nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒02‒19
twenty-two papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Price competition and convex costs By Weibull, Jörgen
  2. Patents, Imitation and Licensing in an Asymmetric Dynamic R&D Race By Fershtman, Chaim; Markovich, Sarit
  3. Optimal Auction Design for Multiple Objects with Externalities By Vasiliki Skreta
  4. Beyond Regulation By Stephen Littlechild
  5. Markets: The Fulton Fish Market By Graddy, Kathryn
  6. Competition, regulation, and pricing behavior in the Spanish retail gasoline market. By Ignacio Contín-Pilart; Aad F. Correljé; M. Blanca Palacios
  8. Methods of Comparison in Games of Status By Ed Hopkins; Tatiana Kornienko
  9. Bargaining and Strategic Discrimination By Björnerstedt, Jonas; Westermark, Andreas
  10. Do Entry Conditions Vary over Time? Entry and Competition in the Broadband Market: 1999-2003 By Xiao, Mo; Orazem, Peter
  11. Coordination Costs: A Drawback for Research Joint Ventures? By Rod Falvey; Joanna Poyago-Theotoky; Khemarat Teerasuwannajak
  12. Optimal Auction Design under Non-Commitment By Vasiliki Skreta
  13. Revenue Equivalence for Arbitrary Type Spaces By Vasiliki Skreta
  14. Asymmetric Duopoly in Space - what policies work? By Dunkerley Fay; Andre de Palma; Proost Stef
  15. Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks By Paul L Joskow
  17. A Theoretical Analysis of Cooperative Behavior in Multi-Agent Q-learning By Waltman, L.; Kaymak, U.
  18. Market design By David Newbery
  19. Informational Intermediation and Competing Auctions By John Kennes; Aaron Schiff
  21. Antitrust in Open Economies By Francois, Joseph; Horn, Henrik
  22. Interconnection Negotiations between Telecommunication Networks and Universal Service Objectives By Vasiliki Skreta

  1. By: Weibull, Jörgen (Dept. of Economics, Stockholm School of Economics)
    Abstract: In the original model of pure price competition, due to Joseph Bertrand (1883), firms have linear cost functions. For any number of identical such price-setting firms, this results in the perfectly competitive outcome; the equilibrium price equal the firms’ (constant) marginal cost. This paper provides a generalization of Bertrand’s model from linear to convex cost functions. I analyze pure price competition both in a static setting - where the firms interact once and for all - and in dynamic setting - where they interact repeatedly over an indefinite future. Sufficient conditions are given for the existence of Nash equilibrium in the static setting and for subgame perfect equilibrium in the dynamic setting. These equilibrium sets are characterized, and it is shown that there typically exists a whole interval of Nash equilibrium prices in the static setting and subgame perfect equilibria in the dynamic setting. It is shown that firms may earn sizable profits and that their equilibrium profits may increase if their production costs go up.
    Keywords: Bertrand competition;
    JEL: D43
    Date: 2006–02–14
  2. By: Fershtman, Chaim; Markovich, Sarit
    Abstract: R&D is an inherently dynamic process which involves different intermediate steps that need to be developed before the completion of the final invention. Firms are not necessarily symmetric in their R&D abilities; some may have advantages in early stages of the R&D process while others may have advantages in other stages of the process. The paper uses a simple two-firm asymmetric ability multistage R&D race model to analyse the effect of different types of patent policy regimes and licensing arrangement on the speed of innovation, firm value and consumers' surplus. The paper demonstrates the circumstances under which a weak patent protection regime, which facilitates free imitation of any intermediate technology, may yield a higher overall surplus than a regime that awards patent for the final innovation. This result holds even in cases where the length of the patent is optimally calculated.
    Keywords: licensing; patent protection; R&D race
    JEL: D43 L1 O3
    Date: 2006–02
  3. By: Vasiliki Skreta
    Date: 2005–01–28
  4. By: Stephen Littlechild
    Abstract: The ‘standard model’ of electricity reform has been refined in many countries but not extended to others. Government is supplanting the role of regulation. Revised calculations suggest that the benefits of UK electricity privatisation were higher than previously estimated and more widely shared with consumers. Other calculations suggest that generation market power in the US is less than previously estimated by Lerner index calculations. Unduly tight price controls explain why there has been less customer switching in some residential electricity markets. There has been significant development of fixed price contracts in Nordic markets, posing questions for regulation in the absence of retail competition. There are alternatives to regulation of network monopolies. In Australia regulated interconnectors have been less economic than merchant interconnectors. In Argentina arrangements for users to determine transmission expansions have worked well. In Florida negotiated settlements have secured a better deal for customers than regulation.
