nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒08‒05
seventeen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Evaluating Welfare with Nonlinear Prices By Peter C. Reiss; Matthew W. White
  2. Auctions in which Losers Set the Price By Claudio Mezzetti; Ilia Tsetlin
  3. Government Outsourcing: Public Contracting with Private Monopoly By Emmanuelle Auriol; Pierre M. Picard
  4. Price setting in German manufacturing: new evidence from new survey data By Stahl, Harald
  5. Asymmetric Spatial Competition By Sougata Poddar; Ruby Toh
  6. Environmental Policy under Imperfect Competition : A Survey By Requate, Till
  7. Sticky prices in the euro area: a summary of new micro evidence By Álvarez, Luís; Dhyne, Emmanuel; Hoeberichts, Marco; Kwapil, Claudia; Le Bihan, Hervé; Lünnemann, Patrick; Martins, Fernando; Sabbatini, Roberto; Stahl, Harald; Vermeulen, Philip; Vilmunen, Juoko
  8. Extreme Adverse Selection, Competitive Pricing, and Market Breakdown By George J. Mailath; Georg Nöldeke
  9. Consumer driven market mechanisms to fight inequality: the case of CSR/product differentiation models with asymmetric information By Leonardo Becchetti; Luisa Giallonardo; Elisabetta Tessitore
  10. Firm size and Innovation in European Manufacturing By Mario Pianta; Andrea Vaona
  11. Beliefs and Pareto Efficient Sets: A Remark By Thibault Gajdos; Jean-Marc Tallon
  12. Private Provision of a Complementary Public Good By Richard Schmidtke
  13. Time-dependent or state-dependent price setting? – micro-evidence from German metal-working industries – By Stahl, Harald
  14. Discriminatory auctions with seller discretion : evidence from German treasury auctions By Rocholl, Jörg
  15. Linear and non-linear price decentralization By Monique Florenzano; Charalambos Aliprantis; Rabee Tourky
  16. Edgeworth and Lindahl-Foley equilibria of a general equilibrium model with private provision of pure public goods By Monique Florenzano; Elena Del Mercato
  17. Nuclear high-radioactive residues: a new economic solution based on the emergence of a global competitive market By Pedro Cosme da Costa Vieira

  1. By: Peter C. Reiss; Matthew W. White
    Abstract: This paper examines how to evaluate consumer welfare when consumers face nonlinear prices. This problem arises in many settings, such as devising optimal pricing strategies for firms, assessing how price discrimination affects consumers, and evaluating the efficiency costs of many transfer programs in the public sector. We extend prior methods to accommodate a broad range of modern pricing practices, including menus of pricing plans. This analysis yields a simpler and more general technique for evaluating exact consumer surplus changes in settings where consumers face nonlinear prices. We illustrate our method using recent changes in mobile phone service plans.
    JEL: D12 D40 H20 L10
    Date: 2006–07
  2. By: Claudio Mezzetti; Ilia Tsetlin
    Abstract: We study auctions of a single object among symmetric bidders with affiliated values. We show that the second-price auction minimizes revenue among all efficient auction mechanisms in which only the winner pays, and the price only depends on the losers’ bids. In particular, we show that the k-th price auction generates higher revenue than the second-price auction, for all k > 2. It follows that with affiliated private values the k-th price auction yields higher revenue than the English auction. We also show that the k-th price auction may generate higher revenue than the English auction even in a setting with common values.
    Keywords: Auctions; Second-Price Auction; English Auction; k-th Price Auction; Affiliated Values; Robust Mechanism Design
    JEL: D44 D82
    Date: 2006–07
  3. By: Emmanuelle Auriol; Pierre M. Picard
    Abstract: The paper studies the impact of government budget constraint in a pure adverse selection problem of monopoly regulation. The government maximizes total surplus but incurs some cost of public funds. An alternative to regulation is proposed in which firms are free to enter the market and to choose their price and output levels. However the government can contract ex-post with the private firms. This ex-post contracting set-up allows more flexibility than traditional regulation where government commits to both investment and operation cash-flows. This is especially relevant in case of high technological uncertainties.
    Keywords: privatization, soft-budget constraint, adverse selection, regulation, natural monopoly
    JEL: D82 L33 L43 L51
    Date: 2006
  4. By: Stahl, Harald
    Abstract: This paper presents new evidence on the formation of producer prices based on a onetime survey that was conducted on a sample of 1200 German firms in manufacturing in June 2004. Most of the firms have price-setting power and apply mark-up pricing. Indexation is negligible. Fixed nominal contracts are the most important reason for postponing a price adjustment. The second most likely reason is coordination failure, which causes more upward than downward stickiness. For every second firm both reasons are important. Firms can be assigned to four different groups according to an increasing complexity of reasons of price stickiness.
