nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒09‒30
twelve papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  2. The Micro-foundations of Intertemporal Price Discrimination By Winston T.H. Koh
  3. Information Congestion By Simon P. Anderson; André de Palma
  4. Household Demand, Network Externality Effects and Intertemporal Price Discrimination By Winston T.H. Koh
  6. What Do We know About Competition and Quality in Health Care Markets? By Martin Gaynor
  7. Incentives for Clinical Trials By Grönqvist, Erik; Lundin, Douglas
  8. Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous By Philippe De Donder; John E. Roemer
  9. Public Policy towards R&D in a Mixed Duopoly with Spillovers By María José Gil-Moltó; Joanna Poyago-Theotoky; Vasileios Zikos
  10. When prices hardly matter: Incomplete insurance contracts and markets for repair goods By Nell, Martin; Richter, Andreas; Schiller, Jörg
  11. On the “Adverse Selection” of Organizations By Matthias Kräkel
  12. A Comment on The Role of Prices for Excludable Public Goods By Gilbert E. Metcalf; Jongsang Park

  1. By: Hassan Benchekroun; Licun Xue
    Abstract: We study the stability of cartels in a differential game model of oligopoly with sticky prices (Fershtman and Kamien 1987). We show that when firms use closed-loop strategies and the rate of increase of the marginal cost is .small enough., the grand coalition (i.e., when the cartel includes all firms) is stable: it is unprofitable for a .firm to exit the cartel. Moreover, a cartel of 3 firms is stable for any positive rate of increase of the marginal cost: it is not profitable for an insider firm to exit the coalition, nor it is profitable for an outsider firm to join the coalition. When firms use open-loop strategies the grand coalition is never stable; moreover, we show that only a cartel of size 2 can be stable and it is so only when the rate of increase of the marginal cost is large enough.
    JEL: D43 L13 L12 C72
    Date: 2006–09
  2. By: Winston T.H. Koh (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper investigates the optimality of intertemporal price discrimination for a durable-good monopoly in a model where infinitely-lived households face an intertemporal budget constraint, and consume both durable goods and non-durable goods. We prove that the optimal price of the durable good is not constant, and may decrease or increase over time. Some households may choose to purchase the durable good at a later date, and pay lower or higher prices, since the gain in discounted utility of consuming more of the non-durable good more than compensates for the loss in utility from delaying the consumption of the durable good.
    Keywords: Intertemporal price discrimination, durable good monopoly, optimal pricing strategy, household demand
    JEL: D40 D42 D91
    Date: 2005–01
  3. By: Simon P. Anderson; André de Palma
    Abstract: Advertising messages compete for scarce attention. ?Junk? mail, ?spam? e-mail, and telemarketing calls need both parties to exert effort to generate transactions. Message recipients supply attention depending on average message beneÞt. Senders are motivated by proÞts. Costlier message transmission may improve message quality so more messages are examined. Too many messages may be sent, or the wrong ones. A Do-Not-Call policy beats a ban, but too many individuals opt out. A monopoly gatekeeper performs better than personal access pricing if nuisance costs are moderate. The medium is the message with multiple channels, and there is excessive indiscriminate mailing.
    Keywords: information overload, congestion, advertising, common property resource, overÞshing, two-sided markets, junk mail, email, telemarketing, Do Not Call List, message pricing, the Medium is the Message, market research.
    JEL: D11 D60 L13
    Date: 2006–06
  4. By: Winston T.H. Koh (School of Economics and Social Sciences, Singapore Management University)
    Abstract: This paper examines the optimality of intertemporal price discrimination when network externality effects are present in the consumption of a durable good. We conduct our study in two settings. In a model with two household types, utilities are dependent on the cumulative proportion of households that have purchased the durable good. Next, in a model with a continuum of household types, we extend the analysis to the case where households consume both a durable good and a stream of non-durable goods. We show that in both settings, the presence of network externalities facilitates a sales strategy with intertemporal price discrimination.
    Keywords: intertemporal price discrimination, durable good, household demand, network externality
    JEL: D40
    Date: 2005–03
  5. By: Rabah Amir; Effrosyni Diamantoudi; Licun Xue
    Abstract: In view of the uncertainty over the ability of merging firms to achieve efficiency gains, we model the post-merger situation as a Cournot oligopoly wherein the outsiders face uncertainty about the merged entity’s final cost. At > the Bayesian equilibrium, a bilateral merger is profitable provided the non-merged firms sufficiently believe that the merger will generate large enough efficiency gains, even if ex post none actually materialize. The effects of the merger on market performance are shown to follow similar threshold rules. The findings are broadly consistent with stylized facts. An extensive welfare analysis is conducted, bringing out the key role of effciency gains and the different implications of consumer and social welfare standards.
