nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒05‒20
nine papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. On Nash equilibrium in prices in an oligopolistic market with demand characterized by a nested multinomial logit model and multiproduct firm as nest By Gang Liu
  2. Tacit Collusion and Capacity Withholding in Repeated Uniform Price Auctions. By Dechenaux, Emmanuel; Kovenock, Dan
  3. Multi-battle contests. By Konrad, Kai A.; Kovenock, Dan
  4. Un modelo de entrada y competencia en telecomunicaciones By Xavier Mancero; Eduardo Saavedra
  5. Price Cap Regulation and Investment Incentives under Demand Uncertainty By Fabien A. Roques; Nicos S. Savva
  6. The marginal pricing rule revisited. By Jean-Marc Bonnisseau; Bernard Cornet; Marc-Olivier Czarnecki
  7. Existence of equilibria with a tight marginal. By Jean-Marc Bonnisseau; Bernard Cornet
  8. Syndication and Robust Collusion in Financial Markets By Vinicius Carrasco; Gustavo Manso
  9. The Competitive Market Paradox. By Gjerstad, S.

  1. By: Gang Liu (Statistics Norway)
    Abstract: This note provides a proof on existence and uniqueness of Nash equilibrium in prices in a market where the demand side is characterized by a nested multinomial logit model with multiproduct firm as nest and the supply side consists of oligopolistic price-setting multiproduct firms with each producing various differentiated variants.
    Keywords: oligopolistic market; multiproduct firm; nested multinomial logit model; Nash equilibrium
    JEL: C25 C62 C72 D43 L13
    Date: 2006–04
  2. By: Dechenaux, Emmanuel; Kovenock, Dan
    Abstract: This paper contributes to the study of tacit collusion by analyzing infinitely reaped multiunit uniform price auctions in a symmetric oligopoly with capacity constrained firms. Under both the Market Clearing and Maximum Accepted Price rules of determining the uniform price, we show that when each firm sets a price-quantity pair specifying the firm’s minimum acceptable price and the maximum quantity the firm is willing to sell at this price, there exists a range of discount factors for which the monopoly outcome with equal sharing is sustainable in the uniform price auction, but not in the corresponding discriminatory auction. Moreover, capacity withholding may be necessary to sustain this outcome. We extend these results to the case where firms may set bids that are arbitrary step functions of price-quantity pairs with any finite number of price steps. Surprisingly, under the Maximum Accepted Price rule, firms need employ no more than two price steps to minimize the value of the discount factor above which the perfectly collusive outcome with equal sharing is sustainable on a stationary path. Under the Market Clearing Price rule, only one step is required. That is, within the class of step bidding functions with a finite number of steps, maximal collusion is attained with simple price-quantity strategies exhibiting capacity withholding.
    Keywords: Auction ; Capacity ; Collusion ; Electricity Market ; Supply Function
    JEL: D43 D44 L13 L41 L94
    Date: 2005–03
  3. 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 ; contest ; race ; conflict ; multi-stage ; R&D ; endogenous uncertainty ; preemption ; discouragement
    JEL: D72 D74
    Date: 2006–03
  4. By: Xavier Mancero (CEPAL, Chile.); Eduardo Saavedra (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Keywords: Subasta, Energía, Abastecimiento incierto, Racionamiento Eléctrico
    JEL: D43 L11 L13
    Date: 2006–04
  5. By: Fabien A. Roques; Nicos S. Savva
    Abstract: We study the effect of price cap regulation on investment in new capacity in an oligopolistic (Cournot) industry, using a continuous time model with stochastic demand. A price cap has two mutually competing effects on investment under demand uncertainty: it makes the option of deferring investment very valuable, but it also reduces the interest of strategic underinvestment to raise prices. We show that there exists an optimal price cap that maximizes investment incentives. As with deterministic demand, the optimal price cap is the clearing price of the competitive market. However, unlike the deterministic case, we show that such a price cap does not restore the competitive equilibrium; there is still under-investment. Sensitivity analyses and Monte Carlo simulations show that the efficiency of price cap regulation depends critically on demand volatility and that errors in the choice of the price cap can have detrimental consequences on investment and average prices.
