nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒11‒25
twenty-six papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Mixing Goods with Two-Part Tariffs By Steffen Hoernig; Tommaso Valletti
  2. R&D Delegation in a Duopoly with Spillovers By Désiré Vencatachellum; Bruno Versaevel
  3. Horizontal Mergers with Free Entry in Differentiated Oligopolies By Nisvan Erkal; Daniel Piccinin
  4. Price Discrimination in Input Markets By Roman Inderst; Tommaso Valletti
  5. Endogenous Heterogeneity in Strategic Models: Symmetry-breaking via Strategic Substitutes and Nonconcavities By Rabah Amir; Filomena Garcia; Malgorzata Knauff
  6. Bargaining in Collusive Markets By Andersson, Ola
  7. Auction theory, sequential local service privatization, and the effects of geographical scale economies on effective competition By Antonio Miralles
  8. Choice of new attributes in the "Elimination by Aspects" duopoly. By Reynald-Alexandre Laurent
  9. On the "Adverse Selection" of Organizations By Matthias Kräkel
  10. Searching the eBay Marketplace By Sailer, Katharina
  11. Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline By Robert Gagné; Simon van Norden; Bruno Versaevel
  12. Zheng’s Optimal Mechanism with Resale and the Second-Price Auction By Bernard Lebrun
  13. First-Price and Second-Price Auctions with Resale By Bernard Lebrun
  14. A Note on Walrasian Equilibria with Moral Hazard and Aggregate Uncertainty By Piero Gottardi; Belén Jerez
  15. The empirics of spatial competition: Evidence from European regions By Nestor Duch Brown
  16. Advertising in Duopoly Market By Situngkir, Hokky
  17. Heterogeneity in Nash Networks By Sudipta Sarangi; Pascal Billand; Christophe Bravard
  18. Barriers to Retail Competition and Prices: Evidence from Spain By Alexander W. Hoffmaister
  19. As luck would have it : innovation and market value in "complex technology" sectors. By Alex Coad; Rekha Rao
  20. Pricing-to-Market, the Interest-Rate Rule, and the Exchange Rate By Maurice Obstfeld
  21. Maize Price Projections for Zambia's 2006/07 Marketing Season By Steven Haggblade
  22. Do Foreign Firms Crowd Out Domestic Firms? Evidence from the Czech Republic By Renata Kosova
  23. Vector Multiplicative Error Models: Representation and Inference By Fabrizio Cipollini; Robert F. Engle; Giampiero M. Gallo
  24. On the Diffusion of Electronic Commerce By Emin M. Dinlersoz; Pedro Pereira
  25. Consumer search and firm growth By Erzo G.J. Luttmer
  26. Profit sharing in unique Nash equilibrium: Characterization in the two-agent case By Justin Leroux

  1. By: Steffen Hoernig (New University of Lisbon - Faculdade de Economia); Tommaso Valletti (Imperial College London, University of Rome "Tor Vergata" and CEPR)
    Abstract: We consider a market where consumers mix content offered by different firms. We show how tariff structures have an impact on firms' profits and efficiency. As compared to pure linear pricing, when firms charge two-part tariffs they make higher profits, while consumers are worse off and the allocation is not first-best since too little mixing occurs. Flat subscription fees make mixing unattractive and are Pareto-dominated by all the other types of tariffs.
    Keywords: Two-part tariffs, flat fees, combinable products, pay-per-view
    JEL: L13 L82
    Date: 2006–08–01
  2. By: Désiré Vencatachellum (IEA, HEC Montréal); Bruno Versaevel
    Abstract: There is evidence that competing firms delegate R&D to the same independent profit-maximizing laboratory. We draw on this stylilzed fact to construct a model where two firms in the same industry offer transfer payments in exchange of user-specific R&D services from a common laboratory. Inter-firm and within-laboratory externalities affect the intensiti of competition among delegating firms on the intermediate market for technology. Whether competition is relatively soft or tight is reflected by each firm’s transfer payment offers to the laboratory. This in turn determines the laboratory’s capacity to earn profits, R&D outcomes, delegating firms’ profits, and social welfare. We compare the delegated R&D game to two other one where firms (i) cooperatively conduct in-house R&D, and (ii) non-cooperatively choose in-house R&D. The delegated R&D game Pareto dominates the other two games, and the laboratory earns positive profits, only if within-laboratory R&D services are sufficiently complementary, but inter-firm spillovers are sufficiently low. We find no room for policy intervention, because the privately profitable decision to delegate R&D, when the laboratory participates, always benefits consumers.