    Keywords: Price rigidity, cluster analysis
    JEL: D40 E30
    Date: 2005
  5. By: Sougata Poddar (Department of Economics, National University of Singapore); Ruby Toh
    Abstract: This paper considers price and location decisions of competing duopolists through an approach that integrates the traditional inside location and outside location model. One firm locates inside a linear city along with consumers while the other locates outside it. We analyze a location-price simultaneous game as well as a location-then price sequential game and characterize the equilibria in pure strategies. The transport cost are assumed to be linear-quadratic and borne by the consumers. We find the results are contrasting to the traditional inside and outside location models and the stability of the proposed model is intermediate between the two.
    Keywords: Inside-outside location model, spatial competition, product differentiation, transportation costs, cross-border shopping
    JEL: C72 D43 L13
  6. By: Requate, Till
    Abstract: In this article I survey the theoretical literature on environmental policy in the presence of imperfect competition, ranging from early contributions in the 1960s to the present. I cover the following market structures when polluting firms have market power in the output market: monopoly, Cournot oligopoly, Bertrand duopoly with homogeneous products, pricesetting duopoly with differentiating commodities, and models of monopolistic competition. Among the latter I consider Cournot oligopoly with free entry, the Dixit-Stiglitz model, and Salop’s model of the circular city with polluting firms. The regulation instruments I concentrate on are emission taxes, tradable permits, and both absolute and relative standards. I also discuss taxation when firms have market power in the input market, and I study models where firms exercise market power in the market of tradable permits. In the latter case I also survey some recent results from the literature on experimental economics. Finally, I briefly discuss environmental policy in open economies when firms have market power in international markets. Here I suggest different decompositions of the unilateral second-best optimal tax rate, thus attempting to unify alternative interpretations of these decompositions in the literature.
    Date: 2005
  7. By: Álvarez, Luís; Dhyne, Emmanuel; Hoeberichts, Marco; Kwapil, Claudia; Le Bihan, Hervé; Lünnemann, Patrick; Martins, Fernando; Sabbatini, Roberto; Stahl, Harald; Vermeulen, Philip; Vilmunen, Juoko
    Abstract: This paper presents original evidence on price setting in the euro area at the individual level. We use micro data on consumer (CPI) and producer (PPI) prices, as well as survey information. Our main findings are: (i) prices in the euro area are sticky and more so than in the US; (ii) there is evidence of heterogeneity and of asymmetries in price setting behaviour; (iii) downward price rigidity is only slightly more marked than upward price rigidity and (iv) implicit or explicit contracts and coordination failure theories are important, whereas menu or information costs are judged much less relevant by firms.
    Keywords: Price setting, Price stickiness, Consumer prices, Producer prices, survey data
    JEL: C25 D40 E31
    Date: 2006
  8. By: George J. Mailath; Georg Nöldeke
    Date: 2006–07–29
  9. By: Leonardo Becchetti (University of Rome Tor Vergata); Luisa Giallonardo (University of Rome Tor Vergata); Elisabetta Tessitore (University of Rome Tor Vergata)
    Abstract: The bottom up pressure of "concerned" consumers and the rise of "socially responsible" products represents a new market mechanism to fight inequality and promote social inclusion. To analyze the new phenomenon of competition in corporate social responsibility (CSR) amid doubts on consumer tastes and of the effective corporate SR stance we adopt a horizontal differentiation approach in which the Hotelling segment is reinterpreted as the space of product SR characteristics and consumer tastes are uncertain. We find equilibria of the pure location and of the price-location games and show what changes when we move from a duopoly of profit maximizing producers to a mixed duopoly. Our findings illustrate that a nonzero degree of CSR is the optimal choice of profit maximizing corporations under reasonable parametric intervals of consumers’ "costs of ethical distance", corporate cost of CSR and uncertainty about consumer tastes.
  10. By: Mario Pianta; Andrea Vaona
    Abstract: The paper investigates the differences between small, medium-sized and large firms regarding their performance in the introduction of new products and processes. After a review of the relevant literature, two models are proposed and tested in search for different business strategies and innovation inputs connected to product and process innovations. The empirical analysis uses innovation survey (CIS 2) data at the industry level for 22 manufacturing sectors, broken down in three firm size classes, for eight European countries. Special attention is devoted to tackling the issues of possible endogeneity of the regressors and of unobserved sectoral heterogeneity. The results - strengthening the findings of previous studies - show that product and process innovations, though having some complementarities, are associated to different innovative inputs and strategies pursued by firms. Systematic differences also emerge between the behaviour of large firms and SMEs.
    Keywords: Product innovation; Process innovation; Firm size; Determinants of innovation; European industries
    JEL: L11 O31 O33
    Date: 2006–07
  11. By: Thibault Gajdos (EUREQUA - Equipe de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I]); Jean-Marc Tallon (EUREQUA - Equipe de Recherche en Economie Quantitative - [Université Panthéon-Sorbonne - Paris I])
    Abstract: We show that, in a two-period economy with uncertainty in the second period, if an allocation is Pareto optimal for a given set of beliefs and remains optimal when these beliefs are changed, then the set of optimal allocations of the two economies must actually coincide. We identify equivalence classes of beliefs giving rise to the same set of Pareto optimal allocations.