    Keywords: : regulation, competition, electricity, transmission
    JEL: L94 L51
    Date: 2006–02
  5. By: Graddy, Kathryn
    Abstract: Centralized markets with large numbers of buyers and sellers are generally thought of as being competitive and well-functioning. However, an important role of centralized markets is matching heterogeneous products, such as fish, to buyers of these products. The high level of differentiation in the Fulton fish market and the institutional structure at the Fulton market has led to patterns of behaviour that suggest imperfect competition and market segmentation. At times in the past, the repeated nature of price setting and extensive knowledge of the sellers may have created the basis for tacit collusion and allowed the dealers to gather economic rents by exploiting the different elasticities and buying patterns. Additional economic rents at the market were created by subsidized rents and lax regulation created fertile ground for organized crime to operate.
    Keywords: fish; imperfect competition; markets; pricing
    JEL: D40 L10
    Date: 2006–02
  6. By: Ignacio Contín-Pilart (Universidad Pública de Navarra); Aad F. Correljé (Delft Technical University, and Clingendael International Energy Programme); M. Blanca Palacios (Universidad del País Vasco)
    Abstract: The restructuring of the Spanish oil industry produced a highly concentrated oligopoly in the retail gasoline market. In June 1990 the Spanish government introduced a system of ceiling price regulation in order to ensure that \"liberalization\" was accompanied by adequate consumer protection. This paper examines the pricing behavior of the retail gasoline market using multivariate error correction models over the period January 1993 (abolishment of the state monopoly)-December 2004. The results suggest that gasoline retail prices respond symmetrically to increases and decreases in the spot price of gasoline. However, one the ceiling price regulation was abolished, the \"collaboration\" between the government and the major operators, Repsol-YPF and Cepsa-Elf in order to control the inflation rate results in a slower rate of increase (decrease) of gasoline retail prices when gasoline spot prices went up (went down) than elsewhere in the European Union. Finally, retail margins were by the end of our timing period of analysis, as in the first years after the abolishment of the state monopoly, well above the European ones.
    Keywords: Competition, regulation, pricing behavior, gasoline market
    JEL: L11 L43 L51 L71
    Date: 2006–02–08
  7. By: William R. Zame (University of California)
    Date: 2005–07–01
  8. By: Ed Hopkins; Tatiana Kornienko
    Abstract: This paper considers the effects of changes in the income distribution in an economy where agents’ utility depends both on consumption and on their rank in the distribution of consumption of a positional good. We introduce a new methodology to compare the behavior of agents that occupy the same rank in the two different income distributions but typically have different levels of incomes, and analyze equilibrium choices and welfare of every member of the society for continuous distributions with arbitrary, even disjoint, ranges. If an income transformation raises incomes at the lower end of the income distribution, the poor will typically be better off. But because such an income transformation also increases the degree of social competition, the middle class will typically be worse off - even if they have higher incomes as well. An increase in incomes can make all better off, but only if it is accompanied by an increase in income dispersion. Our new techniques highlight the importance of density of social space as we demonstrate that one can have an increase both in income and relative position but still be worse off.
    Keywords: Status, relative standing, income inequality, conspicuous consumption, consumption externalities, income inequality, social competitiveness, first price auctions, dispersive orderings.
    JEL: C72 D11 D31 D62
  9. By: Björnerstedt, Jonas (The Research Institute for Industrial Economics); Westermark, Andreas (Department of Economics)
    Abstract: In bargaining between two sellers and one buyer on prices and quantities, strategic inefficiencies arise. By reallocating between the last agreement and the first, the buyer can increase it's share of the surplus. With symmetric sellers producing substitutes, the quantities in the first agreement will be higher than the efficient, and lower than the efficient in the last, implying that sellers are strategically discriminated. In equilibrium when the sellers produce substitutes, the buyer agrees first with the seller with lowest marginal cost. Efficiency is decreasing in the symmetry of the sellers and in the relative bargaining power of the sellers.
