nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒05‒06
eighteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Capital Accumulation and Horizontal Mergers in Differential Oligopoly Games By R. Cellini; L. Lambertini
  2. Entry and Accommodation in Airline Markets: Easyjet Caught in the Middle on the London-Grenoble Route By Cristina Barbot
  3. Price setting behaviour in the Netherlands - results of a survey By Marco Hoeberichts; Ad Stokman
  4. Strategic and extensive games By Martin J. Osborne
  5. Implicit Contracts: Two Different Approaches By Oliver Gürtler
  6. Multi-Battle Contests By Konrad, Kai A; Kovenock, Dan
  7. Private incentives to vertical disintegration among firms with heterogeneous objectives By G. Rossini
  8. Asymmetric Information from Physician Agency: Optimal Payment and Healthcare Quantity By Philippe Chon´e; Ching-to Albert Ma
  9. Government Outsourcing: Public Contracting with Private Monopoly By Auriol, Emmanuelle; Picard, Pierre M
  10. Network Externality and the Coordination Problem: A Generalization of Rohlfs's Model By L. Lambertini; R. Orsini
  11. Market power and the need for regulation in the German airport market By Robert Malina
  12. An Empirical Analysis of Payment Card Usage By Marc Rysman;
  13. On signalling and debt maturity choice By Lensink, Robert; Pham Thi Thu, Tra
  14. Technological Paradigms and Firms' Interaction. By R. Andergassen; F. Nardini; M. Ricottilli
  15. Power Inside the Firm and the Market: A General Equilibrium Approach By Dalia Marin; Thierry Verdier
  16. Consumption and Saving under Knightian Uncertainty By Jianjun Miao;
  17. Network Size and Network Capture By Gerard Llobet; Michael Manove
  18. Coordination in a Mobile World By Jakub Steiner

  1. By: R. Cellini; L. Lambertini
  2. By: Cristina Barbot (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: Low cost carriers (LCCs) have recently proved that they can develop aggressive behaviour towards the threat of new entrants. This paper analyses the theoretical conditions under which a low cost carrier can deter or accommodate entry by means of product proliferation, using the example of Easyjet on the London-Grenoble route. Theoretical conclusions show that they can only deter entry if they launch a service with a quality that is superior to the entrant’s and to their own previous one. Otherwise, they accommodate entry by improving their old product, when they face the entry of a full service carrier (FSC), or by launching a new service, if they are caught in the middle of a FSC and another LCC. Empirical findings about competition in the same route in monopoly, duopoly and oligopoly with three firms show that price competition depends on the existence and nature of rivals, and on the level of demand.
    Keywords: low cost carriers, entry, accommodation
    JEL: L93 L13
    Date: 2006–01
  3. By: Marco Hoeberichts (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Ad Stokman (De Nederlandsche Bank, Research Department P.O. Box 98, 1000 AB Amsterdam, The Netherlands.)
    Abstract: This paper presents the results of a survey among Dutch firms on price setting behaviour in the Netherlands. It aims to identify how sticky prices are, which prices are sticky and why they are sticky. It is part of the Eurosystem Inflation Persistence Network (IPN). The most distinctive feature of the Dutch survey is its broad coverage of the business community (seven sectors and seven size classes). Our primary finding is that price setting behaviour depends critically on both a firm’s size and the competitive environment it faces. Small firms in particular adopt more rigid pricing policies, and the weaker the competition a firm faces, the stickier a company’s price will be. Furthermore, we find that wholesale and retail prices are more flexible than those for business-to-business services. The survey suggests that explicit and informal contracting are the most important sources of price stickiness. Menu costs and psychological pricing – two prominent explanations of price stickiness in the literature – are of minor importance. Finally, there is clear evidence of asymmetries in shocks driving price increases and decreases.
    Keywords: Price setting, nominal rigidity, survey data.
    JEL: E30 D40
    Date: 2006–04
  4. By: Martin J. Osborne
    Abstract: The basic theory of strategic and extensive games is described. Strategic game, Bayesian games, extensive games with perfect information, and extensive games with imperfect information are defined and explained. Among the solution concepts discussed are Nash equilibrium, correlated equilibrium, rationalizability, subgame perfect equilibrium, and weak sequential equilibrium.
