nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒11‒12
twenty-one papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Bundling and Collusion on Communications Markets By Edmond Baranes
  2. Platform Competition: The Role of Multi-homing and Complementors By Juan D. Carrillo; Guofu Tan
  3. Selling and Leasing Software with Network Externality By Jennifer Zhang; Abraham Seidmann
  4. Failing Firm Defense with Entry Deterrence By Alessandro Fedele; Massimo Tognoni
  5. Simulation of Merger in Mobile Telephony in Portugal By Lukasz Grzybowski; Pedro Pereira
  6. Can Information Asymmetry Cause Agglomeration? By Berliant, Marcus; Kung, Fan-chin
  7. Search Costs, Demand Structure and Long Tail in Electronic Markets: Theory and Evidence By Anindya Ghose; Bin Gu
  8. Tying in Two-Sided Markets with Multi-Homing By Jay Pil Choi
  9. Interconnection of Cable Networks: A Regulation Proposal for Broadband Internet Services By Leitao, Joao
  10. Pricing Digital Goods: Discontinuous Costs and Shared Infrastructure By Ke-Wei Huang; Arun Sundararajan
  11. The Quadratic Oil Extraction Oligopoly By John Hartwick
  12. Discriminatory Competition and Local competition By Jack Ochs; S.K. Han
  13. The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks By Pedro Pereira; Tiago Ribeiro
  14. Adverse Network Effects, Moral Hazard, and the Case of Sport-Utility Vehicles By Matthew G. Nagler
  15. Trade Liberalisation, Process and Product Innovation, and Relative Skill Demand By Sebastian Braun
  16. Bandwidth Allocation in Peer-to-Peer File Sharing Networks By Albert Creus Mir; Ramon Casadesus-Masanell; Andres Hervas-Drane
  17. Efficiency inducing taxation for polluting oligopolists: the irrelevance of privatization By Claude, Denis; Tidball, Mabel
  18. Nash equilibria applied to Spot-financial equilibria in General equilibrium incomplete market models By Fugarolas, Guadalupe
  19. Stable and Efficient Electronic Business Networks: Key Players and the Dilemma of Peripheral Firms By Kai Suelzle
  20. When Does Co-location of Manufacturing and R&D Matter? By Mikko Ketokivi
  21. A Structural Analysis for Consumer's Dynamic Switching Decision in the Cellular Service Industry By Jiyoung Kim

  1. By: Edmond Baranes (University of Montpellier)
    Abstract: In this paper we examine competition between a cable operator and a telecom operator on broadband Internet service access whereas the cable operator monopolizes a TV market. We investigate the impact of bundling on the sustainability of collusion in an infinitely repeated game framework. We show that the bundling strategy of the cable operator may hinder collusion. Futhermore, we consider a setting in which the cable operator enters the broadband Internet service market using a one-way access that the incumbent possesses. We then show that when the cable operator bundles its products, a low access charge may increase the feasibility of collusion. This main result may have an important policy implication.
    Keywords: Bindling, Collusion, Differentiation.
    JEL: D43 L13 L9
    Date: 2006–10
  2. By: Juan D. Carrillo (University of Southern California); Guofu Tan (University of Southern California)
    Abstract: In this paper we present a model of platform competition in which two firms offer horizontally differentiated platforms and a group of complementors offers products that are complementary to each platform. Consumers can buy either or both platforms (single- or multihoming) and complementors can produce for either or both platforms (single- or multi-production). We first characterize the pricing structure and find that, in equilibrium, consumers are more likely to multihome as the differentiation of platforms decreases or as the number of complementors for either platform increases. We show that the platform and its complementors always benefit from an increase in the number of complementors in their own platform. When single-homing arises in equilibrium, the platform and its complementors suffer from an increase in the number of complementors in the rival platform. We also study the incentives of the platform to integrate with its complementors, to charge them a royalty or give a subsidy, and to sell its own complementary products to the rival platform.
