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on Microeconomics |
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Issue of 2006‒07‒28
seven papers chosen by Joao Carlos Correia Leitao Universidade da Beira Interior |
| By: | Paul Klemperer (Nuffield College, University of Oxford); Joseph Farrell (University of California) |
| Abstract: | Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in effciency, and gives vendors lucrative ex post market power-over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such "competition for the market" or "life-cycle competition" can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct effciency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-effciency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later "tips" to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and s also discourage more aggressive entry. Because of these competitive effects, even ineffcient incompatible competition is often more profitable than compatible competition, especially for dominant rms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy. |
| Date: | 2006–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0607&r=mic |
| By: | George J. Mailath (Cowles Foundation, Yale University); Georg Noldeke (Universitat Bonn) |
| Abstract: | Extreme adverse selection arises when private information has unbounded support, and market breakdown occurs when no trade is the only equilibrium outcome. We study extreme adverse selection via the limit behavior of a financial market as the support of private information converges to an unbounded support. A necessary and sufficient condition for market breakdown is obtained. If the condition fails, then there exists competitive market behavior that converges to positive levels of trade whenever it is first best to have trade. When the condition fails, no feasible (competitive or not) market behavior converges to positive levels of trade. |
| Keywords: | Adverse selection, Market breakdown, Separation, Competitive pricing |
| JEL: | D40 D82 D83 G12 G14 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1573&r=mic |
| By: | Oksana Loginova (Department of Economics, University of Missouri-Columbia); X. Henry Wang (Department of Economics, University of Missouri-Columbia); Haibin Lu |
| Abstract: | AIn this paper we use mechanism design approach to find the optimal file-sharing mechanism in a peer-to-peer network. This mechanism improves upon existing incentive schemes. In particular, we show that peer-approved scheme is never optimal and service-quality scheme is optimal only under certain circumstances. Moreover, we find that the optimal mechanism can be implemented by a mixture of peer-approved and service-quality schemes. |
| Keywords: | peer-to-peer networks, mechanism design. |
| JEL: | D82 C7 |
| Date: | 2006–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:0608&r=mic |
| By: | Sumru G. Altug; Murta Usman |
| Abstract: | We examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We examine pricesetting equilibria with horizontally differentiated banks. If bank lending takes place under a weak corporate governance mechanism and is fraught with agency problems and ineffective bank monitoring, then an equilibrium emerges in which loan supply is strategically restricted. In this equilibrium, the loan restriction, the “under-lending” strategy, provides an advantage to one bank by increasing its market share and sustaining monopoly interest rates. The bank’s incentives for doing so increase under conditions of increased volatility of lending capacities of banks, more severe borrower-side moral hazard, and lower returns on the investment projects. Although this equilibrium is not always unique, with poor bank monitoring and corporate governance, a more intense banking competition renders the bad equilibrium the unique outcome. |
| Keywords: | Bank lending, threshold effects, underlending equilibria, interest rate competition. |
| JEL: | E22 E62 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0608&r=mic |
| By: | Patrick Lunnemann (Banque Central du Luxembourg, 2, boulevard Royal, L-2983 Luxembourg, Luxembourg.); Ladislav Wintr (Clark University, Worcester, MA 01610, United States.) |
| Abstract: | This paper studies the behaviour of Internet prices. It compares price rigidities on the Internet and in traditional brick-and-mortar stores and provides a cross-country perspective. The data set covers a broad range of items typically sold over the Internet.It includes more than 5 million daily price quotes downloaded from price comparison web sites in France, Germany, Italy, the UK and the US. The following results emerge from our analysis. First, and contrary to the recent findings for common CPI data, Internet prices in the EU countries do not change less often than online prices in the US. Second, prices on the Internet are not necessarily more flexible than prices in traditional brick-and-mortar stores. Third, there is substantial heterogeneity in the frequency of price change across shop types and product categories. Fourth, the average price change on the Internet is relatively large, but smaller than the respective values reported for CPI data. Finally, panel logit estimates suggest that the likelihood of observing a price change is a function of both state- and time-dependent factors. JEL Classification: E31; L11. |
| Keywords: | Price stickiness; Internet; price setting behaviour. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060645&r=mic |
| By: | Marvin Kraus (Boston College) |
| Keywords: | Networks, congestion, returns to scale, congestion pricing |
| Date: | 2006–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:644&r=mic |
| By: | Paola Manzini (Queen Mary, University of London and IZA); Marco Mariotti (Queen Mary, University of London) |
| Abstract: | We study and test a class of boundedly rational models of decision making which rely on sequential eliminative heuristics. We formalize two sequential decision procedures, both inspired by plausible models popular among several psychologists and marketing scientists. However we follow a standard `revealed preference' economic approach by fully characterizing these procedures by few, simple and testable conditions on observed choice. Then we test the models (as well as the standard utility maximization model) with experimental data. We find that the large majority of individuals behave in a way consistent with one of our procedures, and inconsistent with the utility maximization model. |
| Keywords: | Bounded rationality, Choice experiments |
| JEL: | C91 D9 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp561&r=mic |