nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒05‒13
fifteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Endogenous entry under Bertrand-Edgeworth and Cournot competition with capacity indivisibility By Massimo A. De Francesco
  2. Intertemporal Price Discrimination and Competition By Ralph-C Bayer
  3. Competitive Mixed Bundling and Consumer Surplus By John Thanassoulis
  4. Network investment and the threat of regulation – preventing monopoly exploitation or infrastructure construction? By Ulrich Blum; Christian Growitsch; Niels Krap
  5. Bayesian-Cournot Competition By Ji-Tian Jeng
  6. Dynamic Regulation of Public Good Quality By Stéphane Auray; Thomas Mariotti; Fabien Moizeau
  7. Partial Equilibrium Analysis in a Market Game:the Strategic Marshallian Cross By Alex Dickson; Roger Hartley
  8. Willingness to Pay for Low Probability, Low Loss Hazard Insurance By John C. Whitehead
  9. Tax Compliance and Firms' Strategic Interdependence By Ralph-C Bayer; Frank Cowell
  10. Bargaining Microfoundations for Productivity Dispersion By John Thanassoulis
  11. Product Differentiation or Spatial Monopoly? The Market Areas of Austrian Universities in Business Education By Gunther Maier
  12. The Impact of Entry and Competition by Open Source Software on Innovation By Bitzer, Jürgen; Schröder, Philipp J.H.
  13. Market Power, Dismissal Threat and Rent Sharing: The Role of Insider and Outsider Forces in Wage Bargaining By Anabela Carneiro; Pedro Portugal
  14. From a Routine-Based to a Knowledge-Based View: Towards an Evolutionary Theory of the Firm By Fritz Rahmeyer
  15. Demand for Environmental Quality: An Empirical Analysis of Consumer Behavior in Sweden By Ghalwash, Tarek

  1. By: Massimo A. De Francesco
    Abstract: Strategic market interaction is modelled as a two-stage game where potential entrants choose capacities and active firms compete in prices or quantities. Due to capital indivisibility, the capacity choice is made from a finite grid. In either strategic setting, the equilibrium of the game depends on the size of total demand at a price equal to the minimum average cost. With a sufficiently large market, the long-run competitive price emerges at a subgame-perfect equilibrium of either game. Failing the large market condition, equilibrium outcomes are quite different in the two games (in contrast to Kreps and Scheinkman), and neither game reproduces the competitive equilibrium.
    Keywords: Entry, Bertrand-Edgeworth, Cournot, capacity indivisibility
    JEL: D43 D44 L13
    Date: 2006–05
  2. By: Ralph-C Bayer (School of Economics, University of Adelaide)
    Abstract: In this study we investigate the impact of competition on markets for non-durable goods where intertemporal price discrimination is possible. We develop a simple model of different potential scenarios for intertemporal price discrimination and implement it in a laboratory experiment. We compare the outcomes in monopolies and duopolies. Surprisingly, we find that competition does not necessarily prevent intertemporal price discrimination, as our model predicts. However, competition generally reduces sales prices, but by far less than theory predicts. As expected, competition increases efficiency.
    Keywords: Price Discrimination, Oligopoly, Market Experiments.
    JEL: L12 L13 C91
    Date: 2006–05
  3. By: John Thanassoulis
    Abstract: Mixed bundling in imperfectly competitive industries causes some prices to rise and others to fall. This paper studies under what conditions mixed bundling works for or against the consumer interest. We find that if buyers incur firm specific costs or have shop specific tastes then competitive mixed bundling lowers consumer surplus overall and raises profits - the same is true of competitive volume discounts. Competition without these discounts causes all prices to be kept low as larger customers are targeted; with discounts the prices for heavy users drop, but more is extracted from small users. The consumer surplus result is reversed if the differentiation between components as opposed to firms is key.