    Keywords: Platform competition, multi-homing, complementor, royalty and subsidy
    Date: 2006–10
  3. By: Jennifer Zhang (University of Toledo); Abraham Seidmann (University of Rochester)
    Abstract: Previous studies suggested that a monopoly durable goods seller can use leasing to effectively avoid the time-inconsistent problem raised by Coase Conjecture. This paper extends those previous works by examining the monopoly seller’s selling and leasing strategy for a special type of durable good --- software. We look at a software vendor that can sell (at a posted price) or lease his product where as a lesser he guarantees that the lessees will always have the latest version of the software. We address some of the specific issues of implementing the selling and/or leasing policies at the packaged software market, including the impact of network externality, upgrade compatibility, and commitment on pricing in a dynamic environment. We show that by properly defining their pricing structure, software vendors can segment the market and second-degree price discriminate the consumers. We also demonstrate how software vendors can manage the trade-offs of selling and leasing to achieve a higher profit as well as the corresponding welfare effect on the consumers.
    Keywords: Software licensing, Coarse Conjecture, Price discrimination, Network externality, Commitment, Upgrade, Compatibility, Risk.
    Date: 2006–09
  4. By: Alessandro Fedele; Massimo Tognoni
    Abstract: Under the principle of the Failing Firm Defense (FFD) a merger that would be blocked due to its harmful effect on competition could be nevertheless allowed when (i) the acquired firm is actually failing, (ii) there is no less anti-competitive alternative offer of purchase, (iii) absent the merger, the assets to be acquired would exit the market. We focus on potential anti-competitive effects of a myopic application of the third requirement by studying consequences of a horizontal merger on entry in a Cournot oligopoly with a failing firm. If the merger is blocked entry occurs and, when the industry is highly concentrated, consumer welfare is bigger because gains due to augmented competition exceed losses due to shortage of output.
    Keywords: Failing Firm Defense, Entry Deterrence, Consumer Surplus
    JEL: K21 L13 L41
    Date: 2006–10
  5. By: Lukasz Grzybowski (University of Alicante); Pedro Pereira (Autoridade da Concorrencia, Portugal)
    Abstract: This article assesses the unilateral eects of a merger in the Portuguese mobile telephony market. We use aggregate quarterly data from 1999 to 2005 and a nested logit model to estimate the price elasticities of demand and the marginal costs of subscription to mobile services. We nd that mobile services provided by the rms in the market are close substitutes. Based on these estimates, we simulate the eects of the merger. The merger may result in substantial price increases, even in the presence of large cost eciencies.
    Keywords: mobile telephony, merger simulation, network eects, lock in, nested logit
    JEL: L13 L43 L93
    Date: 2006–10
  6. By: Berliant, Marcus; Kung, Fan-chin
    Abstract: Various models, such as those used in the New Economic Geography, employ combinations of agglomerative and repulsive forces to generate equilibria with cities and agglomeration. Can classical asymmetric information in the labor market, in the form of adverse selection, result in an equilibrium that features agglomeration of agents? We use a model with two types, high and low ability, and two locations. The high type dislikes work more than the low type. Firms in both locations have the same technology for production of a single consumption commodity. They know the distribution of types, but the type of a particular agent is private information to that agent. The firms compete with both potential entrants and firms in the other location. Firms offer labor contracts that specify wages based on hours worked. In equilibrium, zero profit, voluntary participation, and incentive compatibility constraints must be satisfied along with feasibility. A further stability requirement is imposed, that the equilibrium be immune to small locational deviations of consumers. We have functional forms and some relatively mild restrictions on parameters such that the equilibrium separates types by location. Thus, high and low skilled workers agglomerate separately. This can be induced as a comparative static change from a symmetric equilibrium to an asymmetric one by varying some of the exogenous parameters.
