nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒12‒09
nineteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. The Effects of Globalization on Worker Training By Hans Gersbach; Armin Schmutzler
  2. Too Many or Too Few Varieties? The Role of Multiproduct Firms By Caminal, Ramón
  3. Mixed Competition and Welfare under Various Nonprofit Objectives Mixed Competition under Various Cost Configurations By Petra Brhlikova
  4. The Monopolist’s Blues By Fabrizio Adriani; Luca G. Deidda
  5. Endogenous Mode of Competition in General Equilibrium By Neary, J Peter; Thakaran, Joe
  6. How Market Fragmentation Can Facilitate Collusion By Kühn, Kai-Uwe
  7. Multi-Product Firms and Flexible Manufacturing in the Global Economy By Eckel, Carsten; Neary, J Peter
  8. Trade Policy, Market Leaders and Endogenous Competition Intensity By Jan Boone; Delia Ionascu; Kresimir Zigic
  9. Horizontal Innovation-Based Growth and Product Market Competition By Alberto Bucci; Carmelo Parello
  10. Experts vs. discounters: consumer free riding and experts withholding advice in markets for credence goods By Uwe Dulleck; Rudolf Kerschbamer
  11. Selection of Boundedly Rational Firms and the Allocation of Resources By Saint-Paul, Gilles
  12. Outsourcing, Complementary Innovations and Growth By Naghavi, Alireza; Ottaviano, Gianmarco I P
  13. The Geometry of Nash Equilibria and Correlated Equilibria and a Generalization of Zero-Sum Games By Viossat, Yannick
  14. Moral Hazard Contracts: Does One Size Fit All? By Alexander K. Koch; Eloïc Peyrache
  15. Strategic pricing of commodities By Jörnsten, Kurt; Ubøe, Jan
  16. Garbled Elections By Schmitz, Patrick W.; Tröger, Thomas
  17. Informational externalities and convergence of behavior By Vieille, Nicolas; Rosenberg, Dinah; Solan, Eilon
  19. Theory of the Firm under Uncertainty: Financing, Attitude to Risk and Output Behavior By Michal Bauer

  1. By: Hans Gersbach (ETH Zurich and IZA Bonn); Armin Schmutzler (University of Zurich)
    Abstract: We consider a three-stage game to examine how market integration affects firms’ incentives to provide general worker training. In stage 1, firms invest in productivity-enhancing training. In stage 2, they can make wage offers for each others’ workers. Finally, Cournot competition takes place. When two product markets become integrated, that is, replaced by a market with greater demand and more firms, training by each firm increases, provided the two markets are initially sufficiently concentrated. When barriers between less concentrated markets are eliminated, training is reduced. Integration increases welfare if it does not reduce training. However, for large parameter regions, welfare decreases if integration reduces training. We also show that opening product markets to countries with publicly funded training or cheap, low-skilled labor can threaten apprenticeship systems.
    Keywords: general worker training, human capital, oligopoly, turnover, globalization
    JEL: D43 J24
    Date: 2006–10
  2. By: Caminal, Ramón
    Abstract: The goal of this paper is to examine the role of multiproduct firms in the market provision of product diversity. The analysis is conducted within the spatial model of nonlocalized competition proposed by Chen and Riordan (2006). It turns out that the effect of multiproduct firms on product diversity depends on the size distribution of firms. Under duopoly, product diversity is lower than under monopolistic competition. Nevertheless, the number of varieties can still be socially excessive. In contrast, if a large multiproduct firm (incumbent monopolist) competes against a large number of small (single product) firms then product diversity is higher than under monopolistic competition. Moreover, the incumbent firm is unable to monopolize the market and deter entry.
