nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒09‒23
fifteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. A note on price-taking and price-making behaviours in general equilibrium oligopoly models By Ludovic Julien; Fabrice Tricou
  2. Fairness and Desert in Tournaments By David Gill; Rebecca Stone
  3. The Organization of Supply: a Vertical Equilibrium Analysis By Nadav Levy
  4. R&D Subsidies and the Surplus Appropriability Problem By Sørensen, Anders
  5. Consumer Choice and Revealed Bounded Rationality By Paola Manzini; Marco Mariotti
  6. Public and Private Activity in Commercial TV Broadcasting By Hansen, Bodil O.; Keiding, Hans
  8. Competition Policy and Innovation By Møllgaard, Peter; Lorentzen, Jo
  9. Competition, Hidden Information, and Efficiency: an Experiment By Antonio Cabrales; Gary Charness; Marie-Claire Villeval
  10. Sequential versus simultaneous market By Haldrup, Niels; Møllgaard, Peter; Nielsen, Claus Kastberg
  11. The welfare economics of optional water metering with asymmetric information By Simon Cowan
  12. Regulation of Television advertising By Simon P. Anderson
  13. Information Exchange, Market Transparency and Dynamic Oligopoly By Overgaard, Per Baltzer; Møllgaard, Peter
  14. Non-Profit Firms and the Provision of Durable Goods By Gregory E. Goering
  15. Two-stage Bargaining Solutions By Paola Manzini; Marco Mariotti

  1. By: Ludovic Julien (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Fabrice Tricou (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: This paper explores the rationale of price-taking and price-making behaviours in the context of Walrasian and Cournotian pure exchange economies. Beside the influence of the number of agents, we underline the role of the structure of preferences. Through three equilibrium variations of the same basic economy, we obtain several results about price manipulation, about asymptotic identifications for large economies and for degenerate preferences, and about welfare comparisons. Perfect competition does not only correspond to the case of large economies, but may also concern economies where market powers are more or less equivalent.
    Keywords: Cournot-Walras equilibria, market power, perfect competition
    Date: 2006–09–08
  2. By: David Gill; Rebecca Stone
    Abstract: We develop a model to describe the behavior of agents who care about receiving their "just deserts" in competitive situations. In particular we analyze the strategic behaviour of two identical desert-motivated agents in a rank-order tournament. Each agent is assumed to be loss averse about an endogenous and meritocratically determined reference point that represents her perceived entitlement. Sufficiently strong desert concerns render the usual symmetric equilibrium unstable or non-existent and allow asymmetric desert equilibria to arise in which one agent works hard while the other slacks off. As a result, agents may prefer competition for status to a random allocation, even when the supply of status is fixed. When employees are desert-motivated we find that an employer may prefer a tournament to relative performance pay linear in the difference in the agents` outputs if output noise is sufficiently fat-tailed or if the employer can use the tournament to induce an asymmetric equilibrium.
    Keywords: Desert, Tournament, Loss Aversion, Status Competition, Relative
    JEL: D63 J33
    Date: 2006
  3. By: Nadav Levy
    Abstract: In this paper I study how the make-or-buy decision of a firm depends on the organization of its peers. I consider a multi-firm framework in which firms choose whether to integrate into the supply of an intermediate input or to outsource its production, and choose the size of their supplier network if outsourcing. Firms find it optimal to share the same set of suppliers, as there are economies of scope in investment to suppliers taking multiple designs. These economies are due to spillovers of technical or operational know-how between projects and to savings in the setup costs on physical capital. The model admits multiple vertical equilibria that are Pareto-ranked, the one with the highest level of outsourcing being most efficient. Outsourcing is more likely in larger markets and when the economies of scope are stronger. The size of the optimal supplier network however typically decreases when the spillovers are stronger. These findings provide insight into the patterns of reorganization of vertical supply relations observed over the last two decades.