    Keywords: Bundling, Loyalty Rebates, Volume Discounts, Competitive Price Discrimination
    JEL: L11 L41
    Date: 2006
  4. By: Ulrich Blum; Christian Growitsch; Niels Krap
    Abstract: In summer 2005, the German telecommunication incumbent Deutsche Telekom announced its plans to build a new broadband fibre optics network. Deutsche Telekom decided as precondition for this new network not to be regulated with respect to pricing and third party access. To develop a regulator's strategy that allows investments and prevents monopolistic prices at the same time, we model an incumbent's decision problem under a threat of regulation in a game-theoretical context. The decision whether to invest or not depends on the probability of regulation and its assumed impact on investment returns. Depending on the incumbent's expectation on these parameters, he will decide if the investment is favourable, and which price to best set. This price is below a non-regulated profit maximising price, since the incumbent tries to circumvent regulation. Thus, we show that the mere threat of a regulator's intervention might prevent supernormal profits without actual price regulation. The regulator, on the other hand, can influence both investment decision and the incumbent's price via his signals on regulation probability and price. These signals an be considered optimal, if they simultaneously allow investment and minimize the incumbent's price.
    Keywords: regulation, investment, teleommuniation, network industries
    JEL: L43 L51 L96
    Date: 2006–05
  5. By: Ji-Tian Jeng (Keele University, Department of Economics)
    Abstract: We consider a model of Cournot competition where firms have incomplete information about their rivals’ costs. The equilibrium concept we use is that of Bayesian-Nash equilibrium. Our analysis is particularly novel since we recognise that each firm’s payoff is determined by its strategy choice and the unweighted sum of all firms’ strategy choices. By exploiting this "aggregative structure", we are able to characterise equilibria in a very simple way, and based on this characterisation we develop sufficient conditions under which there is a unique equilibrium. A comparative statics analysis is also carried out.
    Keywords: Aggregative games, replacement function approach, Bayesian-Nash equilibrium.
    JEL: C72 D81
    Date: 2005–02
  6. By: Stéphane Auray; Thomas Mariotti; Fabien Moizeau
    Abstract: We investigate the design of incentives for public good quality provision in a dynamic regulation setting in which maintenance efforts and quality shocks have durable effects. When the regulator contracts with a sequence of agents, asymmetries of information can lead to over-provision of quality under optimal regulation, reflecting a dynamic rent extraction motive. When the regulator hires a single agent to manage public good quality, over-provision of quality can also occur as a result of quality pooling, which typically occurs if quality depreciates slowly and the discount factor is large. We further show that for small levels of asymmetric information, the regulator prefers to hire a single agent rather than to contract with a sequence of agents, provided all parties can commit to a long-term contract. When no such commitment is feasible, the fact that quality physically links periods together leads to a ratchet effect even when private information is recurring, and shorter franchises are beneficial from a social point of view.
    Keywords: Quality, Regulation, Asymmetric Information
    JEL: D82 L15 L51
    Date: 2006
  7. By: Alex Dickson (Keele University, Department of Economics); Roger Hartley (Keele University, Department of Economics)
    Abstract: We show how non-price-taking behavior by agents in partial equilibrium can be analyzed using strategic versions of Marshallian supply and demand curves. There is a Nash equilibrium of a two-good, strategic market game at a given price if and only if the strategic supply and demand curves intersect at that price. This result allows us to prove new existence and uniqueness results for such games, which have previously been obtained only by imposing somewhat restrictive assumptions such as symmetry on each side of the market. It also enables us to show that many conventional comparative statics results of Marshallian analysis survive strategic play by buyers and sellers. Finally, we show that price manipulation in this game always has the effect of reducing supply and demand and that thick markets are almost competitive.
    Keywords: Strategic Market Game, Imperfect Competition, Marshallian Cross
    JEL: C72 D43 D50
    Date: 2004–09
  8. By: John C. Whitehead
    Abstract: We estimate the willingness to pay for low probability, low loss hazard insurance with the contingent valuation method. The application is to household hurricane evacuation cost insurance – a new product for which there is currently no market. We find that a majority of respondents would not purchase the product at even the lowest price. In general, respondents are rational in response to the probability and costs of a evacuation. Respondents are not likely to pay anything for evacuation cost insurance.
    Date: 2006
  9. By: Ralph-C Bayer (School of Economics, University of Adelaide); Frank Cowell
    Abstract: We focus on a relatively neglected area of the tax-compliance literature in economics, the behaviour of firms. We examine the impact of alternative audit rules on receipts from a tax on profits in the context of strategic interdependence of firms. In the market firms may compete in terms of either output or price. The enforcement policy can have an effect on firms' behaviour in two dimensions - their market decisions as well as their compliance behaviour. An appropriate design of the enforcement policy can thus have a "double dividend" by manipulating firms in both dimensions.
    Keywords: Tax compliance, evasion, oligopoly.
