nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒06‒10
thirteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Partial Multihoming in Two-sided Markets By Rattanasuda Poolsombat; Gianluigi Vernasca
  2. Local Network Externalities and Market Segmentation By Banerji, A; Dutta, Bhaskar
  3. The Biais-Martimort-Rochet equilibrium with direct mechanisms By Gwenaël Piaser
  4. On multiple agent models of moral hazard By Andrea Attar; Eloisa Campioni; Gwenaël Piaser; Uday Rajan
  5. Pareto Improving Financial Innovation in Incomplete Markets By Sergio Turner
  6. Communication Networks with Endogenous Link Strength By Bloch, Francis; Dutta, Bhaskar
  7. Roaming the Woods of Regulation: Public Intervention vs Firms Cooperation in the Wholesale International Roaming Market By Fabio Manenti; Paolo Lupi
  8. Strategic Basins of Attraction, the Farsighted Core, and Network Formation Games By Page Jr, Frank H; Wooders, Myrna H
  9. Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake By Pavlo Blavatskyy; Ganna Pogrebna
  10. Co-branding in advertising: the issue of product and brand-fit By Geuens, M.; Pecheux, C.
  11. The Law of Demand in Tiebout Economies By Cartwright, Edward; Conley, John; Wooders, Myrna
  12. The Curse of Windfall Gains in a Non Renewable Resource Oligopoly By Hassan Benchekroun; Ngo Van Long
  13. Teaching competition in professional sports leagues By Stefan Szymanski

  1. By: Rattanasuda Poolsombat; Gianluigi Vernasca
    Abstract: In this paper we explore the possibility of "partial-multihoming" in a two-sided market where a subset of agents, on one or both side(s), may multihome in equilibrium. We consider a model in which platforms are spatially differentiated and on each side of the market there are two type of agents, low type and high type agents, that differ only by their preferences over the network benefits. We derive under which conditions of network preferences, an equilibrium with partial multihoming on both sides exists. We show that for such an equilibrium to exist, the network benefits of high type agents must be sufficiently higher than transportation costs. Furthermore, the proportions of agents who multihome on both sides must be sufficiently small. Finally, we show that independently of the degree of multihoming on the other side of the market, agents in each group face higher prices when there is partial multihoming on their side than when there is singlehoming.
    Keywords: Two-sided markets, network externalities, heterogeneous agents.
    JEL: L13
    Date: 2006–06
  2. By: Banerji, A (Delhi School of Economics, University of Delhi); Dutta, Bhaskar (Department of Economics, University of Warwick,)
    Abstract: This paper models interaction between groups of agents by means of a graph where each node represents a group of agents and an arc represents bilateral interaction. It departs from the standard Katz-Shapiro framework by assuming that network benefits are restricted only amongst groups of linked agents. It shows that even if rival firms engage in Bertrand competition, this form of network externalities permits strong market segmentation in which firms divide up the market and earn positive profits. The analysis also shows that some graphs or network structures do not permit such segmentation, while for others, there are easy to interpret conditions under which market segmentation obtains in equilibrium
    Keywords: network structure ; network externalities ; price competition ; market segmentation
    JEL: D7
    Date: 2005
  3. By: Gwenaël Piaser (Department of Economics, University Of Venice Cà Foscari)
    Abstract: In this note we show that the equilibrium characterized by Biais, Martimort and Rochet (Econometrica, 2000) could have been characterized by direct mechanisms even if the Revelation Principle does not apply in their setting. The use of more sophisticated mechanisms, such as menus, was not necessary.
    Keywords: Common Agency, Revelation Principle, Direct Mechanisms, Nonlinear Prices.
    JEL: D82
    Date: 2006
  4. By: Andrea Attar (IDEI, Toulouse); Eloisa Campioni (LUISS, University of Rome); Gwenaël Piaser (Department of Economics, University Of Venice Cà Foscari); Uday Rajan (Ross School of Business, University of Michigan)
    Abstract: In multiple principal, multiple agent models of moral hazard, we provide conditions under which the outcomes of equilibria in direct mechanisms are preserved when principals can offer indirect communication schemes. We discuss the role of random allocations and recommendations and relate the result to the existing literature.
    Keywords: Moral Hazard, Multiple Agents, Direct Mechanism.