    Keywords: Bargaining; discrimination; intermediate goods; labor demand
    JEL: C78 J22 J71 L10
    Date: 2006–02–08
  10. By: Xiao, Mo; Orazem, Peter
    Abstract: We extend Bresnahan and Reiss’s (1991) model of local oligopoly to allow firm entry and exit over time. In our framework, entrants have to incur sunk costs in order to enter a market. After becoming incumbents, they disregard these entry costs in deciding whether to continue operating or to exit. We apply this framework to study market structure and competitive conduct in local markets for high-speed Internet service from 1999 to 2003. Replication of Bresnahan and Reiss’s framework generates unreasonable variation in firms’ competitive conduct over time. This variation disappears when entry costs are allowed. We find that once the market has one to three firms, the next entrant has little effect on competitive conduct. We also find that entry costs vary with the order of entry, especially for early entrants. Our findings highlight the importance of sunk costs in determining entry conditions and inferences about firm conduct.
    Keywords: Broadband, High-Speed Internet, Entry, Exit, Competition, Pricing, oligopoly
    JEL: L8
    Date: 2006–02–16
  11. By: Rod Falvey (School of Economics,University of Nottingham); Joanna Poyago-Theotoky (Department of Economics, Loughborough University); Khemarat Teerasuwannajak (Ministry of Foreign Affairs, Thailand)
    Abstract: We analyze a simple oligopoly model where firms can engage in cost-reducing R&D. We compare two R&D regimes, that is, R&D competition and R&D cooperation where firms can enter in a Research Joint Venture (RJV). We introduce coordination costs for the RJV and examine how these affect the equilibrium outcomes. Further, we examine the question of the equilibrium versus the optimal size of the RJV. For a given size of the RJV, its members decrease their own R&D as the anticipated coordination costs increase. This results in lower output and profits. On the contrary, the non-RJV firms increase their R&D investment in response to the fall in the RJV firms' R&D. We show that the performance of the RJV in terms of R&D investment, profit and welfare in relation to R&D competition is sensitive to the level of coordination costs. Furthermore, we show that, although the RJV as a whole may no longer conduct a unit of R&D at a lower cost compared to the independent firm under the non-cooperative R&D regime, its members can still make savings on their own R&D expense through information sharing. Finally, we find that not only the equilibrium size becomes smaller as coordination costs increase, but the discrepancy between the equilibrium and optimal sizes is widening. One important message from our analysis is that by ignoring the coordination costs of operating the RJV, the anticipated benefits or success of the cooperative project could have been grossly exaggerated.
    Keywords: research joint venture, coordination costs, equilibrium size, optimal size
    JEL: O30 L13 D43
    Date: 2006–02
  12. By: Vasiliki Skreta
    Date: 2005–01–28
  13. By: Vasiliki Skreta
    Date: 2005–01–28
  14. By: Dunkerley Fay (K.U.Leuven-Center for Economic Studies); Andre de Palma (Université de Cergy-Pontoise, ENPC and Member of Institut Universitaire de France, THEMA, 33,); Proost Stef (K.U.Leuven-Center for Economic Studies; UCL - CORE)
    Abstract: In this paper we study the problem of a city with access to two subcentres selling a differentiated product. The first subcentre has low free flow transport costs but is easily congested (near city centre, access by road). The second one has higher free flow transport costs but is less prone to congestion (ample public transport capacity, parking etc.). Both subcentres need to attract customers and employees by offering prices and wages that are sufficiently attractive to cover their fixed costs. In the absence of any government regulation, there will be an asymmetric duopoly game that can be solved for a Nash equilibrium in prices and wages offered by the two subcentres. This solution is typically characterised by excessive congestion for the nearby subcentre. We study the welfare effects of a number of stylised policies by setting up a general model and illustrating the model using competition between airports as an example. The first stylised policy is to extend the congested road to subcentre 1. This policy will not necessarily lead to less congestion as more customers will be attracted by the lower transport costs. The second policy option is to add congestion pricing (or parking pricing etc.) for the congested subcentre. This will decrease its profit margin and attract more customers. The third policy is acceptable for politicians: providing a direct subsidy to the remote subcentre, reducing its marginal costs. This policy will again ease the congestion problem for the nearby subcentre but will do this in a very costly way.