    JEL: H20 H21
    Date: 2006–05
  10. By: John Thanassoulis
    Abstract: This paper analyses the implications of bargaining between buyers and sellers on the competitive outcome in a homogeneous good industry. Bargaining creates a competitive equilibrium in which some inefficient sellers coexist with efficient ones leading to productivity dispersion. Rival cost uncertainty then creates an endogenous distribution of productivities which shrinks if rival numbers grow - exactly paralleling current empirical findings. The ability to bargain results in list price dispersion but transaction price uniformity. The bargaining models is not observationally equivalent to Bertrand pricing with product differentiation as positive mark-ups are predicted as idiosyncratic seller cost shocks become small. This and other predictions of the baragining model of competition are assessed against the empirical evidence. The insights are robust to search costs with a nonsequential search stratgegy where a pure strategy (no sales) price equilibrium is found. Further, the results extend to markets without bargaining if sellers post price matching guarantees
    Keywords: Bargaining, List Prices, Transaction Prices, Price-matching Guarantees, Productivity Dispersion, Trade Liberalization.
    JEL: D24 D43 L11 F12
    Date: 2006
  11. By: Gunther Maier
    Date: 2006
  12. By: Bitzer, Jürgen (Free University, Berlin); Schröder, Philipp J.H. (Department of Organisation and Management, Aarhus School of Business)
    Abstract: No abstract
    Keywords: No keywords;
    Date: 2005–12–01
  13. By: Anabela Carneiro (Universidade do Porto and CETE); Pedro Portugal (Banco de Portugal, Universidade Nova de Lisboa and IZA Bonn)
    Abstract: One of the predictions of the insider-outsider theory is that wages will be higher in sectors (firms) with high labor adjustment costs/high turnover costs. This prediction is tested empirically in this study, using an insider-outsider model and a longitudinal panel of large firms in Portugal. The results revealed that firms where insider workers appear to have more market power tend to pay higher wages. In particular, we found that the threat of dismissal acts to weaken insiders’ bargaining power and, consequently, to restrain their wage claims. Moreover, the results also showed that real wages in Portugal are downward rigid.
    Keywords: wages, market power, dismissal threat, rent sharing, system GMM estimator
    JEL: J30 J31
    Date: 2006–04
  14. By: Fritz Rahmeyer (University of Augsburg, Department of Economics)
    Abstract: Evolutionary economics in the initial version of Nelson and Winter is concentrated on the analysis of the evolution of industries and markets and in that entrepreneurial innovation activities. But a theory of the firm beneath the level of the industry is not taken into account to a large extent. In order to widen its fundamental principles a resource-based, and as its extension, a knowledge-based view of the firm, both originated in the field of Business Strategy, are seen as promising candidates to close this gap within evolutionary economics. Industry dynamics as the evolution of a population of firms in this way is supplemented by a more detailed characterization of the internal structure of individual firms. It is the fundamental question with regard to the adequacy of an evolutionary interpretation of firm behaviour and development as to what extend a firm and its individual activities are considered to be capable of purposefully and actively influencing its environment, on the one hand, and are blindly selected by environmental pressure, on the other hand. In this way firms become intendedly heterogenous concerning market performance and organizational structure. Regarding the general topic of a theory of the firm, a unified approach will not be constructed, but more likely a hybrid one being composed of technological, institutional and efficiency-based elements.
    Keywords: economic evolution; resource-based view; knowledge-based view of the firm; theory of the firm management
    JEL: B52 D21 D83 L23
    Date: 2006–05
  15. By: Ghalwash, Tarek (Department of Economics, Umeå University)
    Abstract: In this paper we estimate the income elasticity of demand for recreational services and <p> other traditional groups of goods in Sweden and test for potential changes in such <p> estimates over the twentieth century. Due to the difficulty of directly observing the <p> demand for recreational services, we employ an indirect methodology by using the <p> demand for some outdoor goods as a proxy for the demand for recreational services. In <p> line with most prior research, our results confirm the expectation that recreational <p> services, as a public good, is a luxury good in Sweden. Our results also show that the <p> income elasticities for traditional goods are stable over time, indicating that consumer <p> preferences for expenditure on these specific commodities do not change over time.
    Keywords: Household demand; environmental services; income elasticities; Engel curves
    JEL: D12 H41 Q26
    Date: 2006–05–05

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