nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒04‒22
sixteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Unexploited connections between intra- and inter-temporal allocation By Thomas Crossley; Hamish Low
  2. Advertising: "The Good, the Bad and the Ugly" By Lynne Pepall; Dan Richards; Liang Tan
  3. Equilibrium Size in Network with Indirect Network Externalities: a Comment By Roberto Roson
  4. Ownership Structure of Cable Networks and Competition in Local Access By Duarte Brito; Pedro Pereira
  5. Some Investment and Competition Implications of the Ownership Structure of Overlapping Networks By Duarte Brito; Pedro Pereira
  6. Quality and Competition: An Empirical Analysis across Industries By John M. Crespi; Stephan Marette
  7. Delegation Versus Centralization: The Role of Externalities By Sergio Currarini; Francesco Feri
  8. Innovation and Dominant Design in Mobile Telephone By Heli Koski; Tobias Kretschmer
  9. Consumer Demand under Price Uncertainty: Empirical Evidence from the Market for Cigarettes By Mark Coppejans; Donna Gilleskie; Holger Sieg; Koleman Strumpf
  10. New Networks, Competition and Regulation By Pio Baake; Ulrich Kamecke
  11. Public Good Menus and Feature Complementarity By Christian Roessler
  12. Theory of Demand in Incomplete Markets By Sergio Turner
  13. Entry, Costs Reduction, and Competition in the Portuguese Telephony Industry By Philippe Gagnepain; Pedro Pereira
  14. Merger stability in a three firm game By Duarte Brito; João Gata
  15. An Economist Sells Bagels: A Case Study in Profit Maximization By Steven D. Levitt
  16. Network Design in Games with Spillovers By Sergio Currarini

  1. By: Thomas Crossley; Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge)
    Abstract: This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identi…ed by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.
    Keywords: Elasticity of intertemporal substitution, Euler equation estimation, demand systems
    JEL: D91 E21 D12
    Date: 2005–11
  2. By: Lynne Pepall; Dan Richards; Liang Tan
    Abstract: We model the choice of firms competing in prices in a differentiated products market to bundle advertising messages with their goods in return for payment from advertisers. From the firms’ perspective, the potential to earn revenue from advertisers, makes advertising a “good”. However, because consumers in the product market dislike such advertising, the bundling dampens demand and in this sense is a “bad”. There is also a third role played by advertising, however. Since a firm that bundles advertisements with its good sells a less attractive good, it has to price more aggressively than one that does not do such bundling. Thus, bundling advertisements with the good can lead to more aggressive product pricing and thereby intensify product market competition. In this sense, advertising can make things “ugly”.
    Date: 2006
  3. By: Roberto Roson (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This commentary critically reviews a recent paper by Baraldi (2004). It shows that results obtained there are not robust, and may mot hold after the introduction of minor changes in the model structure. It is claimed that this is not a technical point, but relates to the fundamental nature of markets with indirect externalities.
    Keywords: Network Externalities, Two-Sided Networks
    JEL: L10 L40
    Date: 2006
  4. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this paper, we discuss the role of cable television networks and their ownership structure in promoting competition in the local access market. First, we show that the dual ownership of a local telephone network and a cable network, compared with separate ownership, may increase or decrease incentives to invest in upgrading the cable television network. Second, we argue that separate ownership of the two networks is important to promote competition in local access.
    Keywords: Cable Networks, Local Access, Competition
    JEL: L43 L96
    Date: 2005–04
  5. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article we discuss the role of cable television networks and their ownership structure, in promoting competition in the local access market. An upgraded cable network can o¤er telecommunication services, and therefore can compete with the public switched telephone network. First, we show that the joint ownership of a local telephone network and a cable network, compared with separate ownership, may increase or decrease incentives to invest in upgrading the cable television network. Second, we argue that separate ownership of the two networks is important to promote competition in local access. Third, we perform the welfare analysis of the investment decision and the ownership structure.
    Keywords: Cable Networks, Local Access, Competition
    JEL: L43 L96
    Date: 2006–02
  6. By: John M. Crespi; Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI))
    Abstract: This paper empirically explores the link between quality and concentration in a cross-section of manufactured goods. Using concentration data and product quality indicators, an ordered probit estimation explores the impact of concentration on quality that is defined as an index of quality characteristics. The results demonstrate that market concentration and quality are positively correlated across different industries. When industry concentration increases, the likelihood of the product being higher quality increases and the likelihood of observing a lower quality decreases.
    Keywords: concentration, market structure, ordered probit, product differentiation, product quality.
    Date: 2006–03
  7. By: Sergio Currarini (Department of Economics, University Of Venice Cà Foscari); Francesco Feri (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We study a simple contracting game with a principal and two agents. Contracts exert an externalities on non contractors. The principal can either contract both agents in a centralized manner, or delegate one agent to contract the other. We show that the choice of the principal depends on the sign of the externality. If this is positive, the principal prefers to delegate as long as the agency costs are not too high; if the externality is negative, the principal prefers to centralize for all sizes of agency costs.