    Keywords: Outsourcing, Vertical Integration, Spillovers, Supply relations creation-date: 2004
    JEL: L22 D23
  4. By: Sørensen, Anders (Department of Economics, Copenhagen Business School)
    Abstract: It may be optimal from a welfare perspective to use R&D subsidies when the source of R&D distortions originates from the surplus appropriability problem and technological spillovers in the form of knowledge spillovers, creative destruction, and duplication externalities are absent. Hence, R&D subsidies may constitute the optimal policy even when subsidies directly targeted on monopoly pricing could be applied. The result holds when dynamic effects are important relative to static effects and when governments spending is restricted. The latter characteristic arises when a government is unable or unwilling to use the level of spending required to implement the optimum policy. The argument is developed in a semi-endogenous growth model where the only distortion is monopoly pricing of intermediate goods.
    Keywords: R&D; policy instruments; welfare; market power
    JEL: O38 O41
    Date: 2005–09–13
  5. By: Paola Manzini (Queen Mary, University of London and IZA); Marco Mariotti (Queen Mary, University of London)
    Abstract: We study two boundedly rational procedures in consumer behavior. We show that these procedures can be detected by conditions on observable demand data of the same type as standard revealed preference axioms. This provides the basis for a non-parametric analysis of boundedly rational consumer behavior mirroring the classical one for utility maximization.
    Keywords: Bounded rationality, Revealed preference, Consumer choice
    JEL: D1 D11
    Date: 2006–09
  6. By: Hansen, Bodil O. (Department of Economics, Copenhagen Business School); Keiding, Hans (Department of Economics, Copenhagen Business School)
    Abstract: We consider a model of commercial television market, where private broadcasters coexist with a public television broadcaster. Assuming that the public TV station follows a policy of Ramsey pricing whereas the private stations are profit maximizers, we consider the equilibria in this market and compare with a situation where the public station is privatized and acts as another private TV broadcaster. A closer scrutiny of the market for commercial television leads to a distinction between target rating points, which are the prime unit of account in TV advertising, and net coverage, which is the final goal of advertisers. Working with net coverage as the fundamental concept, we exploit the models of competition between public and private price and quantity in order to show that privatization of the public TV station entails a welfare loss and results in TV advertising becoming more expensive.
    Keywords: TV broadcasting; imperfect competition; Ramsey pricing; welfare comparison
    JEL: L11 L33 L82
    Date: 2006–09–14
  7. By: Jim Engle-Warnick; Bradley Ruffle
    Abstract: We experimentally examine the impact of buyer concentration on the pricing of a monopolist. In our experimental markets, a monopolist faces either two or four buyers. Markets with two buyers achieve significantly lower prices, sometimes below competitive levels, than those with four buyers. We design an additional pair of treatments to pinpoint the source of this difference. We attribute the lower pries in the two-buyer treatment to the monopolist pricing more cautiously when there are fewer buyers in order to avoid costly losses in sales. Buyer concentration may thus be an elective source of countervailing power.
    JEL: C91 D42
    Date: 2006–09
  8. By: Møllgaard, Peter (Department of Economics, Copenhagen Business School); Lorentzen, Jo (Department of Economics, Copenhagen Business School)
    Abstract: We briefly review the rationale behind technological alliances and provide a snapshot of their role in global competition, especially insofar as it is based around intellectual capital. They nicely illustrate the increased importance of horizontal agreements and thus establish the relevance of the topic. We move on to discuss the organisation of industries in a dynamic context and draw out consequences for competition policy. We conclude with an outlook on the underlying tensions between technology alliances, competition policy, and industrial policy.
    Keywords: Competition policy; innovation; alliances; industrial policy
    JEL: L40 L50 O31
    Date: 2006–09–13
  9. By: Antonio Cabrales (Universidad Carlos III de Madrid); Gary Charness (University of California); Marie-Claire Villeval (GATE CNRS)
    Abstract: We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
    Keywords: experiment, hidden information, competition, efficiency
    JEL: A13 B49 C91 C92 D21 J41
    Date: 2006–09
  10. By: Haldrup, Niels (Department of Economics, Copenhagen Business School); Møllgaard, Peter (Department of Economics, Copenhagen Business School); Nielsen, Claus Kastberg (Department of Economics, Copenhagen Business School)
    Abstract: Delineation of the relevant market forms a pivotal part of most antitrust cases. The standard approach is sequential. First the product market is delineated, then the geographical market is defined. Demand and supply substitution in both the product dimension and the geographical dimension will normally be stronger than substitution in either dimension. By ignoring this one might decide first to define products narrowly and then to define the geographical extent narrowly ignoring the possibility of a diagonal substitution. These reflections are important in the empirical delineation of product and geographical markets. Using a unique data set for prices of Norwegian and Scottish salmon, we propose a methodology for simultaneous market delineation and we demonstrate that compared to a sequential approach conclusions will be reversed.