    JEL: D43 L11 L22
    Date: 2006–09
  6. By: Martin Gaynor
    Abstract: The goal of this paper is to identify key issues concerning the nature of competition in health care markets and its impacts on quality and social welfare and to identify pertinent findings from the theoretical and empirical literature on this topic. The theoretical literature in economics on competition and quality, the theoretical literature in health economics on this topic, and the empirical findings on competition and quality in health care markets are surveyed and their findings assessed. Theory is clear that competition increases quality and improves consumer welfare when prices are regulated (for prices above marginal cost), although the impacts on social welfare are ambiguous. When firms set both price and quality, both the positive and normative impacts of competition are ambiguous. The body of empirical work in this area is growing rapidly. At present it consists entirely of work on hospital markets. The bulk of the empirical evidence for Medicare patients shows that quality is higher in more competitive markets. The empirical results for privately insured patients are mixed across studies.
    Keywords: competition,health care,quality,antitrust,
    JEL: I11 L10 L40
    Date: 2006–07
  7. By: Grönqvist, Erik (Centre for Health Economics, Department of Economics); Lundin, Douglas (Pharmaceutical Benefits Board)
    Abstract: Who gains from more information on the quality of pharmaceutical drugs? Are there incentives for voluntary post-approval clinical trials among pharmaceutical companies? Contrary to popular belief, this paper shows that it is not in the consumer interest that clinical evidence establishing the relative effectiveness within a class of drugs are produced. Pharmaceutical companies, on the other hand, do benefit: the elimination of uncertainty regarding quality increases expected product differentiation, thereby raising prices for both high-quality and low-quality drugs, to the disadvantage of consumers. <p> Still there is no unique equilibrium where the market provides clinical trials. If the costs of carrying out clinical trials are small, in relative terms, there will be a coordination problem between firms, as firms will want a rival firm to carry the cost. If the costs are large they will be prohibitive. Legislation that obligates entering firms to carry out post-approval trials is beneficial for firms if it solves the coordination problem, but is otherwise harmful. Legislation is never in the interest of consumers. <p>
    Keywords: Quality uncertainty; Symmetric information; Pharmaceutical market; Clinical trials
    JEL: D81 D83 I18 L15
    Date: 2006–09–25
  8. By: Philippe De Donder; John E. Roemer
    Date: 2006–09–22
  9. By: María José Gil-Moltó (Dept of Economics, Loughborough University); Joanna Poyago-Theotoky (Dept of Economics, Loughborough University); Vasileios Zikos (Dept of Economics, Loughborough University)
    Abstract: We investigate the use of subsidies to R&D, both in a mixed and a private duopoly market. We show that the socially optimal R&D subsidy is positive and increasing in the degree of spillovers both in the private and the mixed duopoly, although it is lower for the former than for the latter. We also find support for the empirical claim that privatization is followed by a scaling down of the R&D activity. A comparative static analysis of welfare levels suggests that privatization is welfare detrimental, which lends some support to the views against the widespread adoption of privatization programs.
    Keywords: mixed duopoly, process innovation, R&D subsidies, privatisation, spillovers.
    JEL: L31 L32 O38 L13 L50
    Date: 2006–07
  10. By: Nell, Martin; Richter, Andreas; Schiller, Jörg
    Abstract: This paper looks at markets characterized by the fact that the demand side is insured. In these markets a consumer purchases a good to compensate consequen¬ces of unfavorable events, such as an accident or an illness. Insurance policies in most lines of insurance base indemnity on the insureds actual expenses, i.e., the insured would be partially or completely reimbursed when purchasing certain goods. In this setting we discuss the interaction between insurance and repair markets by focusing, on the one hand, upon the development of prices and the structure of markets with insured consumers, and, on the other hand, the resulting backlash on optimal insurance contracting. We show that even in the absence of ex post moral hazard the extension of insurance coverage will lead to an increase in prices as well as to a socially undesirable increase in the number of repair service suppliers, if repair markets are imperfect.
    Keywords: insurance; incomplete contracts; repair markets
    JEL: C72 D43 G22
    Date: 2006
  11. By: Matthias Kräkel
    Abstract: According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.
    Keywords: contests; foundation of organizations; internal rent seeking
    JEL: D2 L2 M2
    Date: 2006–09
  12. By: Gilbert E. Metcalf; Jongsang Park
    Abstract: Blomquist and Christensen (2005) argue that welfare is initially decreasing in the price of an excludable public good and that the case for a positive price for an excludable public good price is weak. We argue that this result follows from their particular characterization of the public good and that an alternative and equally reasonable characterization overturns their result. Hence the policy case for a positive price on the public good is stronger than Blomquist and Christiansen suggest. We also provide a flexible characterization of public goods that nests a wide variety of public goods models.
    JEL: H21 H41
    Date: 2006–09

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.