    Keywords: Contracts, Externalities, Centralization, Delegation.
    JEL: D23 C71 C72
    Date: 2006
  8. By: Heli Koski; Tobias Kretschmer
    Keywords: Product innovation, mobile phone handsets, dominant design, min-max principle
    JEL: L15 L96 O32
    Date: 2006–04–03
  9. By: Mark Coppejans; Donna Gilleskie; Holger Sieg; Koleman Strumpf
    Abstract: The goal of this paper is to analyze consumer demand in markets with large price uncertainty. We develop a demand model for goods that are subject to habit formation. We show that consumption plans of forward looking individuals depend not only on preferences and current period prices, but also on individual beliefs about the evolution of future prices. Moreover, a mean preserving spread in the price distribution and, hence, an increase in price uncertainty reduces consumption along the optimal path. With smoking as our application, we test the predictions of our model. We use a unique data set of prices for cigarettes collected by the Bureau of Labor Statistics to characterize price uncertainty and price expectations of individuals. We have also obtained access to the restricted use version of the National Education Longitudinal Study, which provides detailed information on smoking behavior of teenagers in the U.S. Our estimation results suggest that teenagers who live in metropolitan areas with a large amount of cigarette price volatility have, on average, significantly lower levels of cigarette consumption. Moreover, these individuals are less likely to start consuming cigarettes. Our results also provide evidence that young individuals are forward looking. Myopic individuals would not respond to an increase in uncertainty about future prices by reducing consumption.
    JEL: C8 D8 I1
    Date: 2006–04
  10. By: Pio Baake; Ulrich Kamecke
  11. By: Christian Roessler
    Abstract: The distance metric on the location space for multidimensional public good varieties represents complementarity between the goods features. "Euclidean" feature complementarity has atypical strong properties that lead to a failure of intuition about the optimal-menu design problem. If the population is heterogeneous, increasing the distance between two varieties is welfare-improving in Euclidean space, but not generally. A basic optimal-direction principle always applies: "anticonvex" menu changes increase participation and surplus. A menu replacement is anticonvex if it moves the varieties apart in the common line space. The result extends to some impure public goods with break-even pricing and variety-specic costs. A sufficient condition for menus to be Pareto-optimal is that "personal price" (nominal price plus perceived distance from a variety) is linear in the norm that induces the distance metric.
    Keywords: Public Good Menus; complementarity
    JEL: H41 D78 D71 R13 R12
    Date: 2006
  12. By: Sergio Turner
    Date: 2006
  13. By: Philippe Gagnepain (Universidad Carlos III de Madrid); Pedro Pereira (Autoridade da Concorrência)
    Keywords: Mobile Telephony, Entry, Competition, Efficiency, Empirical Analysis
    JEL: L13 L43 L93
    Date: 2005–02
  14. By: Duarte Brito (Universidade Nova de Lisboa); João Gata (Autoridade da Concorrência and Universidade de Aveiro and UECE/ISEG-UTL)
    Abstract: We compare different notions of stability in three firm merger games. We discuss some of their shortcomings and introduce an alternative notion of stability which overcomes them. The paper concludes with an illustrative example.
    Keywords: endogenous mergers, stability, core.
    JEL: L13 L41
    Date: 2006–01
  15. By: Steven D. Levitt
    Abstract: Profit maximizing behavior on the part of firms is a fundamental, but rarely tested, assumption of economics. In this paper, I analyze the decisions made by an MIT trained economist running a company that delivers bagels and donuts. The simplicity and transparency of the business (e.g. marginal cost is easily observed) allow for direct tests of profit maximization in the quantities delivered each day and the prices that are charged. Using thirteen years of data representing more than 80,000 deliveries, I find that the company is extremely adept at determining how many bagels and donuts to deliver to a particular customer on a given day. In stark contrast, the company appears to price on the inelastic portion of the demand curve for the entire period, thereby foregoing a substantial share of available profits. I argue that these results generalize well beyond this particular case study: firms are likely to be close to the efficient frontier on dimensions for which there is frequent and informative feedback regarding profits, but absent that feedback, systematic deviations from profit maximization are more likely.
    JEL: L2
    Date: 2006–04
  16. By: Sergio Currarini (Department of Economics, University Of Venice Cà Foscari)
    Abstract: How should an organization be designed in order to provide its members with minimal incentives to defect? And how does the optimal design depend on the type of strategic interaction between defectors and remaining organizational members? This paper addresses such issues in a game theoretic model of cooperation, in which an organization is formally represented by a connected network, and where gains from cooperation are given by a partition function. We show that critical structural features of the organization depend in a clear-cut way on the sign of spillovers. In particular, positive spillovers favor the adoption of dispersed and centralized forms, while negative spillovers favor cohesive and horizontal ones. Moreover, if the organizational form determines all the communication possibilities of members, a highly centralized organization - the star - emerges under positive spillovers, whereas two horizontal architectures - the circle and the complete - emerge under negative spillovers.
    Keywords: Organizational design, networks, group stability, spillovers.
    JEL: C7 C71 D20
    Date: 2006

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