    Keywords: Research and development, externalities, common agency.
    JEL: C72 L13 O31
    Date: 2005–01
  3. By: Nisvan Erkal; Daniel Piccinin
    Abstract: Antitrust authorities view the possibility of entry as a key determinant of whether a proposed merger will be harmful to society. This paper examines the effects of horizontal mergers in models of non-localized, differentiated Bertrand oligopoly that allow for free entry. The analysis of the long run effects of mergers in differentiated products markets raises issues that are significantly different from those in the short run or in homogeneous products markets due to the introduction of new varieties. Our analysis reveals that determining the properties of consumer preferences is crucial to the antitrust analysis of mergers in differentiated products markets. Specifically, we show that if the demand system satisfies the Independence from Irrelevant Alternatives (IIA) property and if the number of firms is treated as a continuous variable, mergers in differentiated products markets have no long run effect on consumer welfare. Moreover, in this case, marginal cost savings are to a large extent irrelevant to the consumer welfare effects of mergers. If the number of firms is treated as a discrete variable, fixed or marginal cost savings are a necessary condition for mergers to have zero or positive effect on consumer welfare. Using the example of linear demand, we show that if the demand system does not satisfy the IIA property, mergers in differentiated products markets can harm consumer welfare in long run equilibrium. Moreover, the amount of harm increases with consumers’ taste for variety.
    Keywords: Horizontal mergers; free entry; product differentiation; independence from irrelevant alternatives; antitrust policy
    JEL: L13 L22 L41 K21
    Date: 2006
  4. By: Roman Inderst (London School of Economics & Political Science); Tommaso Valletti (Imperial College London, University of Rome "Tor Vergata" and CEPR)
    Abstract: We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.
    Keywords: Price Discrimination, Uniform Pricing, Input Market
    JEL: K21 L13 L42
    Date: 2006–07–01
  5. By: Rabah Amir; Filomena Garcia; Malgorzata Knauff
    Abstract: This paper is an attempt to develop a unified approach to endogenous heterogeneity by constructing general class of two-player symmetric games that always possess only asymmetric pure-strategy Nash equilibria. These classes of games are characterized in some abstract sense by two general properties: payo? non-concavities and some form of strategic substitutability. We provide a detailed discussion of the relationship of this work with Matsuyama’s symmetry breaking framework and with business strategy literature. Our framework generalizes a number of models dealing with two-stage games, with long term investment decisions in the first stage and product market competition in the second stage. We present the main examples that motivate this study to illustrate the generality of our approach.
    Keywords: firm heterogeneity; submodular games; business strategy; innovation strategies.
    JEL: C72 C62 L11
  6. By: Andersson, Ola (Department of Economics, Lund University)
    Abstract: In this paper we investigate collusion in an infinitely repeated Bertrand duopoly where firms have different discount factors. In order to study how a collusive agreement is reached we model the equilibrium selection as an alternating-offer bargaining game. The selected equilibrium has several appealing features: First, it is efficient in the sense that it entails immediate agreement on the monopoly price. Second, the equilibrium shows how discount factors affect equilibrium market shares. A comparative statics analysis on equilibrium market shares reveals that changes in discount factors may have ambiguous effects on market shares.
    Keywords: Bargaining; different discount factors; explicit collusion; market shares
    JEL: C72 D43 L11 L41
    Date: 2006–11–14
  7. By: Antonio Miralles (Universitat de Barcelona)
    Abstract: A sequential weakly efficient two-auction game with entry costs, interdependence between objects, two potential bidders and IPV assumption is presented here in order to give some theoretical predictions on the effects of geographical scale economies on local service privatization performance. It is shown that the first object seller takes profit of this interdependence. The interdependence externality rises effective competition for the first object, expressed as the probability of having more than one final bidder. Besides, if there is more than one final bidder in the first auction, seller extracts the entire bidders expected future surplus differential between having won the first auction and having lost. Consequences for second object seller are less clear, reflecting the contradictory nature of the two main effects of object interdependence. On the one hand, first auction winner becomes stronger, so that expected payments rise in a competitive environment. On the other hand, first auction loser becomes relatively weaker, hence (probably) reducing effective competition for the second object. Additionally, some contributions to static auction theory with entry cost and asymmetric bidders are presented in the appendix.