    Keywords: Relevant market; econometric delineation; salmon
    JEL: C30 K21 L41 Q22
    Date: 2005–03–15
  11. By: Simon Cowan
    Abstract: The paper develops a model of decentralized metering decisions when selective metering is socially optimal. Households choose between two-part tariffs. Decentralization achieves social efficiency when the regulator, who knows household characteristics, gives household-specific compensation (via a reduction in the lump-sum charge on choosing to have a meter), while allowing for the cost of metering. Relative to the status quo of no metering the full-information scheme provides a Pareto improvement. With asymmetric information the first-best allocation of meters can be achieved when only small consumers should have meters. When large consumers alone should be metered it is not possible to separate customers. An exogenous signal that is highly correlated with the unknown type can, however, help to alleviate this problem. The policy of requiring meters to be provided free is problematic because the first-best allocation does not enable all the water supplier`s costs to be recovered.
    Keywords: Water Metering, Optional, Two-part Tariffs, Asymmetric Information
    JEL: D82 L51 Q25
    Date: 2006
  12. By: Simon P. Anderson
    Abstract: Regulation of television advertising typically covers both the time devoted to commercials and restrictions on the commodities or services that can be publicized to various audiences (stricter laws often apply to children’s programming). Time restrictions (advertising caps) may improve welfare when advertising is overprovided in the market system. Even then, such caps may reduce the diversity of programming by curtailing revenues from programs. They may also decrease program net quality (including the direct benefit to viewers). Restricting advertising of particular products (such as cigarettes) likely reflects paternalistic altruism, but restrictions may be less efficient than appropriate taxes.
    Keywords: television, advertising, regulation, length caps, advertising content
    JEL: D42 L15 M37
    Date: 2005–08
  13. By: Overgaard, Per Baltzer (Department of Economics, Copenhagen Business School); Møllgaard, Peter (Department of Economics, Copenhagen Business School)
    Abstract: In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role.
    Keywords: None
    JEL: H00
    Date: 2006–09–13
  14. By: Gregory E. Goering
    Abstract: A simple linear demand two-period durable goods is analyzed where the durable good is provided by private non-profit organization (NPO). A novel flexible objective function is utilized that allows for both the “commercial” and “social concern” aspects of NPOs. The model indicates NPO’s will not typically provide the efficient cost-minimizing durability in sales markets. Indeed, if the NPO cannot credibly commit to its own stakeholders it will manufacture output with less durability than a pure for-profit seller. We show the NPO’s level of commitment ability and social concern with its stakeholders is crucial for determining the amount of “planned obsolescence” that would prevail if NPOs expand into durable goods markets. Interestingly, the social concern commonly cited for the existence of NPOs, is a double edged sword since it may cause more or less product obsolescence.
  15. By: Paola Manzini (Queen Mary, University of London); Marco Mariotti (Queen Mary, University of London)
    Abstract: We introduce and characterize a new class of bargaining solutions: those which can be obtained by sequentially applying two binary relations to eliminate alternatives. As a by-product we obtain as a particular case a partial characterization result by Zhou (Econometrica, 1997) of an extension of the Nash axioms and solution to domains including non-convex problems, as well as a complete characterizations of solutions that satisfy Pareto optimality, Covariance with positive affine transformations, and Independence of irrelevant alternatives.
    Keywords: Bargaining, Non-convex problems, Nash bargaining solution
    JEL: C72 D44
    Date: 2006–09

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