    Keywords: monopolistic competition; multiproduct firms; product diversity; spatial models
    JEL: D43 L12 L13
    Date: 2006–11
  3. By: Petra Brhlikova
    Abstract: I study the competition between one nonprofit and one for-profit firm under various objective functions of the nonprofit firm. The two firms optimize their objectives with respect to quality and price of their products. The nonprofit firm serves one-half of the market under pure quality maximization, while it serves about twothirds under two other objective functions that in addition to quality, include market share. In contrast, the market share and profit of the for-profit firm decrease, and consumer and total surplus increase. For the case of quality maximization pursued by the nonprofit firm, I derive equilibria for several cost configurations. Qualities and prices offered depend on the steepness of the cost function as well as on the proportion between fixed and variable costs.
    Keywords: Nonprofit, For-profit, Competition
    JEL: L21 L31 L11
    Date: 2006–10
  4. By: Fabrizio Adriani; Luca G. Deidda
    Abstract: We consider the problem of trade between a price setting party who has private information about the quality of a good and a price taker who may also have private information. We restrict attention to the case in which, under full information, it is efficient to trade only a subset of all qualities. In particular, we assume that trading a low (high) quality is inefficient when the seller (buyer) sets the price. We show that there is a unique equilibrium outcome passing Cho and Kreps (1987) “Never a Weak Best Response”. The refined outcome is always characterized by no trade, although trade would be mutually beneficial in some state of nature. This occurs: 1. Even if the price taker has more precise information than the price setting party, and 2. Even when the information received by both parties is almost perfect. Both results imply that there are inefficiencies due to price setting that are not present in standard markets with adverse selection. We find that the price setting party can always increase her profits through ex-ante delegation of the price choice to an uninformed third party. We discuss applications to professional bodies and the market for unskilled labor.
    Keywords: Market for Lemons, Signaling, Two-Sided Asymmetric Information, Professional Bodies, Trade Unions, Market Breakdown.
    JEL: D4 D8 L15
    Date: 2006
  5. By: Neary, J Peter; Thakaran, Joe
    Abstract: This paper endogenises the extent of intra-sectoral competition in a multi-sectoral model of oligopoly in general equilibrium. Firms choose capacity followed by prices. If the benefits of capacity investment in a given sector are below a threshold level, the sector exhibits Bertrand behaviour, otherwise it exhibits Cournot behaviour. By endogenising the threshold parameter in general equilibrium, we show how exogenous shocks alter the mix of sectors between 'more' and 'less' competitive, or Bertrand and Cournot. The model also has implications for the effects of trade liberalisation and technological change on the relative wages of skilled and unskilled workers.
    Keywords: Bertrand and Cournot competition; GOLE (General Oligoplistic Equilibrium); Kreps-Scheinkman; market integration
    JEL: F10 F12 L13
    Date: 2006–11
  6. By: Kühn, Kai-Uwe
    Abstract: When regulated markets are liberalized, economists always stress the benefits of fragmenting existing capacities among more firms. This is because oligopoly models typically imply that a larger number of firms generates stronger competition. I show in this paper that this intuition may fail under collusion. When individual firms are capacity constrained relative to total demand, the fragmentation of capacity facilitates collusion and increases the highest sustainable collusive price. This result can explain the finding in Sweeting (2005) that dramatic fragmentation of generation capacity in the English electricity industry led to increasing price cost margins.
    Keywords: Bertrand-Edgeworth competition; collusion; industry restructuring; market fragmentation
    JEL: J1 J11
    Date: 2006–11
  7. By: Eckel, Carsten; Neary, J Peter
    Abstract: We present a new model of multi-product firms (MPFs) and flexible manufacturing and explore its implications in partial and general equilibrium. International trade integration affects the scale and scope of MPFs through a competition effect and a demand effect. We demonstrate how MPFs adjust in the presence of single-product firms and in heterogeneous industries. Our results are in line with recent empirical evidence and suggest that MPFs in conjunction with flexible manufacturing play an important role in the impact of international trade on product diversity.
