nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒07‒02
six papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Two-Sided Markets with Pecuniary and Participation Externalities By Schmidtke, Richard
  2. Networks and Firm Location By José Pedro Pontes
  3. Efficient Recommender Systems By Dirk Bergemann; Deran Ozmen
  4. Private Provision of a Complementary Public Good By Schmidtke, Richard
  5. Firms merge in response to constraints By Boone,Jan
  6. Inefficiency of equilibria in query auctions with continuous valuations By Grigorieva Elena; Herings P. Jean-Jacques; Müller Rudolf; Vermeulen Dries

  1. By: Schmidtke, Richard
    Abstract: The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.
    Keywords: two-sided markets; broadcasting; advertising; market entry; digital television
    JEL: D43 L13 L82
    Date: 2006–06
  2. By: José Pedro Pontes
    Abstract: This paper models the decision of vertically-linked firms to build either partitioned or connected networks of supply of an intermediate good. In each case, the locations of upstream and downstream firms are correlated. Input specificity is related both to variable costs (transport costs of the input) and fixed costs (learning costs of the use of the input). When both are low, a connected network emerges and a partitioned pattern arises in the opposite case. In the boundary region, there are multiple equilibria, either asymmetric (mixed network) or symmetric.
    Keywords: Vertically-linked industries; Intermediate goods; Networks; Input flexibility.
    JEL: R30 L13
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Deran Ozmen (Yale University)
    Abstract: We study the efficient allocation of buyers in the presence of recommender systems. A recommender system affects the market in two ways: (i) it creates value by reducing product uncertainty for the customers and hence (ii) its recommendations can be offered as add-ons, which generates informational externalities. We investigate the impact of these factors on the efficient allocation of buyers across different products. We find that the efficient allocation requires that the seller with the recommender system has full market share. If the recommender system is sufficiently effective in reducing uncertainty, it is optimal to have some products to be purchased by a larger group of people than others. The large group consists of customers with flexible tastes.
    Keywords: D42, D83, D85
    Date: 2006–06
  4. By: Schmidtke, Richard
    Abstract: For several years, an increasing number of firms are investing in Open Source Software (OSS). While improvements in such a non-excludable public good cannot be appropriated, companies can benefit indirectly in a complementary proprietary segment. We study this incentive for investment in OSS. In particular we ask how (1) market entry and (2) public investments in the public good affects the firms' production and profits. Surprisingly, we find that there exist cases where incumbents benefit from market entry. Moreover, we show the counter-intuitive result that public spending does not necessarily lead to a decreasing voluntary private contribution.
    Keywords: Open Source Software; Private Provision of Public Goods; Cournot-Nash Equilibrium; Complements; Market Entry
    JEL: C72 L13 L86
    Date: 2006–06
  5. By: Boone,Jan (Tilburg University, Center for Economic Research)
    Abstract: Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.
    Keywords: Pro/anti-competitive mergers;efficiency defence;constraints;merger waves; deregulation
    JEL: G34 K21 L40
    Date: 2006
  6. By: Grigorieva Elena; Herings P. Jean-Jacques; Müller Rudolf; Vermeulen Dries (METEOR)
    Abstract: We show that, when bidders have continuous valuations, any ex post equilibrium in an ex post individually rational query auction can only be ex post efficient when the running timeof the auction is infinite for almost all realizations of valuations of the bidders. We also show that this result applies to the general class of bisection auctions. In contrast we show that, when we allow for inefficient allocations with arbitrarily small probability, there is a query auction (to be more specific, a bisection auction) that attains this level of approximate efficiency in equilibrium, while additionally the running time of the auction in equilibrium is finite for all realizations of valuations.
    Keywords: mathematical economics;
    Date: 2006

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