nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒11‒04
fourteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous By De Donder, Philippe; Roemer, John E
  2. Outsourcing Induced by Strategic Competition By Yutian Chen; Pradeep Dubey; Debapriya Sen
  3. Selling to Consumers with Endogenous Types By Boone, Jan; Shapiro, Joel
  4. Hotelling Was Right About Snob/Congestion Goods (Asymptotically) By Christian Ahlin; Peter Ahlin
  5. Tacit Collusion in the Presence of Cyclical Demand and Endogenous Capacity Levels By Christopher R. Knittel; Jason J. Lepore
  7. Upstream market foreclosure By Jean j., GABSZEWICZ; Skerdilajda, ZANAJ
  8. An overview of Stackelberg pricing in networks By Hoesel Stan van
  9. Cournot Competition By Andrew F. Daughety
  10. Networks for Free Trade Agreements among Heterogeneous Countries By Ana, MAULEON; Huasheng, SONG; Vincent, VANNETELBOSCH
  11. Regulation – the Corridor to Liberalization: The Experience of the Israeli Phone Market 1984-2005 By Reuben Gronau
  12. Farsightedly Stable Networks By Herings P. Jean-Jacques; Mauleon Ana; Vannetelbosch Vincent
  13. The Company You Keep: Qualitative Uncertainty in Providing Club Goods By Bipasa Datta; Clive D Fraser
  14. Productivity in Estonian enterprises: the role of innovation and competition By Priit Vahter

  1. By: De Donder, Philippe; Roemer, John E
    Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of government's participation. Our main results are twofold. First, government's participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of government's participation in the high-quality firm increases with how much consumers care for average equality.
    Keywords: factions; mixed oligopoly; party-unanimity Nash equilibrium; vertical differentiation
    JEL: D21 D43 D62 H82
    Date: 2006–10
  2. By: Yutian Chen (Dept. of Economics, SUNY-Stony Brook); Pradeep Dubey (Dept. of Economics, SUNY-Stony Brook); Debapriya Sen (Dept. of Economics, SUNY-Stony Brook)
    Abstract: We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.
    Keywords: Intermediate goods, Outsourcing, Cournot duopoly, Stackelberg duopoly
    JEL: D41 L11 L13
    Date: 2006–11
  3. By: Boone, Jan; Shapiro, Joel
    Abstract: For many goods (such as experience goods or addictive goods), consumers' preferences may change over time. In this paper, we examine a monopolist's optimal pricing schedule when current consumption can affect a consumer's valuation in the future and valuations are unobservable. We assume that consumers are anonymous, i.e. the monopolist can't observe a consumer's past consumption history. For myopic consumers, the optimal consumption schedule is distorted upwards, involving substantial discounts for low valuation types. This pushes low types into higher valuations, from which rents can be extracted. For forward looking consumers, there may be a further upward distortion of consumption due to a reversal of the adverse selection effect; low valuation consumers now have a strong interest in consumption in order to increase their valuations. Firms will find it profitable to educate consumers and encourage forward-looking behaviour.
    Keywords: addictive goods; endogenous types; experience goods; price discrimination
    JEL: D42 D82 L12
    Date: 2006–10
  4. By: Christian Ahlin (Department of Economics, Vanderbilt University); Peter Ahlin (Chatham Financial)
    Abstract: We add congestion/snobbery to the Hotelling model of spatial competition. For any firm locations on opposite sides of the midpoint, a pure strategy price equilibrium exists and is unique if congestion costs are strong enough relative to transportation costs. The maximum distance between firms in any pure strategy symmetric location equilibrium declines toward zero as congestion costs increase relative to transportation costs. For any non-zero minimum distance between firms, high enough congestion costs relative to transportation costs guarantee that the unique pure strategy symmetric location equilibrium involves minimum differentiation. In this sense Hotelling was right about differentiation of snob/congestion goods.