    Keywords: Strategic games, Bayesian games, extensive games, Nash equilibrium, correlated equilibrium, subgame perfect equilibrium, sequential equilibrium
    JEL: C7
  5. By: Oliver Gürtler (Oliver Gürtler, Department of Economics, BWL II, University of Bonn, Adenauer- allee 24-42, D-53113 Bonn, Germany. Tel.:+49-228-739214, Fax:+49-228-739210; E-mail:
    Abstract: In this paper, I compare two different approaches to model implicit contracting, the infinite-horizon approach typically used in the literature and afinite-horizon approach building on an adverse-selection model. I demonstrate that even the most convincing result of the infinite-horizon approach, namely that implicit contracting is improved, if the discountrate is lowered, does not carry over to the alternative modeling approach. Predictions of the first approach should therefore be handled with care and subject to athorough reinvestigation.
    Keywords: Trust, finite horizon, infinite horizon, discounting, implicit contracting
    JEL: D82 D83 J33 M52
    Date: 2006–04
  6. By: Konrad, Kai A; Kovenock, Dan
    Abstract: We study equilibrium in a multistage race in which players compete in a sequence of simultaneous move component contests. Players may win a prize for winning each component contest, as well as a prize for winning the overall race. Each component contest is an all-pay auction with complete information. We characterize the unique equilibrium analytically and demonstrate that it exhibits endogenous uncertainty. Even a large lead by one player does not fully discourage the other player, and each feasible state is reached with positive probability in equilibrium (pervasiveness). Total effort may exceed the value of the prize by a factor that is proportional to the maximum number of stages. Important applications are to war, sports, and R&D contests and the results have empirical counterparts there.
    Keywords: all-pay auction; conflict; contest; discouragement; endogenous uncertainty; multi-stage; preemption; R&D; race
    JEL: D72 D74
    Date: 2006–04
  7. By: G. Rossini
  8. By: Philippe Chon´e (CREST-LEI); Ching-to Albert Ma (Department of Economics, Boston University)
    Abstract: We model asymmetric information arising from physician agency, and its effect on the design of payment and healthcare quantity. The physician-patient coalition aims to maximize a combination of physician profit and patient benefit. The degree of substitution between profit and patient benefit in the physician-patient coalition is the physician’s private information, as is the patient’s intrinsic valuation of treatment quantity. The equilibrium mechanism depends only on the physician-patient coalition parameter. Moreover, the equilibrium mechanism exhibits extensive pooling, with prescribed quantity and payment being insensitive to the agency characteristics or patient’s actual benefit. The optimal mechanism is interpreted as managed care where strict approval protocols are placed on treatments.
    Keywords: Physician Agency, Altruism, Optimal Payment, Healthcare Quantity, Managed Care
    JEL: D82 I1 I10 L15
    Date: 2006–02
  9. By: Auriol, Emmanuelle; Picard, Pierre M
    Abstract: The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds à la Laffont and Tirole (1993). An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where governments commit to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.
    Keywords: adverse selection; natural monopoly; privatization; regulation; soft-budget constraint
    JEL: D82 L33 L43 L51
    Date: 2006–04
  10. By: L. Lambertini; R. Orsini
  11. By: Robert Malina (Institute of Transport Economics, University of Muenster)
    Abstract: With the increasing profit orientation of German airport operators the question as to weather they possess market power is gaining more importance. Whereas there have been some studies about the degree of market power of individual airports in countries as Australia and Great Britain, the German airport market has not yet been studied in detail. This paper is a part of a research project that tries to assess market power in this market. It indicates which of the 35 examined German airports possess market power and therefore need special regulatory attendence. We calculate a substitution coefficient for inter-airport competition that quantifies the quality of the best substitute for a certain airport. It is defined as the proportion of inhabitants within the relevant regional market of an airport that consider another airport, which has been identified as meeting the demands of the airlines, to be a good substitute from their perspective as well. The analysis is complemented by an assessment of intermodal substitution and countervailing power of airlines. The study gives strong indication that 23 out of the 35 German airports do not possess relevant market power. In contrast to this, four airports (HAM, FRA, MUC, STR) and Berlin Airport System (THF, TXL, SXF) have strong, five (BRE, DRS, LEJ, NUE, HAJ) have modest market power. The results provide a basis for the construction of an efficient regulatory framework for the German airport market.