    Keywords: local service, privatization
    Date: 2005
  8. By: Reynald-Alexandre Laurent
    Abstract: The "Elimination by aspects" (EBA) duopoly of product differentiation (Laurent, 2006a) was constructed from the discrete model of probabilistic choice worked out by Tversky (1972a,b). In this framework, an unique price equilibrium exists with a "differentiation by attributes", which embodies horizontal and vertical differentiations as possible special cases. This paper extends this analysis by studying a two-stage game in which firms choose the specific attributes of their product and then compete in prices. At the price equilibrium, the "competitive effect", present in pure vertical differentiation models, is replaced by a "differentiation effect" in this EBA duopoly. Subgame perfect Nash equilibria are shown to exist with exogenous costs but also with attributes-dependent unit and fixed costs. At the equilibrium, products are generally differentiated both horizontally and vertically. But a purely vertical outcome may also occur when costs of innovation are strongly convex or when consumers are very sensible to the price levels. When costs are endogenous, the social optimum is achieved for a pure horizontal differentiation. Thus, there is too much differentiation at the equilibrium: the vertical dimension induces a strong raise of prices, which also reduces the welfare.
    Date: 2006
  9. By: Matthias Kräkel (University of Bonn and IZA Bonn)
    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: 2006–10
  10. By: Sailer, Katharina
    Abstract: This paper proposes a framework for demand estimation with data on bids, bidders' identities, and auction covariates from a sequence of eBay auctions. First the aspect of bidding in a marketplace environment is developed. Form the simple dynamic auction model with IPV and private bidding costs it follows that if participation is optimal the bidder searches with a "reservation bid" for low-price auctions. Extending results from the empirical auction literature and employing a similar two-stage procedure as has recently been used when estimating dynamic games it is shown that bidding costs are non-parametrically identified. The procedure is tried on a new data set. The median cost is estimated at less than 2% of transaction prices.
    Keywords: search models; auctions; eBay; Internet auctions; econometrics of auctions; bidding costs; identification
    JEL: C23 C51 D44 D82 D83 L10 L81
    Date: 2006–10
  11. By: Robert Gagné (IEA, HEC Montréal); Simon van Norden (IEA, HEC Montréal); Bruno Versaevel
    Abstract: We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.
    Keywords: price regulation, oligopoly supergame, Markov switching model, gasoline
    JEL: L13 L81 C32
    Date: 2006–10
  12. By: Bernard Lebrun (Department of Economics, York University)
    Abstract: We show that Zheng (2002)’s optimal mechanism in the presence of resale can be interpreted as an equilibrium of an ascending-price auction and, in the two-bidder case, as an equilibrium with a no-regret property of the English and second-price auctions. We also show that it can be extended beyond Zheng (2002)’s original assumptions
    Keywords: Zheng’s mechanism, optimality, resale, second-price auction, independent private values
    JEL: D44
    Date: 2006
  13. By: Bernard Lebrun (Department of Economics, York University)
    Abstract: We add a resale stage to standard auctions with two bidders. Bids are either kept secret or made public. Either the auction winner or the auction loser chooses the resale price. We characterize an infinity of equilibria of the second-price auction and a unique equilibrium of the first-price auction. For every equilibrium of an auction without bid disclosure, we construct an outcome-equivalent and, in the case of the second-price auction, “posterior implementable” equilibrium of the auction with bid disclosure. We compare the revenues from the two auctions and from the two bargaining procedures at resale
    Keywords: Auctions, resale
    JEL: D44
    Date: 2006
  14. By: Piero Gottardi (Department of Economics, University Of Venice Ca’ Foscari); Belén Jerez (Universidad Carlos III de Madrid)
    Abstract: In a fundamental contribution, Prescott and Townsend (1984) [PT] have shown that the existence and efficiency properties of Walrasian equilibria extend to economies with moral hazard, when agents' trades are observable (exclusive contracts can be implemented). More recently, Bennardo and Chiappori (2003) [BC] have argued that Walrasian equilibria may (robustly) fail to exist when the class of moral hazard economies considered by Prescott and Townsend is generalized to allow for the presence of aggregate, in addition to idiosyncratic, uncertainty and for preferences which are nonseparable in consumption and effort. We re-examine here the existence and efficiency properties of Walrasian equilibria in the moral hazard economy considered by Bennardo and Chiappori. We show that Walrasian equilibria always exist in such economy and are incentive efficient, so the results of Prescott and Townsend continue to hold in the more general set-up considered by Bennardo and Chiappori.
