17. How do consumers overcome ambivalence toward hedonic purchases ? a typology of consumer strategies By Dubois, Bernard; Laurent, Gilles; Czellar, Sandor
  18. From household to individual’s welfare: does the Lorenz criteria still hold? Theory and Evidence from French Data By Helen Couprie; Eugenio Peluso; Alain Trannoy
  19. Competition for Railway Markets: The Case of Baden-Wuerttemberg By Rafael Lalive; Armin Schmutzler
  20. The Market for Patents in Europe By Alfonso Gambardella; Paola Giuri; Alessandra Luzzi
  21. Competition in markets for life insurance. By Marc Pomp; M. Bijlsma; Machiel van Dijk; Michiel van Leuvensteijn; C. Zonderland
  22. Institutions, Bargaining Power and Labor Shares By Benjamin Bental; Dominique Demougin

  1. By: Thomas Borek (Department of Mathematics, Swiss Federal Institute of Technology Zurich); Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.
    Keywords: merger, asymmetric information, oligopoly, single crossing
    JEL: D43 D82 L13 L33
    Date: 2004–07
  2. By: Byoung Heon Jun; In-Uck Park
    Abstract: Extending Milgrom and Roberts (1982) we present an infinite horizon entry model, where the incumbent(s) may use the current price to signal its strength to deter entry. We show that, due to the importance of entrants' types on the post-entry duopoly/oligopoly pro?ts, the incumbent(s) may want to signal its weakness to invite entry of weaker firms. (JEL D42, D43, D82, L11)
  3. By: Francesco Menoncin; Rosella Nicolini
    Abstract: This paper aims at assessing the optimal behavior of a firm facing stochastic costs of production. In an imperfectly competitive setting, we evaluate to what extent a firm may decide to locate part of its production in other markets different from that which it is actually settled. This decision is taken in a stochastic environment. Portfolio theory is used to derive the optimal solution for the intertemporal profit maximization problem. In such a framework, splitting production between different locations may be optimal when a firm is able to charge different prices in the different local markets.
  4. By: Marc Pomp; Victoria Shestalova; L. Rangel
    Abstract: The success or failure of reforms aimed at liberalising markets depends to an important degree on consumer behaviour. If consumers do not base their choices on differences in prices and quality, competition between firms may be weak and the benefits of liberalisation to consumers may be small. One possible reason why consumers may respond only weakly to differences in price and quality is high costs of switching to another firm. This report presents a framework for analysing markets with switching costs and applies the framework in two empirical case studies. The first case study analyses the residential energy market, the second focuses on the market for social health insurance. In both markets, there are indications that switching costs are substantial. The report discusses policy options for reducing switching costs and for alleviating the consequences of switching costs.
    Keywords: Switching costs; consumer behaviour; competition; energy markets; health insurance
    JEL: L13 D12
    Date: 2005–09
  5. By: Simon Loertscher (Economic Department, University of Berne); Yves Schneider (Socioeconomic Institute, University of Zurich)
    Abstract: In many markets, homogenous goods and services are sold both by large global frms and small local frms. Surprisingly, the large frms charge, often substantially, higher prices. Examples include hotels, airlines, and coffee shops. This paper provides a parsimonious model that can account for these pricing patterns. In this model, consumers face costs when switching from one supplier to another and consumers change locations with a given positive probability. Consequently, large frms or "chain stores" insure consumers against this switching cost. The model predicts that chain stores and local stores coexist in equilibrium and that chain stores charge higher prices and yet attract more consumers than local stores. As consumer mobility increases, the profits of both local stores and chain stores increase, but the chain stores' profts increase at a faster rate.
    Keywords: Firm size, switching costs, consumer mobility, market structure
    JEL: D43 L15
    Date: 2005–08
  6. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Dennis Gaertner (Socioeconomic Institute, University of Zurich); Daniel Halbheer (Socioeconomic Institute, University of Zurich)
    Abstract: This paper examines the e®ects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we ¯rst show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.