    Keywords: airport competition, counterveiling power, market power, substitution
    JEL: L93 R48 D42
    Date: 2005–10
  12. By: Marc Rysman (Department of Economics, Boston University);
    Abstract: This paper exploits a unique data set on the payment card industry to study issues associated with network effects and two-sided markets. We show that consumers concentrate their spending on a single payment network (single-homing), although many maintain unused cards that allow the ability to use multiple networks (multi-homing). Further, we establish a regional correlation between consumer usage and merchant acceptance within the four major networks (Visa, Mastercard, American Express and Discover). This correlation is suggestive of the existence of a positive feedback loop between consumer usage and merchant acceptance.
    Keywords: payment cards, two-sided markets, network effects
    JEL: L14 L80
    Date: 2006–01
  13. By: Lensink, Robert; Pham Thi Thu, Tra (Groningen University)
    Abstract: The theoretical literature on a firm?s choice of debt maturity argues that a borrowing firm can signal its value in asymmetric information setting by borrowing short. This well-known fact is based on Flannery (1986). This paper questions the use of debt maturity as a signalling device. We demonstrate that Flannery?s (1986) signalling outcome is vulnerable on two accounts. First, the separating equilibrium established by Flannery is not driven by the incentive compatibility. Second, derivations of the separating equilibrium appear to be vulnerable due to the lack of the refinements of pooling equilibria. If correct constraints are provided, the parameter space for the separating equilibrium shrinks, moderating the signalling role of debt maturity.
    Date: 2006
  14. By: R. Andergassen; F. Nardini; M. Ricottilli
  15. By: Dalia Marin (Department of Economics, Ludwigstr. 28, 80539 Munich, phone: +49-89-2180-2446, fax: +49-89-2180-6227, e-mail address:; Thierry Verdier (DELTA, Paris)
    Abstract: Recent years have witnessed an enormous amount of reorganization of the corporate sector in the US and in Europe. This paper examines the role of market competition for this trend in corporate reorganization. We find that at intermediate levels of competition the CEO of the corporation decides to have less power inside the firm and to delegate control to lower levels of the firms’ hierarchy. Thus, workers empowerment and the move to flatter firm organizations emerge as an equilibrium when competition is not too tough and not too weak. The model predicts merger waves or waves of outsourcing when countries become more integrated into the world economy as the corporate sector reorganizes in response to an increase in international competition.
    Keywords: monopolistic competition, international trade, corporate reorganisation, flattening firm hierarchies
    JEL: F12 D23 L22 L1
    Date: 2001–12
  16. By: Jianjun Miao (Institute for Economic Development, Boston University);
    Abstract: This paper studies consumption/saving problem under Knightian uncer- tainty in a two period setting. The multiple-priors utility model is adopted. The e®ects of income uncertainty and capital uncertainty on optimal savings are analyzed by deriving closed form solutions.
    JEL: D81 D91
  17. By: Gerard Llobet (CEMFI); Michael Manove (Boston University, Department of Economics)
    Abstract: Most types of networks, over time, spawn the creation of complementary stocks that enhance network value. Computer operating systems, for example, induce the development of the comple- mentary stock of software applications that increase the value of the operating system. In this paper, we challenge the conventional wisdom that a large network, which induces the creation of large complementary stocks, serves as a barrier to entry that protects the incumbent from competi- tion or network capture. We show that a larger network may either deter or attract entry depending on the relation between the network quality and the cost of an innovator?s network product. The probability of entry also depends on the level of compatibility between the potential entrant?s technology and existing complementary stocks, which in turn is in?uenced by the strength of the intellectual-property-rights environment. Intellectual property rights and the associated threat of entry may a¤ect an incumbent?s choice of network size in counterintuitive ways.
    JEL: L41 O34
    Date: 2002–12
  18. By: Jakub Steiner
    Abstract: We study coordination failures in many simultaneously occurring coordination problems called projects. Players encounter one of these projects, but have an outside option to search for another of the projects. Drawing on the global games approach, we show that such a mobile game has a unique equilibrium which allows us to examine comparative statics. The endogeneity of the outside option value and of the search activity leads to non-monotonicity of welfare with respect to search costs; high mobility may hurt players. Moreover, outcomes of the mobile game are remarkably robust to changes in the exogenous parameters. In contrast to the “static” benchmark global game without a search option, successful coordination is frequent in the mobile game even for extremely poor distributions of economic fundamentals, and coordination failures are common even for extremely good distributions. The strategic consequences of the search option are robust to various modifications of the model.
    Keywords: Coordination, Equilibrium Uniqueness, Global Games, Search, Mobility, Globalization
    JEL: C72 D82 D83
    Date: 2006–04

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