    Keywords: Adverse selection; Agglomeration
    JEL: R13 D82 R12
    Date: 2006–10–31
  7. By: Anindya Ghose (Stern School of Business, New York University); Bin Gu (McCombs School of Business, University of Texas at Austin)
    Abstract: It is well known that the Internet has significantly reduced consumers’ search costs online. But relatively little is known about how search costs affect consumer demand structure in online markets. In this paper, we identify the impact of search costs on firm competition and market structure by exploring a unique theoretical insight that search costs create a kink in aggregate demand when firms change prices. The significance of the kink reflects the magnitude of online search costs and the kinked demand function provides information on how search costs affect competition in the online market. Using a dataset collected from Amazon and Barnes & Noble, we find that search costs vary significantly across online retailers. Consumers face low search costs for price information from It leads to a higher price elasticity when the firm reduces prices than when it increases prices, increasing Amazon’s incentive to engage in price competition. On the other hand, consumers face relatively higher search costs for price information from Barnes & Noble. This leads to a lower price elasticity when Barnes & Noble reduces prices than when it increases prices, reducing Barnes & Noble’s incentive to engage in price competition. We also find that search costs decrease with the passage of time as the information about price changes dissipates among consumers, leading to increased price elasticity over time. Finally, we highlight that search costs are lower for popular books compared to rare and unpopular books. These findings have implications for the impact of the Internet on the Long Tail phenomenon.
    Keywords: Electronic Markets, Search Costs, Kinked Demand Curve, Price Elasticity, Price Competition, Long Tail
    Date: 2006–10
  8. By: Jay Pil Choi (Michigan State University)
    Abstract: This paper analyzes the effects of tying arrangements on market competition and social welfare in two-sided markets when economic agents can engage in multi-homing, that is, they can participate in multiple platforms in order to reap maximal network benefits. The model shows that tying induces more consumers to multi-home and makes platform-specific exclusive content available to more consumers, which is also beneficial to content providers. As a result, tying can be welfare-enhancing if multi-homing is allowed, even in cases where its welfare impacts are negative in the absence of multi-homing. The analysis thus can have important implications for recent antitrust cases in industries where multi-homing is prevalent.
    Keywords: tying, two-sided markets, (indirect) network effects, multi-homing.
    JEL: L1 L4
    Date: 2006–09
  9. By: Leitao, Joao
    Abstract: In this article a brief revision of the European and Portuguese Regulatory frameworks is made, especially in terms of the interconnection of broadband internet services that are offered by cable operators. A formalization with two cable networks is presented, in order to obtain a benchmark for symmetric networks, and two scenarios: collusion and regulated market; are developed. This justifies the implementation of regulatory policies, with the establishment of caps for the interconnection tariffs, in order to assure a larger penetration rate of the broadband internet services and a bigger total welfare.
    Keywords: Regulation; Tariffs of Interconnection; Goodwill.
    JEL: L51 D40
    Date: 2006–10–16
  10. By: Ke-Wei Huang (Leonard N. Stern School of Business, New York University); Arun Sundararajan (Leonard N. Stern School of Business, New York University)
    Abstract: We develop and analyze a model of pricing for digital products with discontinuous supply functions. This characterizes a number of information technology-based products and services for which variable increases in demand are fulfilled by the addition of "blocks" of computing or network infrastructure. Examples include internet service, telephony, online trading, on-demand software, digital music, streamed video-on-demand and grid computing. These goods are often modeled as information goods with variable costs of zero, although their actual cost structure features a mixture of positive periodic fixed costs, and zero marginal costs. The pricing of such goods is further complicated by the fact that rapid advances in semiconductor and networking technology lead to sustained rapid declines in the cost of new infrastructure over time. Furthermore, this infrastructure is often shared across multiple goods and services in distinct markets. The main contribution of this paper is a general solution for the optimal nonlinear pricing of such digital goods and services. We show that this can be formulated as a finite series of more conventional constrained pricing problems. We then establish that the optimal nonlinear pricing schedule with discontinuous supply functions coincides with the solution to one specific constrained problem, reduce the former to a problem of identifying the optimal number of "blocks" of demand that the seller will fulfil under their optimal pricing schedule, and show how to identify this optimal number using a simple and intuitive rule (which is analogous to "balancing" the marginal revenue with average "marginal cost"). We discuss the extent to which using "information-goods" pricing schedules rather than those that are optimal reduce profits for sellers of digital goods. A first extension includes the rapidly declining infrastructure costs associated with Moore’s Law to provide insight into the relationship between the magnitude of cost declines, infrastructure planning and pricing strategy. A second extension examines multi-market pricing of a set of digital goods and services whose supply is fulfilled by a shared infrastructure. Our paper provides a new pricing model which is widely applicable to IT, network and electronic commerce products. It also makes an independent contribution to the theory of second-degree price discrimination, by providing the first solution of monopoly screening when costs are discontinuous, and when costs incurred can only be associated with the total demand fulfilled, rather than demand from individual customers.