    Keywords: real options, stochastic games, price cap regulation, electricity markets
    JEL: C73 D92 L51 L94
    Date: 2006–05
  6. By: Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne); Bernard Cornet (Centre d'Economie de la Sorbonne et University of Kansas); Marc-Olivier Czarnecki (ACSIOM, UMR 5149, Université de Montpellier 2)
    Abstract: The purpose of the paper is to introduce a tighter definition for the marginal pricing rule. By means of an example, we illustrate the improvements that one gets with the new definition with respect to the former one with the Clarke's normal come.
    Keywords: General economic equilibrium, increasing returns, marginal pricing rule.
    JEL: C62 D50 D51
    Date: 2005–11
  7. By: Jean-Marc Bonnisseau (Centre d'Economie de la Sorbonne); Bernard Cornet (Centre d'Economie de la Sorbonne et University of Kansas)
    Abstract: This paper deals with the existence of marginal pricing equilibria when it is defined by using a new and tighter normal cone introduced by B. Cornet and M.O. Czarnecki. The main interest of this new definition of the marginal pricing rule comes from the fact that it is more precise in the sense that the set of prices satisfying the condition is smaller than the one given by the Clarke's normal cone. The counterpart is that it is not convex valued, which leads to some mathematical difficulties in the existence proof. The result is obtained through an approximation argument under the same assumptions as in the previous existence results.
    Keywords: General economic equilibrium, increasing returns, marginal pricing rule, existence.
    JEL: C62 D50 D51
    Date: 2006–01
  8. By: Vinicius Carrasco (Department of Economics PUC-Rio.); Gustavo Manso (Graduate School of Business, Stanford University.)
    Abstract: This paper investigates the extent to which syndication in financial markets is related to collusive behavior. A group of financiers who have private information regarding their capability of monitoring an entrepreneur must decide whether to provide a loan individually in a competitive fashion, or provide it collectively. When deciding whether to provide the loan collectively, the lenders bargain over their participation, on who will be monitoring the lender (the leader), and on pricing. It is shown that if the bargaining stage is robust to timing of communication of their private information (Ex-Post Incentive Compatibility), and if the lenders believe it is better to agree on a collective deal than competing, positive participation in the loan is given to all lenders even when side payments are allowed. Hence, we show that syndication is the optimal response of colluding lenders to the communication costs resulting from the negotiations between them for a given loan. Syndication improves on pricing but introduces a distortion by leaving the most effective monitor with less than full participation in the loan. Necessary conditions for syndication prevailing over competition are provided.
    Date: 2006–05
  9. By: Gjerstad, S.
    Abstract: The competitive market model is a paradoxical. In perfect competition, agents cannot influence price: they only select an output quantity. Such passive behavior doesn’t conform to the intuitive notion of competition. This paper describes an experiment which demonstrates that near or even at a competitive equilibrium price, competition is undiminished. A substantial difference between the performance of sellers and buyers frequently results from this vigorous competition, even with low price variability and approximate efficiency. In double auction experiment sessions conducted with both automated and human agents, exogenous variation of the pace of asks and bids of automated agents demonstrates that the performance difference between sellers and buyers results primarily from a difference between the pace of asks and bids. If the buyers’ pace is slower than sellers’ pace, buyers make price concessions less frequently than sellers so that prices move below the equilibrium price. Then more buyers become active and fewer sellers remain active. Prices stabilize when changes to the numbers of active buyers and sellers offset the superior bargaining capability of one side or the other. In competitive equilibrium, to a first approximation agents are price takers, but that doesn’t preclude vigorous competition: competitive behavior moves to the dimension of bargaining pace.
    Keywords: Bargaining ; bounded rationality ; competitive equilibrium ; double auction ; experimental economics
    JEL: C78 C92 D41 D44
    Date: 2006–02

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