    Keywords: infrastructure quality, deregulation, investment incentives, access charges, regulation
    JEL: D43 L43
    Date: 2004–01
  7. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We aim to clarify the role of access charges under two-way network competition, employing a reduced-form approach. Retaining the key features of specific network competition models but imposing less structure, we analyze the impact of changes in access charges on linear and non-linear retail prices. We derive su.cient conditions for usage fees to be increasing (and subscriber charges to be decreasing) in access charges. These conditions are shown to be satisfied only under rather restrictive assumptions on the demand for calls, suggesting that implementing collusion by inflating access charges is likely to be nonfeasible.
    Keywords: network competition, two-way access, collusion, nonlinear retail prices
    JEL: D43 L43
    Date: 2005–01
  8. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We examine vertical backward integration in a reducedform model of successive oligopolies. Our key findings are: (i) There may be asymmetric equilibria where some firms integrate and others remain separated, even if firms are symmetric initially; (ii) Efficient firms are more likely to integrate vertically. As a result, integrated firms also tend to have a large market share. The driving force behind these findings are demand/mark-up complementarities in the product market. We also identify countervailing forces resulting from strong vertical foreclosure, upstream sales and endogenous acquisition costs.
    Keywords: successive oligopolies, vertical integration, effciency, foreclosure
    JEL: L13 L22 L40 L82
    Date: 2003–08
  9. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We examine the interplay of endogenous vertical integration and costreducing downstream investment in successive oligopoly. We start from a linear Cournot model to motivate our more general reducedform framework. For this general framework, we establish the following main results: First, vertical integration increases own investment and decreases competitor investment (intimidation effect). Second, asymmetric equilibria typically involve integrated firms that invest more into effciency than their separated counterparts. Our findings suggest that asymmetric vertical integration is a potential explanation for the initial difference between leader and laggard in investment games.
    Keywords: vertically related oligopolies, investment, vertical integration, cost reduction
    JEL: L13 L20 L22
    Date: 2004–07
  10. By: Radosveta Ivanova-Stenzel (Department of Economics, Spandauer Str. 1, D-10178 Berlin, Germany.; Sabine Kröger (Université Laval, Département d’économique, Pavillon J.A.DeSève, Québec city, Québec, G1K 7P4 Canada.
    Abstract: This paper analyzes the trade of an indivisible good within a two-stage mechanism, where a seller first negotiates with one potential buyer about the price of the good. If the negotiation fails to produce a sale, a second–price sealed–bid auction with an additional buyer is conducted. The theoretical model predicts that with risk neutral agents all sales take place in the auction rendering the negotiation prior to the auction obsolete. An experimental test of the model provides evidence that average prices and profits are quite precisely predicted by the theoretical benchmark. However, a significant large amount of sales occurs already during the negotiation stage. We show that risk preferences can theoretically account for the existence of sales during the negotiation stage, improve the fit for buyers’ behavior, but is not sufficient to explain sellers’ decisions. We discuss other behavioral explanations that could account for the observed deviations.
    Keywords: auction, negotiation, combined mechanism, sequential mechanism, risk preferences, experiment
    JEL: C72 C91 D44 D82
    Date: 2005–10
  11. By: Francisco J. Pueyo
    Abstract: Spanish banking historiography asserts that the largest banks performed in the twentieth century as though they constituted a monopoly. One of their main coordination schemes would have been a network of interlocking bank directors that would include most of the financial firms. Evidence available for the 1920s and 1960s seems to confirm the veracity of this hypothesis. In this paper, more systematic evidence is presented to cover the whole twentieth century with the aim of checking whether these networks persisted over the entire period or they were by-products of temporary situations. Our results show that no general network remained for more than a decade. Therefore, it should be ruled out that interlocking directorates worked as a coordination device of an alleged banking cartel.