    Keywords: digital goods, price discrimination, nonlinear pricing, screening, discontinuous costs, shared infrastructure, Moore’s Law
    JEL: D41 D82 L1
    Date: 2006–09
  11. By: John Hartwick (Queen's University)
    Abstract: Each extractor has a distinct quadratic extraction cost and faces a linear industry demand schedule. We observe that the open loop and closed loop solutions are the same if initial stocks are such that each competitor is extracting in every period in which her competitors are extracting.
    Keywords: oligopoly extractors, closed loop solution
    JEL: D43 Q32
    Date: 2006–09
  12. By: Jack Ochs; S.K. Han
    Date: 2006–01
  13. By: Pedro Pereira (Autoridade da Concorrencia, Portugal); Tiago Ribeiro (Indera)
    Abstract: In Portugal, the telecommunications incumbent o®ers broadband access to the Inter- net, both through digital subscriber line and cable modem. In this article, we estimate the impact on broadband access to the Internet of the structural separation of these two businesses. We use a panel of consumer level data and a discrete choice model to estimate the price elasticities of demand and the marginal costs of broadband access to the Internet. Based on these estimates, we simulate the e®ect on prices and social welfare of the structural separation. Our results indicate that the structural separation would lead to substantial price reductions. For broadband clients, on average, each household would save 3:37 euros per month, or 14% of the current price levels. Overall, on average, each household would save 2:73 euros per month, or 14% of the current price levels. We test the robustness of our results in terms of: (i) the estimates of the demand elasticities, (ii) the strategic behavior of the ¯rms, and (iii) the market share estimates. There is no evidence of collusion.
    Keywords: Broadband, Structural Separation, Prices
    JEL: L25 L51 L96
    Date: 2006–08
  14. By: Matthew G. Nagler (Lehman College, The City University of New York)
    Abstract: The paper examines a class of phenomena that combine adverse network effects with moral hazard, using the motor vehicle market as an example to develop and illustrate the key concepts. It is hypothesized that consumers behave as if there is a network externality with respect to vehicle size: the more large vehicles there are on the roads, the greater a consumer’s propensity to seek protection from them by driving a large vehicle herself. One consequence of this is that motor vehicle manufacturers are discouraged from making large vehicles less hazardous to other motorists. The paper measures the network effect and consequent moral hazard using disaggregate data on choice of vehicle type and related household characteristics, combined with a state-level measure of the incidence of traffic fatalities. The results show that for each 1 million light trucks that replace cars, between 961 and 1,812 would-be car buyers decide to buy a light truck instead, in reaction to the increased risk of death posed by the incremental light trucks. This network effect, when run in reverse, creates egregious incentives for vehicle manufacturers: for every life saved due to safety innovations that make light trucks less deadly to other motorists, manufacturers can expect to sell about 31 fewer light trucks.
    Keywords: Network Externalities, Moral Hazard, Highway Safety, Discrete Choice Models
    JEL: D00 D12 K10
    Date: 2005–10
  15. By: Sebastian Braun (School of Business and Economics, Humboldt University of Berlin)
    Abstract: The interaction between trade liberalisation, product and process innovation, and relative skill demand is analysed in a model of international oligopoly. Lower trading barriers increase the degree of foreign competition. The competing enterprises respond by investing more aggressively in lowering marginal costs of production. Moreover, firms reduce the substitutability of their products through additional investment in product innovation. The paper also shows that the relative demand for skilled workers may increase as a result.