    JEL: D82
    Date: 2006
  5. By: Sergio Turner
    Date: 2006
  6. By: Bloch, Francis (GREQAM, Universite d Aix-Marseille,); Dutta, Bhaskar (Department of Economics, University of Warwick)
    Abstract: This paper analyzes the formation of communication networks when players choose endogenously their investment on communication links. We consider two alternative de?nitions of network reliability ; product reliability, where the decay of information depends on the product of the strength of communication links, and min reliability where the speed of connection is a¤ected by the weakest communication link. When investments are separable, the architecture of the efficient network depends crucially on the shape of the transformation function linking investments to the quality of communication links. With increasing marginal returns to investment, the efficient network is a star ; with decreasing marginal returns, the con?ict between maximization of direct and indirect bene?ts prevents a complete characterization of efficient networks. However, with min reliability, the efficient network must be a tree. Furthermore, in the particular case of linear transformation functions, in an e¢ cient network, all links must have equal strength. When investments are perfect complements, the results change drastically : under product reliability, the efficient network must contain a cycle, and is in fact a circle for small societies. With min reliability, the e¢ cient network is either a circle or a line. As in classical models of network formation, e fficient networks may not be supported by private invesment decisions. We provide examples to show that the star may not be stable when the transformation functions is strictly convex. We also note that with perfect substitutes and perfect complements (when the e¢ cient network displays a very symmetric structure), the e¢ cient network can indeed be supported by private investments when the society is large.
    Keywords: communication networks ; network reliability
    JEL: D85 C70
    Date: 2005
  7. By: Fabio Manenti (University of Padua); Paolo Lupi (Autorita' per le garanzie nelle comunicazioni (Italy))
    Abstract: Despite a general trend of lower charges for mobile calls, prices for international roaming calls have remained at levels surprisingly high. The apparent reluctance of European mobile network operators to lower roaming tariffs is generating many antitrust concerns. This paper discusses in a two country - two firm framework, the distortions associated with the functioning of the current system governing wholesale international roaming agreements based on Inter Operator Tariffs (IOTs) and the role played by cross border roaming alliances between foreign operators. We describe how competition between roaming operators at the wholesale level is influenced by the adoption of traffic redirection techniques. The paper shows that when mobile operators act un-cooperatively and traffic redirection techniques allow only partial control on traffic flows, competition between roaming operators may not guarantee a reduction in IOTs and, consequently, on retail tariffs. We propose a simple and effective regulatory price cap mechanism to restore efficiency in the wholesale market. When mobile operators cooperate within a cross border alliance, internal IOTs are set at cost and retail prices are lower.
    JEL: L13 L51 L42 L96
    Date: 2006–05
  8. By: Page Jr, Frank H (Department of Finance, University of Alabama); Wooders, Myrna H (Department of Economics, Vanderbilt University and Department of Economics, University of Warwick)
    Abstract: We make four main contributions to the theory of network formation. (1) The problem of network formation with farsighted agents can be formulated as an abstract network formation game. (2) In any farsighted network formation game the feasible set of networks contains a unique, finite, disjoint collection of nonempty subsets having the property that each subset forms a strategic basin of attraction. These basins of attraction contain all the networks that are likely to emerge and persist if individuals behave farsightedly in playing the network formation game. (3) A von Neumann Morgenstern stable set of the farsighted network formation game is constructed by selecting one network from each basin of attraction. We refer to any such von Neumann-Morgenstern stable set as a farsighted basis. (4) The core of the farsighted network formation game is constructed by selecting one network from each basin of attraction containing a single network. We call this notion of the core, the farsighted core. We conclude that the farsighted core is nonempty if and only if there exists at least one farsighted basin of attraction containing a single network. To relate our three equilibrium and stability notions (basins of attraction, farsighted basis, and farsighted core) to recent work by Jackson and Wolinsky (1996), we define a notion of pairwise stability similar to the Jackson-Wolinsky notion and we show that the farsighted core is contained in the set of pairwise stable networks. Finally, we introduce, via an example, competitive contracting networks and highlight how the analysis of these networks requires the new features of our network formation model.
