nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒07‒15
twelve papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Two-Sided Markets with Pecuniary and Participation Externalities By Richard Schmidtke
  2. Persistence of Monopoly, Innovation, and R-and-D Spillovers: Static versus Dynamic Analysis By Kresimir Zigic
  3. Voice over IP. Competition Policy and Regulation By christoph Engel
  4. Umbrella Branding and the Provision of Quality By Hendrik Hakenes; Martin Peitz
  5. Artificial Neural Network Enhanced Parametric Option Pricing By Panayiotis C. Andreou
  6. Mixed Bundling Auctions By Philippe Jehiel; Moritz Meyer-ter-Vehn; Benny Moldovanu
  7. Language competition with bilinguals in social networks By Xavier Castelló; ; Víctor M. Eguíluz
  8. Observable Reputation Trading By Hendrik Hakenes; Martin Peitz
  9. Technology Licensing to a Rival By Boivin, Caroline; Langinier, Corinne
  10. Competition as a Socially Desirable Dilemma By Christoph Engel
  11. The U-shaped relationship between vertical integration and competition: theory and evidence By Philippe Aghion; Rachel Griffith; Peter Howitt
  12. First-mover disadvantage By Tymofiy Mylovanov

  1. By: Richard Schmidtke (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, Tel.: +49-89-2180 3957, Fax.: +49-89-2180 2767,
    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: Kresimir Zigic (CERGE-EI)
    Keywords: dynamic duopoly, R&D spillovers, persistence of monopoly, strategic predation, accommodation
    JEL: L12 L13 L41
    Date: 2006–07–04
  3. By: christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Traditionally, there have been two separate telecommunications networks, one based on switches, the other based on routers. The switched network basically carried voice. The packet switched network basically carried data. Now voice is about to go packet switched too. Ultimately, both networks might merge. If that were to happen, the governance structure of either of these networks would have to change fundamentally. Currently, a large amount of packet switched traffic goes over the public Internet. The Internet is organised as a club good. There is an access fee, but no further fee for its actual use. Volume metering is technically feasible, but typically only bandwidth is controlled. In the switched network, a split price is standard. There is an access fee, plus a separate fee for each call. In a club good, by definition each side pays for part of the traffic. On the Internet, the receiver pays principle is thus applied. In most countries, the switched network is governed by the caller pays principle. Under that principle, there are termination charges. Each operator has a local monopoly over its customers. There is thus the possibility that telephony will in the future be controlled by the same principles. Actually, in that case the only remaining property right would be access to the network. In the opposite case, data traffic might be contaminated by the principles currently governing switched telephony. This would presuppose that operators succeed in introducing artificial property rights for the relationship with their customers, maybe even for the individual instance of communication. Technically, there are two main opportunities for this. In switched telephony, for technical reasons it is natural to give out telephone numbers to operators, not to clients. Through these numbers, they control their customers. Voice over IP operators try to implement the same scheme for packet switched voice traffic, although here the domain name system would be natural. Domains are accorded to end users, not to operators. A second conduit for artificially introducing property rights is technical standards. They are needed for defining addressees, for the management of real-time interaction, and for the digital coding of voice signals. By way of proprietary standards, the operator gains full control. Competition policy should not only see at the establishment of these fundamental governance structures. It should also check the potential for distorting systems competition between switched and packet switched telephony. Incumbents are having a host of potential strategies for creating new barriers to entry, and for distorting actual competition. Most critical are bundling strategies. Diagonally integrated incumbents might offer their clients to carry their traffic over IP where possible, and through their traditional network otherwise. That way they could turn their customer base in the traditional networks into a barrier to entry. Currently, this strategy can fully work for mobile telephony. In fixed telephony it is more difficult to implement as long as IP addressees are not earmarked.
    Keywords: property right, club good, network externality, monopolistic competition, systems competition, packet switched telephony, network access, E. 164 numbers vs. IP addresses, caller pays principle vs. receiver pays principle, sip, codecs
    JEL: D D43 H41 K21 K23 L13 L15 L43 L86
    Date: 2005–12
  4. By: Hendrik Hakenes (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany,; Martin Peitz (International University in Germany, 76646 Bruchsal, Germany,
    Abstract: Consider a two-product firm that decides on the quality of each product. Product quality is unknown to consumers. If the firm sells both products under the same brand name, consumers adjust their beliefs about quality subject to the performance of both products. We show that if the probability that low quality will be detected is in an intermediate range, the firm produces high quality under umbrella branding whereas it would sell low quality in the absence of umbrella branding. Hence, umbrella branding mitigates the moral hazard problem. We also find that umbrella branding survives in asymmetric markets and that even unprofitable products may be used to stabilize the umbrella brand. However, umbrella branding does not necessarily imply high quality; the firm may choose low-quality products with positive probability.