    Keywords: Hotelling, spatial competition, differentiation, congestion, snobbery
    JEL: D21 D43 R12
    Date: 2006–10
  5. By: Christopher R. Knittel; Jason J. Lepore
    Abstract: We analyze tacit collusion in an industry characterized by cyclical demand and long-run scale decisions; firms face deterministic demand cycles and choose capacity levels prior to competing in prices. Our focus is on the nature of prices. We find that two types of price wars may exist. In one, collusion can involve periods of mixed strategy price wars. In the other, consistent with the Rotemberg and Saloner (1986) definition of price wars, we show that collusive prices can also become countercyclical. We also establish pricing patterns with respect to the relative prices in booms and recessions. If the marginal cost of capacity is high enough, holding current demand constant, prices in the boom will be generally lower than the prices in the recession; this reverses the results of Haltiwanger and Harrington (1991). In contrast, if the marginal cost of capacity is low enough, then prices in the boom will be generally higher than the prices in the recession. For costs in an intermediate range, numerical examples are calculated to show specific pricing patterns.
    JEL: L0 L1 L13 L49
    Date: 2006–10
  6. By: Hernán Vallejo G
    Abstract: The theories of natural market structures have been well known in economics for a long time. In this paper, a framework for such natural market structures is developed, where natural monopoly, natural oligopoly, perfect competition and monopolistic competition are special cases. The paper explains why with increasing returns to scale at the level of the firm; a given market size; a continuum of firms; complete information and homogeneous goods, there is usually a margin for regulation –most notably when the number of firms in the market is low. The paper shows that R&D, FDI and trade liberalization can improve welfare, and that they can be complements or imperfect substitutes to the need for market regulation. It is argued that when markets are expected to grow, or technologies to change, avoiding policies that prevent entry of firms –such as licences- can reduce significantly the need for regulation while allowing for a more efficient allocation of resources. It is also argued that the need for market regulation can be better explained by the exploitation of economies of scale, than by the existence of economic rents. Finally, the paper shows that when there is a discrete number of firms, the level of profits and the regulatory margins, can be described by a “saw”
    Date: 2006–02–05
  7. By: Jean j., GABSZEWICZ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Skerdilajda, ZANAJ
    Abstract: This paper investigates how an incumbent monopolistic can weaken potential rivals or deter entry in the output market by manipulating the access of these rivals in the input market. We analyze two polar cases. In the first one, the input market is assumed to be competitive with the input being supplied inelastically. We show that the situation opens the door to entry deterrence. Then, we assume that the input is supplied by a single seller who chooses the input price. In this case we show that entry deterrence can be reached only through merger with the seller of the input.
    Keywords: Entry deterrence, Foreclosure, Overinvestment, Bilateral monopoly
    JEL: D20 D43 L42
    Date: 2006–02–24
  8. By: Hoesel Stan van (METEOR)
    Abstract: The Stackelberg pricing problem has two levels of decision making: tariff setting by an operator, and then selection of the cheapest alternative by customers. In the network version, an operator determines tariffs on a subset of the arcs that he owns. Customers, who wish to connect two vertices with a path of a certain capacity, select the cheapest path. The revenue for the operator is determined by the tariff and the amount of usage of his arcs. The most natural model for the problem is a (bilinear) bilevel program, where the upper level problem is the pricing problem of the operator, and the lower level problem is a shortest path problem for each of the customers. This paper contains a compilation of theoretical and algorithmic results on the network Stackelberg pricing problem. The description of the theory and algorithms is generally informal and intuitive. We redefine the underlying network of the problem, to obtain a compact representation. Then we describe a basic branch-and-bound enumeration procedure. Both concepts are used for complexity issues and for the development of algorithms: establishing NP-hardness, approximability, special cases solvable in polynomial time, and an efficient exact branch-and-bound algorithm.
    Keywords: Economics ;
    Date: 2006
  9. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University)
    Abstract: Cournot's 1838 model of strategic interaction between competing firms has become the primary workhorse for the analysis of imperfect competition, and shows up in a variety of fields, notably industrial organization and international trade. This entry begins with a tour of the basic Cournot model and its properties, touching on existence, uniqueness, stability, and efficiency; this discussion especially emphasizes considerations involved in using the Cournot model in multi-stage applications. A discussion of recent applications is provided as well as the URL for an extended bibliography of approximately 125 selected publications from 2001 through 2005.
    Keywords: Cournot models, Cournot equilibrium, oligopoly, multi-stage models of competition, best-response functions.