    Keywords: Basins of attraction ; Network formation ; Supernetworks ; Farsighted core ; Nash networks
    JEL: A14 D20 J00
    Date: 2005
  9. By: Pavlo Blavatskyy; Ganna Pogrebna
    Abstract: In the television show Affari Tuoi an individual faces a sequence of binary choices between a risky lottery with equiprobable prizes of up to half a million euros and a monetary amount for certain. The decisions of 114 show participants are used to test the predictions of ten decision theories: risk neutrality, expected utility theory, fanning-out hypothesis (weighted utility theory, transitive skew-symmetric bilinear utility theory), (cumulative) prospect theory, regret theory, rank-dependent expected utility theory, Yaari’s dual model, prospective reference theory and disappointment aversion theory. Assumptions of risk neutrality and loss aversion are clearly violated, respectively, by 55% and 46% of all contestants. There appears to be no evidence of nonlinear probability weighting or disappointment aversion. Observed decisions are generally consistent with the assumption of regret aversion and there is strong evidence for the fanning-out hypothesis. Nevertheless, we find no behavioral patterns that cannot be reconciled within the expected utility framework (or prospective reference theory that gives identical predictions).
    Keywords: decision theory, natural experiment, television show, expected utility, nonexpected utility
    JEL: C93 D81
    Date: 2006–06
  10. By: Geuens, M.; Pecheux, C.
    Abstract: Three studies are conducted to investigate co-branding in advertising by manipulating product and brand fit. Polarity of brand images (positive or neutral) and the type of ad processing (top-down versus bottom up) were also taken into account. The results show that either product or brand fit is sufficient to produce positive attitudes towards the core brand in case of a high image core brand. However, these results do not hold for core brands with a neutral image. In that case, brands better team up with a brand possessing high product fit and/or a positive image instead of a similar image.
    Date: 2006–06–05
  11. By: Cartwright, Edward (Department of Economics, University of Kent); Conley, John (Department of Economics, Vanderbilt University); Wooders, Myrna (Department of Economics, Vanderbilt University)
    Abstract: We consider a general equilibrium local public goods economy in which agents have two distinguishing characteristics. The first is 'crowding type', which is publicly observable and provides direct costs or benefits to the jurisdiction (coalition or firms) the agent joins. The second is taste type, which is not publicly observable, has no direct effects on others and is defined over private good, public goods and the crowding profile of the jurisdiction the agent joins. The law of demand suggests that as the quantity of a given crowding type (plummers, lawers, smart people, tall people, nonsmokers, for example) increases, the compensation that agents of that type receive should go down. We provide counterexamples, however, that show that some agents of a given crowding type might actually benefit when the proportion of agents with the same crowding type increases. This reversal of the law of demand seems to have to do with interaction effect between tastes and skills, something difficult to study without making these classes of characteristics distinct. We argue that this reversal seems to relate to the degree of difference between various patterns of tastes. In particular, if tastes are homogeneous, the law of demand holds.
    Date: 2005
  12. By: Hassan Benchekroun; Ngo Van Long
    Abstract: We investigate the effect of stock discovery on the profits of non-identical oligopolists. We show that a uniform addition to all stocks could harm firms that are originally larger than average. One conclusion that could be drawn from the results is that a new technology that leads to more efficient exploitation of the available resource is not necessarily welcomed by all firms. <P>On étudie les effets de la découverte des stocks de ressources sur les profits des firmes asymétriques. On montre que l’augmentation uniforme des stocks pour toutes les firmes pourrait désavantager celles qui sont initialement les plus grandes. On déduit que la découverte d’une nouvelle technologie qui permet une augmentation d’efficacité d’extraction pour toutes les firmes pourrait réduire le profit de certaines firmes.
    Keywords: non-renewable resource, oligopoly, stock discovery, découverte des stocks, oligopole, ressources naturelles
    Date: 2006–05–01
  13. By: Stefan Szymanski (Tanaka Business School, Imperial College)
    Abstract: In recent years there has been some dispute over the appropriate way to model decision-making in professional sports leagues. In particular, Szymanski and Kesenne (2004), argue that formulating the decision-making problem as a noncooperative game leads to radically different conclusions about the nature of competition in sports leagues. This paper describes a simulation model that van be used in a classroom to demonstrate how competition works in a noncooperative context. The supporting Excel spreadsheet used to conduct the game can be downloaded from the author’s personal webpage anski.
    JEL: A20 D43 L83
    Date: 2006–05

This nep-mic issue is ©2006 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.