nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒10‒14
nineteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Competitive Nonlinear Pricing and Bundling By Mark Armstrong; John Vickers
  2. Pure Numbers Effects and Market Power: New Results from Near Continuous Posted-Offer Markets By Douglas D. Davis
  3. Access pricing, bypass and universal service in post By Armstrong, Mark
  4. Innovation and competitive pressure By Vives, Xavier
  5. Monopoly Pricing in the Binary Herding Model By Lise Vesterlund; Subir Bose; Gerhard Orosel; Marco Ottaviani
  6. Private Provision of Public Goods and Local Interaction By Luca Corazzini, Ugo Gianazza
  7. Markets with Search and Switching Costs By Wilson, Chris
  8. Competition vs. Cooperation: Analyzing Strategy Dilemma in Business Growth under Changing Social Paradigms By Rajagopal
  9. Prospect Theory in Choice and Pricing Tasks By Lise Vesterlund; Bill Harbaugh; Kate Krause
  10. Payment industry dynamics: a two-sided market approach By James McAndrews; Zhu Wang
  11. The interaction between tolls and capacity investment in serial and parallel transport networks By De Borger Bruno; Dunkerley Fay; Proost Stef
  12. Alternating-move Hotelling with Demand Shocks By Leufkens Kasper; Peeters Ronald
  13. Competition and Disclosure By Oliver Board
  14. A Brief History of Mobile Telecommunication in Europe By Dunnewijk, Theo; Hultén, Staffan
  15. Computing abuse related damages in the case of new entry: the.... By Maite Martínez-Granado; Georges Siotis
  16. Paradoxes of Perfect Foresight in General Equilibrium Theory By Johnson, Joseph
  17. Markets with Bilateral Bargaining and Incomplete Information By Chatterjee, Kalyan; Dutta, Bhaskar
  18. Dynamic Spatial Competition Between Multi-Store Firms By Victor Aguirregabiria; Gustavo Vicentini
  19. Entry, Exit and Patenting in the Software Industry By Iain M. Cockburn; Megan J. MacGarvie

  1. By: Mark Armstrong; John Vickers
    Abstract: We examine the impact of multiproduct nonlinear pricing on profit, consumer surplus and welfare in a duopoly. When consumers buy all their products from one firm (the one-stop shopping model), nonlinear pricing leads to higher profit and welfare, but often lower consumer surplus, than linear pricing. By contrast, in a unit-demand model where consumers may buy one product from one firm and another product from another firm, bundling generally acts to reduce profit and welfare and to boost consumer surplus. In a more general model where consumers may buy from more than one firm and where consumers have elastic demands for each product, nonlinear pricing has ambiguous effects. Compared with linear pricing, nonlinear pricing tends to raise profit but harm consumer surplus when: (i) demand is elastic, (ii) there is substantial product differentiation, (iii) there is substantial heterogeneity in consumer demand, (iv) consumers face substantial shopping costs when visiting more than one firm, and (v) a consumer`s brand preference for one product is strongly correlated with her brand preference for another product. Nonlinear pricing is more likely to lead to welfare gains when (i), (ii), (iv) and (v) hold, but (iii) does not.
    Keywords: Nonlinear Pricing, Bundling, Discounts
    JEL: D43 L13
    Date: 2006
  2. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: This paper reports an experiment conducted with extensively repeated posted-offer markets to examine interrelationships between seller concentration, static market power and pricing. Although contexts exist where both increased concentration and static market power raise prices, repeated-game effects also importantly affect outcomes. When sellers have static market power, dynamic effects cause prices to increase by more than the changes in static equilibrium predictions. Moreover, in a design where sellers have no static market power, but where the market structure facilitates dynamic price signaling activity, higher prices arise in three and four seller markets than in duopolies.