    Keywords: Monopolization strategies, Interlocking directorates, Spanish banking
    JEL: L12 L14 N24
    Date: 2006–01
  12. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Christian Kaiser (University of St. Gallen); Franz Jaeger (University of St. Gallen)
    Abstract: This paper provides evidence on the relation between the intensity of product market competition and the probability of exit. We adopt a natural experiment approach towards analyzing the impact of a tightening of Swiss antitrust legislation on exit probabilities. Based on a sample of more than 68,000 firms from all major sectors of the Swiss economy, we find that the exit probability of nonexporting firms increased significantly, whereas the exit probability of exporting firms remained largely unaffected. Our results support the notion that there is a positive relationship between the intensity of product market competition and the probability of exit.
    Keywords: competition intensity, exit, natural experiment
    JEL: D43 L23 L40
    Date: 2004–03
  13. By: Hernán Vallejo G
    Abstract: This paper analyses two approaches to measuring market power –the commonly used Lerner index and a range of exploitation measures-. It is argued that the Lerner index is designed to quantify market power from the supply side, and the exploitation measures are designed to quantify market power from the demand side, and that those two approaches do not always behave in a symmetric way, since they do not always have the same bounds. To sort out these potentially undesirable properties, this paper proposes a new general index to measure market power, which is symmetrical in the sense that it is bounded between cero and one, regardless of whether the market power comes from the supply or the demand side. The index proposed allows for the presence of more than one firm and for the existence of conjectural variations.
    Date: 2005–10–30
  14. By: Cuihong Fan (Shanghai University of Finance and Economics, School of Economics, Guoding Road 777, 200433 Shanghai, China.; Elmar Wolfstetter (Humboldt University at Berlin, Dept. of Economics, Institute of Economic Theory I, Spandauer Str. 1, D–10178 Berlin, Germany.
    Abstract: This paper reconsiders the explanation of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to license their innovations and to pool their R&D investments. We show that in equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the export oligopoly game. Nevertheless, national governments are driven to subsidize their own national firms in order to increase their strength in the joint venture bargaining game. Therefore, our analysis suggests an alternative explanation of the observed proliferation of R&D subsidies.
    Keywords: patent licensing, industrial organization, R&D subsidies, research joint ventures, innovation policy
    JEL: L13 O34
    Date: 2005–10
  15. By: Rodrigo M. Zeidan; Marcelo Resende
    Abstract: Indirect assessments of market conduct have become widespread in the New Empirical Industrial Organization-NEIO literature. Recently, Steen and Salvanes (1999) provided a flexible dynamic econometric formulation of the approach advanced by Bresnahan (1982) and Lau (1982). The present paper considers a similar approach as applied to regional cement markets in Brazil under more favorable data availability and it also attempts to address part of the critiques that usually emerge with respect to the NEIO literature. In particular, issues pertaining to structural stability and yet the control for the number of competing firms are addressed. The evidence clearly indicates non-negligible and distinct market power in the different regions and yet distinct conduct patterns in the short and long-run.
    JEL: L11 L13
    Date: 2005
  16. By: Dalen, Dag Morten (Norwegian School of Management and the Frisch Centre); Strøm, Steinar (Dept. of Economics, University of Oslo); Haabeth, Tonje (University of Oslo and the Frisch Centre)
    Abstract: In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap, termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition. Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; evaluation of yardstick based price regulation
    JEL: C35 D43 I18 L11
    Date: 2005–11–25
  17. By: Dubois, Bernard; Laurent, Gilles; Czellar, Sandor
    Abstract: Purchase decisions for hedonic products and services are often characterized by ambivalence -sensory benefits make them attractive, but consumers may feel guilty about bying them. To overcome this ambivalence, consumers frequently adopt strategies that allow them to enloy hedonic benefits while limiting their negative feelings. Combining an extensive literature review with an interpretive study, the authors identify 23 consumer strategies and propose a typology in four groups on the basis of strategy antecedents: two groups of objective strategies (obtaining consumption benefits without purchasing, objectively contining purchasing costs) and two groups of subjective strategies (manipulating the mental accounting of costs and benefits, relinquishing responsability).