    Keywords: Moral Hazard, Aggregate Risk, Incentive Efficiency, Walrasian Markets
    JEL: D82 D86 D50
    Date: 2006
  15. By: Nestor Duch Brown (Universitat de Barcelona)
    Abstract: The New Economic Geography literature allows detailed analysis of the factors that determine the location decisions of firms in integrated markets. However, the competitive process is modelled in a rather rudimentary way, and the empirical evidence has usually been obtained from reduced-form econometric specifications. This study describes a structural model that takes into account strategic interactions between firms. We investigate the relationship between the degree of perceived competition not only from local firms but from firms in other regions and geographic concentration. The preliminary results indicate that, in aggregate terms, local firms present stronger competition than firms in other regions. Moreover, it is confirmed that greater geographical concentration of production reduces market power, due to the intensification of local competition; however, its impact on production costs is unclear.
    Keywords: agglomeration, conjectural variations, spatial competition
    JEL: F15 L11 L22 L23 L60 R15 R32
    Date: 2006
  16. By: Situngkir, Hokky
    Abstract: The paper presents the dynamics of consumer preferences over two competing products acting in duopoly market. The model presented compared the majority and minority rules as well as the modified Snazjd model in the Von Neumann neighborhood. We showed how important advertising in marketing a product is. We show that advertising should also consider the social structure simultaneously with the content of the advertisement and the understanding to the advertised product. Some theoretical explorations are discussed regarding to size of the market, evaluation of effect of the advertising, the types of the advertised products, and the social structure of which the product is marketed. We also draw some illustrative models to be improved as a further work.
    Keywords: advertising; snazjd model; majority model; duopoly market.
    JEL: M31 M37 C63
    Date: 2006–11–10
  17. By: Sudipta Sarangi; Pascal Billand; Christophe Bravard
    Abstract: Heterogeneity in Nash networks can arise due to differences in the following four variables: (i) the value of information held by agents, (ii) the rate at which information decays or loses its value as it traverses the network, (iii) the prob- ability with which a links transmits information, and (iv) the cost of forming a link. In this paper we examine Nash networks, efficient networks and the existence of equilibrium networks under different heterogeneity conditions for the two-way flow model of networks.
  18. By: Alexander W. Hoffmaister
    Abstract: Why do prices in Spain's regions fail to converge? The prime suspects for this puzzling result are differences in regional barriers to entry in retail distribution. This paper develops a Cournot-Nash model of imperfect competition to illustrate the effect of barriers on prices. A unique data set-derived from an extensive analysis of competition policies in Spain- provides evidence that barriers to entry increase regional prices. The evidence also suggests that, consistent with the model's predictions, barriers to entry raise prices up to a point, and thus indicate that barriers have a threshold effect on prices.
    Keywords: Barriers to entry , Cournot-Nash model , regulation in goods markets , and panel cointegration ,
    Date: 2006–10–20
  19. By: Alex Coad (Centre d'Economie de la Sorbonne et LEM); Rekha Rao (LEM,Sant'Anna School of Advanced Studies, Pisa, Italy)
    Abstract: How do financial markets respond to firms' efforts at innovation ? To answer this question, we mesure innovation by creating a synthetic indicator based on a firm's recent history of R&D expenditure and patent applications. We focus on four 2-digit "complex technology" manufacturing sectors that have been hand-picked according to their high propensities to innovate. Whilst standard regression techniques find a positive relationship between innovation and growth, quantile regression analysis adds a new dimension to the literature. We identify those "superstar" firms with the highest stock market valuations and show that these firms owe a lot of their success to their previous efforts at innovation. However, there are also other firms whose attempts to innovate are virtually ignored by financial markets. Our results emphasize the fundamental uncertainty of R&D.