    Keywords: experiments, market concentration, antitrust policy
    JEL: C9 D4 L4
    Date: 2006–09
  3. By: Armstrong, Mark
    Abstract: An incumbent postal service provider faces two issues which make the design of efficient access pricing especially difficult. First, universal service obligations, together with the presence of significant fixed costs, require retail prices to be out of line with underlying marginal costs. Second, competing firms may be able to bypass the incumbent's delivery network. Within a simple framework, this note analyses how access charges should best be set in the light of these twin constraints.
    Keywords: Access pricing; post; regulation; liberalisation
    JEL: L87 L51
    Date: 2006–05
  4. By: Vives, Xavier (IESE Business School)
    Abstract: The effects of competition on process and product innovation are analyzed, obtaining robust results that hold for a range of market structures. It is found that increasing the number of firms tends to reduce R&D effort, whereas increasing the degree of product substitutability, with or without free entry, increases R&D effort -provided that the total market for product varieties does not shrink. Increasing the total market size increases R&D effort and has ambiguous effects on the number of varieties offered, while decreasing the cost of entry increases the number of entrants and varieties but reduces R&D effort per variety. The framework and results shed light on empirical strategies to assess the impact of competition on innovation.
    Keywords: cost reduction; X-inefficiency; market concentration; market size; substitutability; product introduction; corporate governance; globalization;
    Date: 2006–06–10
  5. By: Lise Vesterlund; Subir Bose; Gerhard Orosel; Marco Ottaviani
    Date: 2006–01
  6. By: Luca Corazzini, Ugo Gianazza (ISLA, Universita' Bocconi, Milano)
    Abstract: The main results of the traditional theory of private provision of public goods under the assumptions of identical individuals and normality of both public good and private consumption are: 1) there exists a unique Nash equilibrium pattern of contributions in which everybody contributes the same amount; 2) this pattern is stable. Under homothetic preferences, we show that these results generally no longer hold in the context of “locally enjoyed” public goods. In particular, there always exists a set of values for the parameter which describes preferences for the public good such that the symmetric Nash equilibrium is unstable and there exists at least one asymmetric Nash equilibrium which is locally stable.
    Keywords: Local Interaction, Public Goods, Nash Equilibria.
    JEL: C62 C72 H41
    Date: 2006–08
  7. By: Wilson, Chris
    Abstract: By incorporating the additional existence of switching costs into an oligopoly search model by Stahl (1989), this paper dispels the misleading idea that search costs can simply be treated as a form of switching cost. Due to the assumption that search costs, unlike switching costs, are incurred unconditionally on the decision to switch suppliers it is shown that the anticompetitive effects of search costs are consistently larger than those from an equivalent level of switching costs. The finding suggests that obfuscation practices that aim to deter consumers from searching, such as competing on deliberately complex tariffs, may be particularly powerful relative to practices that increase the costs of substitution between firms, such as loyalty programs or termination fees.
    Keywords: Search costs; Switching costs; Obfuscation
    JEL: D83 D43 L13
    Date: 2006–05–06
  8. By: Rajagopal (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: There are many factors that determine the structure of competition in the environment of growing globalization. Of these, the factors which predominates the nature of competition include not only rivals, but also the economics of particular industries, new entrants, the bargaining power of customers and suppliers, and the threat of substitute services or products. Hence, competition seems to be inevitable. However, collaboration in the business strategy may be considered analogous with the cooperation in the reference to prevailing concerns of the globalization. This paper delineates the driving factors after the ideologies of the strategy formulation through competition and cooperation. The arguments in the paper are woven around sociological, economical and human behavioral paradigms and analytically discuss the strategic fit of competition and cooperation maxims intended towards the growth of business in a firm. The motivation on these juxtaposed issues of competition and cooperation has been derived by reviewing the ideologies debated over the recent past.