    Keywords: consumer behavior; hedonic purchase; consumer strategies
    JEL: D12
    Date: 2006–02–06
  18. By: Helen Couprie; Eugenio Peluso; Alain Trannoy
    Abstract: Consider an income distribution among households of the same size in which individuals, equally needy from the point of view of an ethical observer, are treated unfairly within the household. In the first part of the paper, we look for necessary and sufficient conditions under which the Generalized Lorenz test is preserved from household to individual level. We find that the concavity of the expenditures devoted to public goods relatively to household income is a necessary condition. This condition also becomes sufficient, if joined with the concavity of the expenditure devoted to private goods of the dominated individual. The results are extended to the case of heterogeneous populations, when more complex Lorenz comparisons are involved. In the second part of the paper, we propose a new method to identify the intra-family sharing rule. The double concavity condition is then non-parametrically tested on French households.
    Keywords: Lorenz comparisons, intra-household inequality, concavity
    JEL: D63 D13 C14
    Date: 2005–11
  19. By: Rafael Lalive (Institute for Empirical Economics, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: This paper studies the e.ects of introducing competition for local passenger railway markets in the German state of Baden-Wuerttemberg. We compare the evolution of the frequency of service on lines that were exposed to competition for the market and lines that were not. Our results suggest that competitive lines enjoyed a stronger growth of the frequency of service than non-competitive lines, even after controlling for various line characteristics that might have an independent influence on the frequency of service. Our results further suggest that the e.ects of competition may depend strongly on the operator and on characteristics of the line.
    Keywords: Competition for the market, liberalization, passenger railways, procurement auctions
    JEL: D43 D44 R48
    Date: 2005–09
  20. By: Alfonso Gambardella; Paola Giuri; Alessandra Luzzi
    Abstract: By using the PatVal-EU dataset we find that the most important determinant of patent licensing is firm size. Patent breadth, value, protection, and other factors suggested by the literature also have an impact, but not as important. In addition, most of these factors affect the willingness to license, but not whether a license actually takes place. We discuss why this suggests that there are transaction costs in the markets for technology. The issue is important because many potential licenses are not licensed suggesting that the markets for technology can be larger, with implied economic benefits.
    Keywords: Licensing, Patent scope, Complementary assets, Firm size, Markets for technology
    Date: 2006–02–09
  21. By: Marc Pomp; M. Bijlsma; Machiel van Dijk; Michiel van Leuvensteijn; C. Zonderland
    Abstract: This report presents an empirical analysis of competition in the market for life insurance. In this market, financial advisors play a large role. Therefore, the report devotes considerable attention to the functioning of the market for financial advice. The main findings are as follows. Empirical indicators of competition find only weak competition in the market for life insurance. There are substantial economies of scale, large X-inefficiencies, and limited competition as measured by the Boone-indicator compared to other services sectors. Also, the higher profitability of Dutch life insurers compared to their foreign peers suggests weak competition, although it should be pointed out that this indicator mainly reflects the situation in the past. Better functioning of financial advisors offers a key towards improving competition. Consumers who purchased annuities through advisors are found to achieve lower pay-outs than consumers who purchased directly from life insurers. This finding underlines the importance of more transparency of life insurance products and of independent advice.
    Keywords: competition; life insurance; financial advice
    JEL: L13 D14
    Date: 2005–09
  22. By: Benjamin Bental; Dominique Demougin
    Abstract: We use a static framework characterized by both moral hazard and holdup problems. In the model the optimal allocation of bargaining power balances these frictions. We examine the impact of improved monitoring on that optimal allocation and its impact upon effort, investment, profits and rents. The model’s predictions are consistent with the recent evolution of labor shares, wages per efficiency units and the ratio of labor in efficiency units to capital in several OECD countries. The model suggests further that improvement in monitoring may also play a key role in understanding opposition to institutional reforms in the labor market.
    Keywords: moral hazard, hold up, bargaining, labor share
    JEL: D24
    Date: 2006–01

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