    Keywords: Innovation, market value, quantile regression, patents, Tobin's q.
    JEL: C61 C62 D20 D46 D51
    Date: 2006–11
  20. By: Maurice Obstfeld
    Abstract: Even when the exchange-rate plays no expenditure-switching role, countries may wish to have flexible exchange rates in order to free the domestic interest rate as a stabilization tool. In a setting with nontraded goods, exchange-rate movements may also enhance international risk sharing.
    JEL: F41 F42
    Date: 2006–11
  21. By: Steven Haggblade (Department of Agricultural Economics, Michigan State University)
    Abstract: The coming 2005/06 maize harvest promises to be a good one, certainly better than last season. Market prices have begun falling, and the question now is how far they are likely to fall. Government currently has a maize export ban in place. This short note aims to assess the likely price levels this coming season, with and without an export ban.
    Keywords: food security, food policy, Zambia, maize
    JEL: Q18
    Date: 2006
  22. By: Renata Kosova (The George Washington University School of Business)
    Date: 2006–03
  23. By: Fabrizio Cipollini; Robert F. Engle; Giampiero M. Gallo
    Abstract: The Multiplicative Error Model introduced by Engle (2002) for positive valued processes is specified as the product of a (conditionally autoregressive) scale factor and an innovation process with positive support. In this paper we propose a multi-variate extension of such a model, by taking into consideration the possibility that the vector innovation process be contemporaneously correlated. The estimation procedure is hindered by the lack of probability density functions for multivariate positive valued random variables. We suggest the use of copulafunctions and of estimating equations to jointly estimate the parameters of the scale factors and of the correlations of the innovation processes. Empirical applications on volatility indicators are used to illustrate the gains over the equation by equation procedure.
    Date: 2006–11
  24. By: Emin M. Dinlersoz (University of Houston); Pedro Pereira (Autoridade da Concorrência)
    Abstract: This paper analyzes retailers’ adoption of e-commerce in a technology adoption race framework. An Internet-based firm with no traditional market presence competes with an established traditional firm to adopt the e-commerce technology and sell to a growing number of consumers with on-line shopping capability. The focus of the analysis is on identifying how consumer loyalty, differences in firms’ technology and consumers’ preferences across the traditional versus the virtual market, and expansion in market size made possible by the Internet can affect the timing and sequence of adoption by firms, as well as the post-adoption evolution of prices. The model’s implications are used to discuss empirical evidence on adoption patterns across different product categories and firm types.
    Date: 2006–11
  25. By: Erzo G.J. Luttmer
    Abstract: This paper presents a simple model of search and matching between consumers and firms. The firm size distribution has a Pareto-like right tail if the population of consumers grows at a positive rate and the mean rate at which incumbent firms gain customers is also positive. This happens in equilibrium when entry is sufficiently costly. As entry costs grow without bound, the size distribution approaches Zipf’s law. The slow rate at which the right tail of the size distribution decays and the 10% annual gross entry rate of new firms observed in the data suggest that more than a third of all consumers must switch from one firm to another during a given year. A substantially lower consumer switching rate can be inferred only if part of the observed firm entry rate is attributed to factors outside the model. The realized growth rates of large firms in the model are too smooth.
    Date: 2006
  26. By: Justin Leroux (IEA, HEC Montréal)
    Abstract: Two agents jointly operate a decreasing marginal returns technology to produce a private good. We characterize the class of output-sharing rules for which the labor-supply game has a unique Nash equilibrium. It consists of two families: rules of the serial type which protect a small user from the negative externality imposed by a large user, and rules of the reverse serial type, where one agent effectively employs the other agent’s labor. Exactly two rules satisfy symmetry; a result in sharp contrast with Moulin and Shenker’s (Econometrica, 1992) characterization of their serial mechanism as the unique cost-sharing rule satisfying the same incentives property. We also show that the familiar stand alone test characterizes the class of fixed-path methods (Friedman, Economic Theory, 2002) under our incentives criterion.
    Keywords: Joint production, serial rule, decreasing serial rule, strategyproofness.
    JEL: C72 D23 D62
    Date: 2006–10

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