    Keywords: Competition, business growth, cooperation, human behavior, market leadership
    JEL: A13 D63 L22 M14 M20
    Date: 2006–08
  9. By: Lise Vesterlund; Bill Harbaugh; Kate Krause
    Date: 2005–01
  10. By: James McAndrews; Zhu Wang
    Abstract: This paper provides a theory of payment industry dynamics, in which we focus on the monetary nature of payment devices and consider an alternative microfoundation for the two-sided market approach. In a competitive economy, the adoption of an emerging payment method is determined by the distribution of consumer incomes and firm sizes, and the change of consumer income, adoption cost, and card-industry market structure each have important influence on payment pricing and usage dynamics. Our findings suggest that both the increasing concentration of payment card network and the growth of consumer income relative to card service costs may help explain the puzzles surrounding payment card interchange fees.
    Date: 2006
  11. By: De Borger Bruno (University of Antwerp); Dunkerley Fay (K.U.Leuven-Center for Economic Studies); Proost Stef (K.U.Leuven-Center for Economic Studies; UCL - CORE)
    Abstract: The purpose of this paper is to compare the interaction between pricing and capacity decisions on simple serial and parallel transport networks. When individual links of the network are operated by different regional or national authorities, toll and capacity competition is likely to result. Moreover, the problem is potentially complicated by the presence of both local and transit demand on each link of the network. We bring together and extend the recent literature on the topic and, using both theory and numerical simulation techniques, provide a careful comparison of toll and capacity interaction on serial and parallel network structures. First, we show that there is more tax exporting in serial transport corridors than on competing parallel road networks. Second, the inability to toll transit has quite dramatic negative welfare effects on parallel networks. On the contrary, in serial transport corridors it may actually be undesirable to allow the tolling of transit at all. Third, if the links are exclusively used by transit transport, toll and capacity decisions are independent in serial networks. This does not generally hold in the presence of local transport. Moreover, it contrasts with a parallel setting where regional authorities compete for transit; in that case, regional investment in capacity leads to lower Nash equilibrium tolls.
    Keywords: congestion pricing, transport investment, transit traffic
    JEL: H23 H71 R41 R48
    Date: 2006–07
  12. By: Leufkens Kasper; Peeters Ronald (METEOR)
    Abstract: In this paper an infinite-horizon alternating-move Hotelling model in which consumers are uniformly distributed over the market is considered. In a Markov perfect equilibrium, a seller’s move in any period depends on the price the other seller is committed to. The analytic solution is given and the unique linear Markov perfect equilibrium is computed for different values of the discount factor. The base model is then extended by the introduction of exogenous demand shocks which makes finding an analytical solution using the conventional analysis impossible. For this extended model the margin in which long-run prices fluctuate is determined for different values of the shock probability. It is found that the prices set in the high demand state are always lower than in the low demand state. Thus, our findings would support a notion of counter cyclical pricing with respect to the state of demand.
    Keywords: Industrial Organization;
    Date: 2006
  13. By: Oliver Board
    Date: 2006–01
  14. By: Dunnewijk, Theo (UNU-MERIT); Hultén, Staffan (Stockholm School of Economics)
    Abstract: Since the introduction of mobile telephony in the early fifties in Europe, US and Japan the demand for this service exploded. It seems that the latent demand for mobile telecommunication services for decade's continued to be very strong. Since the introduction of cellular technology the capacity of the services increasingly became able to meet the massive demand. Next and future generations of mobile telecommunication technologies bring increased transmission speed and more versatile services. This forces network operators to organise multi- sourced information flows supplied by service providers to increase the network effect of the system instead of providing the network infrastructure and leave the content to the users as in pure voice telephony. The drivers and inhibitors behind the emergence and recent developments of mobile telecommunications systems in Europe are highlighted in this paper. Liberalisation of the telecom markets in Europe drove new entrants to the market and curbed excessive pricing. However, in recent years the lack of challenging service is the main cause for the wavering development of newer generations of mobile telecommunication services.