    Keywords: flexible manufacturing; general oligoplistic equilibrium (GOLE); international trade; multi-product firms; product diversity
    JEL: F12 L13
    Date: 2006–11
  8. By: Jan Boone; Delia Ionascu; Kresimir Zigic
    Abstract: It is well known that tariff policy can alleviate the negative consequences of breaching intellectual property rights by foreign firms. Yet, the positive effect of tariff protection is thought to be the benefit firms get at the expense of consumers (at least in the short run). Using a set-up in which the intensity of market competition is endogenous, we argue that consumers can benefit from tariffs even in the short run. A high level of tariff protection alters the firms’ cost efficiency distribution and induces tougher market competition. Consumers benefit from the tariff policy, and governments that assign a high enough weight to the consumer surplus set positive tariff levels. Under protection the innovation level remains the same as under free trade but the average industry efficiency increases.
    Keywords: Tariff protection, supergames, cost asymmetries, market conduct, leadership, consumer welfare
    JEL: F12 F13
    Date: 2006–10
  9. By: Alberto Bucci (Department of Economics, Business and Statistics, University of Milan); Carmelo Parello (Catholic University of Louvain)
    Abstract: The influence of the degree of competition in the goods market on growth is analyzed by developing an endogenous growth model with horizontal innovation. Product market competition is measured by (1- Lerner index) and depends on both the share of factor inputs in total income and on the elasticity of substitution across goods. We find that the shape of the relationship between competition and growth can change dramatically according to which proxy of competition is used. We interpret our results in terms of the interplay between the resource allocation and the profit incentive effects.
    Keywords: Innovation, Product Market Competition, Endogenous Growth, Scale Effects,
    Date: 2006–07–18
  10. By: Uwe Dulleck (Department of Economics, Johannes Kepler University Linz, Austria); Rudolf Kerschbamer (Department of Economics, University of Innsbruck, Austria)
    Abstract: This paper studies price competition between experts and discounters in a market for credence goods. While experts can identify a consumer’s problem by exerting costly but unobservable diagnosis effort, discounters just sell treatments without giving any advice. The unobservability of diagnosis effort induces experts to use their tariffs as signaling devices. This makes them vulnerable to competition by discounters. We explore the conditions under which experts survive competition by discounters and find that there exist situations in which adding a single customer to a large population of existing consumers leads to a switch from an experts only to a discounters only market. We also discuss whether vertical restraints can alleviate these inefficiencies.
    Keywords: Experts; Discounters; Credence Goods; Vertical Restraints
    JEL: L15 D82 D40
    Date: 2005–09
  11. By: Saint-Paul, Gilles
    Abstract: I study how savers allocate funds between boundedly rational firms which follow simple pricing rules. Firms need cash to pay their inputs in advance, and savers-shareholders allocate cash between them so as to maximize their rate of return. When the rate of return on each firm is observed, there are multiple equilibria, and some degree of monopoly power is sustained. However, the economy gets close to the Walrasian equilibrium when the availability of funds goes to infinity. Multiple equilibria also arise when there are ‘entrants’ with unobservable rates of return. In an equilibrium where entrants are not funded, savers invest in incumbents because those entrants which will divert customers from incumbents are likely to be excess underpricers.
    Keywords: bounded rationality; credit allocation; evolution; selection; winner's curse
    JEL: D4 D5 Z19
    Date: 2006–11
  12. By: Naghavi, Alireza; Ottaviano, Gianmarco I P
    Abstract: This paper analyzes the organization of firms in a dynamic setting with endogenous growth to shed light on the link between economic growth and the parallel creation and adoption of complementary innovations by independent labs and plants. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back into innovation and growth. Our dynamic perspective reveals a tension between the static and dynamic effects of outsourcing. The reason is that firms make their organizational choices weighting the higher searching and contracting costs of outsourcing against the higher entry and foregone specialization costs of vertical integration. In so doing, they neglect the effects of their choices on innovation and growth. Hence, when outsourcing is selected, the static gains from specialized production may at times be associated with relevant dynamic losses for consumers.
    Keywords: complementary innovations; growth; incomplete contracts; organization of firms; outsourcing; welfare
    JEL: D91 L14 L23 O32
    Date: 2006–11
  13. By: Viossat, Yannick (Dept. of Economics, Stockholm School of Economics)
    Abstract: A pure strategy is coherent if it is played with positive probability in at least one correlated equilibrium. A game is pre-tight if in every correlated equilibrium, all incentives constraints for non deviating to a coherent strategy are tight. We show that there exists a Nash equilibrium in the relative interior of the correlated equilibrium polytope if and only if the game is pre-tight. Furthermore, the class of pre-tight games is shown to include and generalize the class of two-player zero-sum games.