    Keywords: Umbrella branding, reputation transfer, signaling, experience goods.
    JEL: L14 L15 M37 D82
    Date: 2006–06
  5. By: Panayiotis C. Andreou (University of Cyprus)
    Keywords: Option pricing, implied volatilities, implied parameters, artificial neural networks, optimization
    JEL: G13 G14
    Date: 2006–07–04
  6. By: Philippe Jehiel (Paris-Jourdan Sciences Economiques, and University College, London,; Moritz Meyer-ter-Vehn (; Benny Moldovanu (Department of Economics, University of Bonn, Lennestr. 37, 53113 Bonn, Germany;
    Abstract: We study multi-object auctions where agents have private and additive valuations for heterogeneous objects. We focus on the revenue properties of a class of dominant strategy mechanisms where a weight is assigned to each partition of objects. The weights influence the probability with which partitions are chosen in the mechanism. This class contains efficient auctions, pure bundling auctions, mixed bundling auctions, auctions with reserve prices and auctions with pre-packaged bundles. For any number of objects and bidders, both the pure bundling auction and separate, efficient auctions for the single objects are revenue-inferior to an auction that involves mixed bundling.
    Date: 2006–02
  7. By: Xavier Castelló; ; Víctor M. Eguíluz
    Keywords: Complex systems, Language competition, social networks
    Date: 2006–07–04
  8. By: Hendrik Hakenes (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany,; Martin Peitz (School of BA, International University in Germany, 76646 Bruchsal, Germany,
    Abstract: Is the reputation of a firm tradable when the change in ownership is observable? We consider a competitive market in which a share of owners must retire in each period. New owners bid for the firms that are for sale. Customers learn the owner’s type, which reflects the quality of the good or service provided, through experience. After observing an ownership change they may want to switch firm. However, in equilibrium, good new owners buy from good old owners and retain high-value customers. Hence reputation is a tradable intangible asset, although ownership change is observable.
    Keywords: Reputation, ownership change, intangible assets, theory of the firm.
    JEL: D40 D82 L14 L15
    Date: 2003–07
  9. By: Boivin, Caroline; Langinier, Corinne
    Abstract: Licensing a new technology implies introducing competition into the market. This has a negative effect on the profit of the incumbent if the demand remains unchanged. However, because of the novel content of an innovation, consumers may have different perceptions of the value of a good depending on the market structure. Thus, the introduction of a competitor into the market may enhance demand, and consequently have a positive effect on the profit of the incumbent. In a simple setting, we show that the incumbent may decide to license her technology even in the absence of a royalty when the positive effect outweighs the negative one.
    JEL: L1
    Date: 2005–09–19
  10. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: A cartel is socially not desirable. But is it a normative problem? And has merger control reason to be concerned about tacit collusion? Neither is evident once one has seen that the members of a cartel face a problem of strategic interaction. It is routinely analysed in terms of game theory. Much less frequently, however, an obvious parallel is drawn. For cartel members, the formation of the cartel and cartel discipline are a public good. Making the parallel explicit is elucidating both at the theoretical and at the experimental levels. The paper contrasts oligopoly theory with public goods theory, and oligopoly experiments with public goods experiments.
    Keywords: Oligopoly, Public Good, Experiment
    JEL: C D D H K L L
    Date: 2006–05
  11. By: Philippe Aghion (Institute for Fiscal Studies and Harvard University); Rachel Griffith (Institute for Fiscal Studies); Peter Howitt (Institute for Fiscal Studies and Brown University)
    Abstract: This paper considers how competition can affect aggregate innovative activity through its effects on firms’ decision whether or not to vertically integrate. A moderate increase in competition enhances innovation incentives, too much competition discourages innovative effort. These effects generates an inverted-U relationship between competition and innovation and between competition and the incentive to vertically integrate. Preliminary evidence finds that there is a non-linear relationship between competition and the propensity of firms to vertically integrate. These results seem to be more consistent with the Property Right Theory (PRT) of vertical integration than with the Transaction Cost Economics (TCE) approach.
    Date: 2006–06
  12. By: Tymofiy Mylovanov (Department of Economics, University of Bonn, Adenauerallee 24-42, 53113 Bonn.
    Abstract: This note considers a bargaining environment with two-sided asymmetric information and quasilinear preferences in which parties select bargaining mechanism after learning their valuations. I demonstrate that sometimes the buyer achieves a higher ex-ante payoff if the bargaining mechanism is selected by her opponent rather than by herself. In the model, the buyer has limited wealth and in addition to acquiring one good from the seller can purchase a different good from a competitive market. The positive relation between the values of these goods is what delivers our result.
    JEL: C72 C78 D82
    Date: 2005–10

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