    JEL: D43
    Date: 2006–10
  10. By: Ana, MAULEON (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Huasheng, SONG (Zhejiang University); Vincent, VANNETELBOSCH
    Abstract: The paper examnes the formation of free trade agreements as a network formation game. We consider a three-country model in which international trade occurs between economies with imperfectly competitive product markets. Labor markets can be unionized and non-unionized in each country. We show that if all countries are of the same type (all of them are either unionized or non-unionized), the global free trade network is both the unique pairwise stable network and the unique efficient network. If some countries are unionized while others are non-unionized, other networks apart from the global free trade network are likely to be pariwise stable. however the efficient network is always the global free trade network. Thus, a conflict between stability and efficiency may occur. Moreover, starting from the network in which no country has signed a free trade agreement, all sequences of networks due to continuously profitable deviations to do not lead (in most cases) to the global free trade network, even when global free trade is stable
    Keywords: Free-trade agreements, Network formation games, Unionization
    JEL: F15 F16 C70
    Date: 2006–06–15
  11. By: Reuben Gronau
    Abstract: An important part of the literature on regulatory economics is based on the US experience, where a well-established regulator faces a privately owned monopoly. It is sometimes forgotten that this model does not apply in many places where a newly established regulator faces a government owned, or a newly privatized, company. It definitely does not apply to the case of the Israeli communication industry where the government serves as regulator and at the same time is the owner of the wireline monopolist. The paper follows the regulatory experience of the Israeli communication industry over the last 20 years, analyzing its impact on consumers' welfare, the monopoly's profitability and its productivity. Though the Israeli institutions may look to a Western observer today as unique they were quite common in most of the developed economies prior to the wave of privatizations and deregulation in the 90s. The lessons learned from the Israeli experience have, however, more than a historic interest, and may be relevant for the regulatory process in general.
    JEL: K2 L43 L5 L51 L96
    Date: 2006–10
  12. By: Herings P. Jean-Jacques; Mauleon Ana; Vannetelbosch Vincent (METEOR)
    Abstract: We propose a new concept, the pairwise farsightedly stable set, in order to predict which networks may be formed among farsighted players. A set of networks G is pairwise farsightedly stable (i) if all possible pairwise deviations from any network g ∈ G to a network outside G are deterred by the threat of ending worse off or equally well off, (ii) if there exists a farsightedly improving path from any network outside the set leading to some network in the set, and (iii) if there is no proper subset of G satisfying (i) and (ii). We show that a non-empty pairwise farsightedly stable set always exists and we provide a full characterization of unique pairwise farsightedly stable sets of networks. Contrary to other pairwise concepts, pairwise farsighted stability yields a Pareto dominating network, if it exists, as the unique outcome. Finally, we study the relationship between pairwise farsighted stability and other concepts such as the largest consistent set.
    Keywords: Economics ;
    Date: 2006
  13. By: Bipasa Datta; Clive D Fraser
    Abstract: Clubs are typically experience goods. Potential members cannot ascertain precisely beforehand their quality (dependent endogenously on the club's facility investment and number of users, itself dependent on its pricing policy). Members with unsatisfactory initial experiences discontinue visits. We show that a monopoly profit maximiser never offers a free trial period for such goods but, for a quality function homogeneous of any feasible degree, a welfare maximiser always does. When the quality function is homogeneous of degree zero, the monopolist provides a socially excessive level of quality to repeat buyers. In other possible regimes, the monopolist permits too little club usage.
    Keywords: Clubs, qualitative uncertainty, monopoly, welfarist
    JEL: D42 D80 D60 H4
    Date: 2006–10
  14. By: Priit Vahter
    Abstract: This paper provides some stylised facts about differences in labour productivity and total factor productivity (TFP) in Estonian firms and about the role of selected determinants of productivity differences. Enterprise level panel data of the whole population of Estonian firms from years 1995-2002 is used. It appears that the variation of productivity indicators in Estonia is much greater than in Western Europe. Although there is a lot of entry and exit of firms, there is not much movement within the productivity distribution of surviving .rms. It is found that both innovation and less concentrated market structure seem to be positively related to higher productivity of firms
    Keywords: productivity, competition, innovation, market structure
    JEL: G3 L2 O31 O4

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