    Keywords: Telecommunications, Market Structure, Production, Pricing, Technological Change, Economic History, Europe
    JEL: L96 L11 O31 N70
    Date: 2006
  15. By: Maite Martínez-Granado (Universidad del País Vasco / The University of the Basque Country); Georges Siotis (Universidad Carlos III de Madrid)
    Abstract: A number of European countries, among which the UK and Spain, have opened up their Directory Enquiry Services (DQs, or 118AB) market to competition. We analyse the Spanish case, where both local and foreign firms challenged the incumbent as of April 2003. We argue that the incumbent had the ability to abuse its dominant position, and that it was a perfectly rational strategy. In short,the incumbent raised its rivals' costs directly by providing an inferior quality version of the (essential) input, namely the incumbent's subscribers' database. We illustrate how it is possible to quantify the effect of abuse in situation were the entrant has no previous history in the market. To do this, we use the UK experience to construct the relevant counterfactual, that is the "but for abuse" scenario. After controlling for relative prices and advertising intensity, we find that one of the foreign entrants achieved a Spanish market share of only half of what it would have been in the absence of abuse.
    Keywords: Competition policy; abuse of dominance; telecommunications.
    JEL: L41 C22 L96
    Date: 2006–10–05
  16. By: Johnson, Joseph
    Abstract: Intertemporal General Equilibrium Theory cannot be used to settle the Capital Controversy. The device of using dated commodities to avoid dynamic analysis excludes, artificially, strategic behaviour. The auctioneer plays an unsuspectedly stronger role in the dynamic economy than in the static economy, if capital goods are present.
    Keywords: General Equilibrium; perfect foresight; foresight; Capital Controversy; Cambridge Controversy
    JEL: D5
    Date: 2006–10–04
  17. By: Chatterjee, Kalyan (Department of Economics, The Pennsylvania State University); Dutta, Bhaskar (Department of Economics, University of Warwick)
    Abstract: We study the relationship between bargaining and competition with incomplete information. We consider a model with two uninformed and identical buyers and two sellers. One of the sellers has a privately-known reservation price, which can either be Low or High. The other seller’s reservation price is commonly known to be in between the Low and High values of the privately-informed seller. Buyers move in sequence, and make offers with the second buyer observing the offer made by the first buyer. The sellers respond simultaneously. We show that there are two types of (perfect Bayes) equilibrium. In one equilibrium, the buyer who moves second does better. In the second equilibrium, buyers’ expected payoffs are equalised, and the price received by the seller with the known reservation value is determined entirely by the equuilibrium of the two-player game between a single buyer and an informed seller. We also discuss extensions of the model to multiple buyers and sellers, and to the case where both sellers are privately informed.
    Date: 2006
  18. By: Victor Aguirregabiria; Gustavo Vicentini
    Abstract: We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store firms. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We provide an algorithm to compute Markov Perfect Equilibria (MPE) in our model. We conduct several numerical experiments to study how the propensity of multi-store retailers to spatial preemptive behavior depends on the magnitude of entry costs, exit value and transportation costs.
    Keywords: Spatial competition; Market dynamics; Sunk costs; Spatial preemptive behavior.
    JEL: C73 L13 L81 R10 R30
    Date: 2006–08–29
  19. By: Iain M. Cockburn; Megan J. MacGarvie
    Abstract: We examine the effects of software patents on entry and exit in 27 narrowly-defined classes of software products, using a dataset with comprehensive coverage of both mature public firms and small privately held firms between 1994 and 2004. Reflecting the complex economics underlying the relationship between patent protection, entry costs and industry structure, we find that patents have a mixture of effects on entry and exit. Controlling for firm and market characteristics, firms are less likely to enter product classes in which there are more software patents. However, all else equal, firms that hold software patents are more likely to enter these markets. The net effect on entry of increasing the number of software patents is difficult to measure precisely: estimates of the effect of an across-the-board 10% increase in patent holdings on the number of entrants into the average market in this sample range from -5% to +3.5%, with quite large standard errors. Evidence on exit and survival is consistent with these findings - holding patents appears to enhance the survival prospects of firms after entering a market.
    JEL: L1 L6 O34
    Date: 2006–10

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