nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒04‒01
six papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Optimal Pricing with Recommender Systems By Dirk Bergemann; Deran Ozmen
  2. TRIP CHAINING: WHO WINS WHO LOSES? By Andre de Palma; Dunkerley Fay
  3. When Different Market Concentration Indices Agree By Hennessy, David A.; Lapan, Harvey E.
  4. Rational Expectations Equilibrium in Economies with Uncertain Delivery By Joao Correia-da-Silva; Carlos Hervés-Beloso
  5. Intermediation by aid agencies By Colin Rowat and Paul Seabright
  6. Mechanism Design with Renegotiation and Costly Messages By Robert Evans

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Deran Ozmen (Boston Consulting Group)
    Abstract: We study optimal pricing in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons which generate informational externalities. The quality of the recommendation add-on is endogenously determined by sales. We investigate the impact of these factors on the optimal pricing by a seller with a recommender system against a competitive fringe without such a system. If the recommender system is sufficiently effective in reducing uncertainty, then the seller prices otherwise symmetric products differently to have some products experienced more aggressively. Moreover, the seller segments the market so that customers with more inflexible tastes pay higher prices to get better recommendations.
    Keywords: Recommender system, Collaborative filtering, Add-ons, Pricing, Information externality
    JEL: D42 D83 D85
    Date: 2006–03
  2. By: Andre de Palma (Université de Cergy-Pontoise, ENPC and Member of Institut Universitaire de France, THEMA, 33); Dunkerley Fay (K.U.Leuven-Center for Economic StudiesAuthor-Name: Proost Stef; K.U.Leuven-Center for Economic Studies; UCL - CORE)
    Abstract: In this paper we study how trip chaining affects the pricing and equilibrium number of firms. We use a monopolistic competition model where firms offer differentiated products as well as differentiated jobs to households who are all located at some distance from the firms. Trip chaining means that shopping and commuting can be combined in one trip. The symmetric equilibriums with and without the option of trip chaining are compared. We show analytically that introducing the trip chaining option can, in the short run, only decrease the profit margin of the firms and will increase welfare. The welfare gains are however smaller than the transport cost savings. In the long run, with free entry, the number of firms decreases but welfare with trip chaining possible is still higher than when it is excluded. A numerical illustration gives orders of magnitude of the different effects.
    Keywords: trip chaining, discrete choice model, general equilibrium model, imperfect competition, wage competition
    JEL: D43 L13 R3
    Date: 2006–03
  3. By: Hennessy, David A.; Lapan, Harvey E.
    Abstract: Market concentration ratios are popular statistics for characterizing the extent of market dominance in an imperfectly competitive market, but these ratios may not agree when comparing two markets. Neither do they necessarily agree with the Herfindahl-Hirschman or entropy indices. This letter compares two Cournot oligopoly markets in which firms have constant unit costs. It is shown that the majorization pre-ordering on normalized marketing margin vectors is both necessary and sufficient for all aforementioned indices to agree on which is the more concentrated market.
    Keywords: anti-trust; cost dispersion; majorization.
    JEL: C6 D4
    Date: 2006–03–23
  4. By: Joao Correia-da-Silva (CEMPRE, Faculdade de Economia, Universidade do Porto); Carlos Hervés-Beloso (RGEA. Facultad de Económicas. Universidade de Vigo.)
    Abstract: In economies with uncertain delivery, objects of choice are lists of bundles instead of bundles. Agents trade their endowments for lists, and it is the market that selects one of the bundles in the list for actual delivery. Knowledge of the selection mechanism allows agents to predict the bundle that is to be selected in each state of nature. A small but informed agent is introduced in the economy in order to guarantee existence of a rational expectations equilibrium.
    Keywords: General equilibrium, Private information, Uncertain delivery, Rationalexpectations, Options, Default.
    JEL: C62 D51 D82
    Date: 2006–03
  5. By: Colin Rowat and Paul Seabright
    Abstract: This paper models aid agencies as financial intermediaries that do not make a financial return to depositors, whose concern is to transfer resources to investor-beneficiaries. This leads to a problem of verifying that the agency is using donations as intended. One solution to this problem is for an agency to employ altruistic workers at below-market wages: altruistic workers, who can monitor the agency's activities, would not work at below-market rates unless it were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible. In a model with pure moral hazard, observability of wages makes incorporation as a not-for-profit firm redundant as a commitment device. In a model with both moral hazard and adverse selection, incorporation as a not-for-profit firm can serve as a costly commitment mechanism reassuring donors against misuse of their funds. Hiring a worker of low ability can also be a valuable commitment device against fraud.
    Keywords: signalling, non-profit, wage differential, donations, altruism, two-sided market
    JEL: D21 D64 J31 L31
    Date: 2005–11
  6. By: Robert Evans
    Abstract: According to standard theory, the set of implementable outcome functions is reduced if the mechanism or contract can be renegotiated ex post. In some cases contracts can achieve nothing and so, for example, the holdup problem may be severe. This paper shows that if the mechanism is designed in such a way that sending a message involves a small cost (e.g., the opportunity cost of time spent attending a hearing) then ex post renegotiation essentially does not restrict the set of implementable functions. Any Pareto-efficient, bounded social choice function can be implemented in subgame-perfect equilibrium, for any strictly positive message cost.
    Keywords: Implementation with Renegotiation, Incomplete Contracts, Hold-up problem, Communication Costs
    JEL: D23
    Date: 2006–03

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