    Keywords: Intra-industry trade, process innovation, product innovation, relative skill demand, trade liberalisation
    JEL: F12 F15 F16 O32
    Date: 2006–10
  16. By: Albert Creus Mir (Universitat Politecnica de Catalunya); Ramon Casadesus-Masanell (Harvard Business School); Andres Hervas-Drane (Universitat Autonoma de Barcelona)
    Abstract: We present a model of bandwidth allocation in a stylized peer-to-peer ¯le sharing net- work. Given an arbitrary population of peers composed of sharers and freeriders, where all peers interconnect to maximize their allocated bandwidth, we derive the expected band- width obtained by sharers and freeriders. We show that sharers are always better o® than freeriders and that the di®erence decreases as the size of the network grows. This paper con- stitutes a ¯rst step towards providing a general analytical foundation for resource allocation in peer-to-peer networks.
    Keywords: Peer-to-Peer, Network formation, Resource allocation, Congestion
    Date: 2006–10
  17. By: Claude, Denis; Tidball, Mabel
    Abstract: This paper examines the optimal environmental policy in a mixed oligopoly when pollution accumulates over time. Specifically, we assume quantity competition between several private firms and one partially privatized firm. The optimal emission tax is shown to be independent of the weight the privatized firm puts on social welfare. The optimal tax rule, the accumulated stock of pollution, firms' production paths and profit streams are identical irrespective of the public firm's ownership status.
    Keywords: Mixed Oligopoly; Pollution Control; Markovian Taxation.
    JEL: L51 Q58 L33
    Date: 2006–07–10
  18. By: Fugarolas, Guadalupe
    Abstract: We consider a two period pure exchange economy with a finite number of states of nature at the second date. The economy consists of a real asset structure and a finite set of durable goods in the initial period that depreciate; we suppose that there is only one single good available in each state of nature at the second date. In this paper, we demonstrate that the spot-financial equilibrium can be obtained as a Nash equilibrium of a market game in which the strategies of the players consist in suggesting prices and quantities for both goods and assets.
    Keywords: Incomplete markets; market games; Nash equilibrium; strategic outcome functions
    JEL: D52 C72
    Date: 2006–09
  19. By: Kai Suelzle (Ifo Institute for Economic Research at the University of Munich & Dresden University of Technology)
    Abstract: This paper studies a spatial model of electronic business network formation where firms build links based on a cost-benefit analysis. Benefits result from directly and indirectly connected firms in terms of knowledge flows, which are heterogeneous: a "key-player" (e.g. a firm providing an exchange platform in a business-to-business network) provides a higher level of knowledge flows than "peripheral" firms (e.g. tier 3 suppliers in a vertically differentiated industry). For intermediate cost values of link formation, stable and efficient network structures comprise only a subset of the total set of firms, excluding peripheral firms which are most distantly located to the key player. When link formation implies a certain degree of network congestion, the stable and efficient network size is smaller than in a model with bilateral decisions upon link formation between two firms.
    Keywords: Network Formation, Business-to-Business, Spatial Model
    JEL: C70 D85 L22
    Date: 2005–10
  20. By: Mikko Ketokivi
    Keywords: location decisions, co-location, functional integration, organization theory
    JEL: D21 L23 M11 O32 R32
    Date: 2006–11–03
  21. By: Jiyoung Kim (University of Wisconsin-Madison)
    Abstract: This paper develops an empirical framework to analyze consumer’s dynamic switching decision in the cellular service industry. It first incorporates the sequential problem of quantity, plan and firm subscription choice in the presence of switching costs into a dynamic structural model, which allows for fully heterogeneous consumers and multiple switching possibilities across networks. The model is estimated using the data set on the number of switching consumers and the evolution of observed plan/firm characteristics over time. Based on the BLP-style estimation methods, we combine a nested technique that uses parametric assumptions with the structural estimation algorithm. The magnitude of switching costs is estimated and the impact of number portability is evaluated. A dynamic model with restricted number of switching is likely to underestimate the switching costs. I find that future expectations affect consumers' optimal timing of switching. Change in the variety of optional plans and plan qualities play a great role in the consumer switching decision. I also find that the pattern of switching rates which we observed after number portability is attributed more to decrease in the prices and increase in the product qualities than decrease in the magnitude of switching costs.
    Date: 2006–10

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