    Keywords: duopoly, imperfect competition, congestion, general equilibrium, airport competition
    JEL: L13 D43 R41 R13
    Date: 2005–12
  15. By: Paul L Joskow
    Abstract: Modern theoretical principles to govern the design of incentive regulation mechanisms are reviewed and discussed. General issues associated with applying these principles in practice are identified. Examples of the actual application of incentive r egulation mechanisms to the regulation of prices and service quality for “unbundled” transmission and distribution networks are presented and discussed. Evidence regarding the performance of incentive regulation in practice for electric distribution and transmission networks is reviewed. Issues for future research are identified.
    Keywords: regulation, incentives, networks, electricity, transmission, distribution
    JEL: L94 L51
    Date: 2006–02
  16. By: José Rueda-Llano (Universidad de Alicante); Luis Corchón (Universidad de Alicante)
    Abstract: In this paper we develop a differentiable approach to deal with incentives in a, possibly small, subset of a general domain of preferences in economies with one public and one private good. We show that, for two agents, there is no social rule which is efficient, nondictatorial and strategy-proof. For the case of more agents the same result occurs when nondictatorship is replaced by Individual Rationality or by Envy-Freeness. Journal of Economic Literature
    Keywords: Strategy-proofness, public goods economies, differentiable mechanisms
    JEL: D61 D78 H41
    Date: 2004–08
  17. By: Waltman, L.; Kaymak, U. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: A number of experimental studies have investigated whether cooperative behavior may emerge in multi-agent Q-learning. In some studies cooperative behavior did emerge, in others it did not. This report provides a theoretical analysis of this issue. The analysis focuses on multi-agent Q-learning in iterated prisoner?s dilemmas. It is shown that under certain assumptions cooperative behavior may emerge when multi-agent Q-learning is applied in an iterated prisoner?s dilemma. An important consequence of the analysis is that multi-agent Q-learning may result in non-Nash behavior. It is found experimentally that the theoretical results derived in this report are quite robust to violations of the underlying assumptions.
    Keywords: Prisoner?s Dilemma;Cooperation;Nash Equilibrium;Multi-Agent Reinforcement Learning;Multi-Agent Q-Learning;
    Date: 2006–02–01
  18. By: David Newbery
    Abstract: Europe is liberalising electricity in accordance with the European Commission’s Electricity Directives. Different countries have responded differently, notably in the extent of restructuring, treatment of mergers, market power, and vertical unbundling. While Britain and Norway have achieved effective competition, others like Germany, Spain and France are still struggling to deal with dominant and sometimes vertically integrated companies. The Netherlands offers an interesting intermediate case, where good economic analysis has sometimes been thwarted by legalistic interpretations. Investment under the new Emissions Trading system could further transform the electricity industry but may be hampered by slow progress in liberalising European gas markets.
    Keywords: Competition, liberalisation, restructuring, electricity, market power
    JEL: G34 K23 L51 L94
    Date: 2006–02
  19. By: John Kennes (Department of Economics, University of Copenhagen); Aaron Schiff (Department of Economics, University of Auckland)
    Abstract: We examine the effects of provision of information about seller qualities by a third-party in a directed search model with heterogeneous sellers, asymmetric information, and where prices are determined ex post. The third party separates sellers into quality-differentiated groups and provides this information to some or all buyers. We show that this always raises total welfare, even if it causes the informed buyers not to trade with low quality sellers. However, buyers and some sellers may be made worse off in equilibrium. We also examine the provision of information by a profit maximizing monopoly, and show that it may have an incentive to overinvest in the creation of information relative to the social optimum.
    Date: 2006–02
  20. By: Mitsunori Noguchi (Department of Economics Meijo University); William R Zame (UCLA Department of Economics/Div of Humanities Social Science/California Institute of Technology)
    Date: 2004–12–01
  21. By: Francois, Joseph; Horn, Henrik
    Abstract: We examine antitrust rules in a two-county general equilibrium trade model, contrasting national and multilateral (cooperative) determination of competition policy, exploring the properties of the policy equilibrium. It is not imperfect competition, but variation in competitive stance between sectors that matters for trading partners. Beggar-thy-neighbor competition policies relate to countries' comparative advantages, and hurt the factor intensively used, or specific to, the imperfectly competitive sector. They also create a competitive advantage for export firms. FDI can be pro-competitive in this context, reducing the scope for beggar-thy-neighbor policies and reducing the gains from a multilateral competition agreement.
    Keywords: antitrust policy; competition policy; FDI; merger policy; trade and imperfect competition
    JEL: F12 F3 L4
    Date: 2006–02
  22. By: Vasiliki Skreta
    Date: 2005–01–28

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