    Keywords: Beliefs, Pareto Optimality
    Date: 2006–07–20
  12. By: Richard Schmidtke
    Abstract: For several years, an increasing number of firms have been 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 affect 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
  13. By: Stahl, Harald
    Abstract: Price setting in German metal-working industries is analysed using a monthly panel of individual price data for more than 2,000 plants covering the period from 1980 to 2001. Motivated by several models in the literature, a duration model is estimated. Price changes can be explained by a combination of state-dependence and time-dependence but time-dependence clearly dominates. Time-dependence is strongest if a price increase follows a price increase. This is typically the case during the observed period. A price increase is most likely to follow a price increase after 1, 4, 5, 8, 9, … quarters. This time-dependent effect is so strong and cost and price increases are so weak in the observed period that adjustment occurs before the sticky price sufficiently deviates from the flexible price, as traditional menu cost models assume. State-dependence seems to be most relevant in periods with decreasing demand. Then prices are reduced and the time between two price reductions only rarely exceeds four months.
    Keywords: price rigidity, duratio alysis, business survey data
    JEL: D43 E31 L11
    Date: 2005
  14. By: Rocholl, Jörg
    Abstract: This paper examines the results of 93 discriminatory German Treasury auctions between 1998 and 2002. It documents the seller’s use of discretion and its influence on auction outcomes and bidding strategies. The evidence suggests that the seller uses its discretion frequently and substantially. It does not maximize revenues in a single-period game, but moves up in the competitive demand curve to set the auction price close to the market price. Bidders do not make profits in German auctions on average, while their bidding strategies reflect the uncertainty created by the seller’s discretion. The paper extends and tests the multi-unit auction model by Lengwiler (1999). The empirical evidence is consistent with the implication that the market-clearing price depends on the seller’s marginal cost rather than on the submitted demand.
    Keywords: Discriminatory auctions, Winner’s curse, Seller discretion
    JEL: G28 H63
    Date: 2005
  15. By: Monique Florenzano (Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Universit? Panth?on-Sorbonne - Paris I]); Charalambos Aliprantis (Department of Economics, Purdue University - [Purdue University]); Rabee Tourky (Department of Economics, Purdue University - [Purdue University])
    Abstract: Abstract. Compendious and thorough solutions to the existence of a linear price equilibrium problem, the second welfare theorem, and the limit theorem on the core are provided for exchange economies whose consomption sets are the positive cone of arbitrary ordered Fréchet-dispensing entirely with the assumption that the vector ordering of the commodity space is a lattice. The motivation comes from economic applications showing the need to bring within the scope of equilibrium theory vector orderings that are not lattices, which arise in the typical model of portfolio trading with missing options. The assumptions are on the primitives of the model. They are bounds on the marginals of non-linear prives and for omega-proper economies they are both sufficient and necessary.
    Keywords: Linear and non-linear prices; equilibrium; welfare theorems
    Date: 2006–07–17
  16. By: Monique Florenzano (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Elena Del Mercato (Department of Economics, University of Salerne - [University of Salerne])
    Abstract: Abstract. In this paper, we propose a definition of Edgeworth equilibrium for a private ownership production economy with (possibly infinitely) many private goods and a finite number of pure public goods. We show that Edgeworth equilibria exist whatever be the dimension of the private goods space, and can be decentralized, in the finite and infinite dimensional cases, as Lindahl-Foley equilibria. Existence theorems for Lindahl-Foley equilibria are a by-product of our results.
    Keywords: production economy; public goods; Edgworth equilibrium; Lindahl-Foley equilibrium; proper economy
    Date: 2006–07–13
  17. By: Pedro Cosme da Costa Vieira (Faculdade de Economia, Universidade do Porto)
    Abstract: Nuclear energy is economic and does not emit CO2 but has two central setbacks. First, it has not been yet implemented an efficient method of disposing the spent fuel. Second, the reactors’ complexity is expensive and turns possible the occurrence of accidents. In this paper, first I propose a very simple, economic and safe boiling heavy-water reactor that may constitute a way of mitigating these setbacks. The reactor is a container filled with a hydraulic suspension of fuel that is crossed-over by two fluxes: by one side, the fuel suspension that remains 250 days in the reactor and, by another side, the cooler that remains 50 seconds in the reactor. Second, I discuss that the solution of nuclear high-radioactive residues problem passes by the emergence of a global competitive market.
    Keywords: Nuclear reactor; Heavy water; Boiling water; Continuous fuel feeding; IV generation; Nuclear residues pricing and trading
    JEL: D41 D45 L72 Q48
    Date: 2006–07

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.