    Keywords: correlated equilibrium; Nash equilibrium; zero-sum games; dual reduction
    JEL: C72
    Date: 2006–08–29
  14. By: Alexander K. Koch (Royal Holloway, University of London and IZA Bonn); Eloïc Peyrache (HEC School of Management, Paris)
    Abstract: Incentive theory predicts that contract terms should respond to differences in agents’ productivities. Firms’ practice of anonymous contracts thus appears puzzling. We show that such a "one-size-fits-all" approach can be reconciled with standard agency theory if careers are marked by frequent transitions between employers, and agents have career concerns because complete long-term contracts are not feasible.
    Keywords: anonymous contracts, career concerns, incentive contracts, reputation
    JEL: D80 J33 L14 M12
    Date: 2006–11
  15. By: Jörnsten, Kurt (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Ubøe, Jan (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper we will consider a setting where a large number of agents are trading commodity bundles. Assuming that agents of the same type have a certain utility attached to each transaction, we construct a statistical equilibrium which in turn implies prices on the different commodities. Our basic question is then the following: Assume that some commodities come out with prices that are socially unacceptable. Is it possible to change these prices systematically if a new type of agents is paid to enter the market? In the paper we will consider explicit examples where this can be done.
    Keywords: Agent preferences; efficient markets; statistical equilibria; commodity prices; arbitrageurs
    JEL: D40 D50 G10
    Date: 2006–12–01
  16. By: Schmitz, Patrick W.; Tröger, Thomas
    Abstract: Majority rules are frequently used to decide whether or not a public good should be provided, but will typically fail to achieve an efficient provision. We provide a worst-case analysis of the majority rule with an optimally chosen majority threshold, assuming that voters have independent private valuations and are ex-ante symmetric (provision cost shares are included in the valuations). We show that if the population is large it can happen that the optimal majority rule is essentially no better than a random provision of the public good. But the optimal majority rule is worst-case asymptotically efficient in the large-population limit if (i) the voters' expected valuation is bounded away from 0, and (ii) an absolute bound for valuations is known.
    Keywords: majority rule; public goods
    JEL: D72 D82
    Date: 2006–11
  17. By: Vieille, Nicolas; Rosenberg, Dinah; Solan, Eilon
    Abstract: This paper presents a general model of information dissemination
    Keywords: private information; behavior; knowledge
    JEL: D82 D83
    Date: 2006–10–28
  18. By: Maria Jesus Nieto; Lluis Santamaria
    Abstract: This paper analyses technological collaboration as an input to the innovation processes of SMEs. Technological collaboration may be a useful mechanism to offset some of the weaknesses in SMEs’ resource endowments and bring their innovation capabilities closer to that of their large counterparts. The results, based on a large longitudinal sample of Spanish manufacturing firms, show that technological collaboration is a critical factor in improving the capabilities and innovativeness of SMEs. While a general bridging of the gap between the innovativeness of SMEs and large firms was observed, the most significant advance was in product rather than process innovations.
    Date: 2006–11
  19. By: Michal Bauer (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The paper examines the risk behavior of a competitive firm under price uncertainty. In the model developed in the paper we have departed from the thought-provoking approach of Greenwald and Stiglitz (1993a), which implies solely risk averse behavior of firms due to its restrictive assumptions about firm’s financing. Through the incorporation of other plausible and more general assumptions about the firm’s financing (namely the access to the equity market, possible existence of soft budget constraint) we were able to theoretically formulate the conditions, under which the firm is induced to behave in more risk averse vs. risky manner. While the firm’s attitude to risk directly influences its willingness to produce, our results indicate that in the environment of uncertainty the price and technology are not the only important determinants of the firm’s optimal output level as is the case for the neoclassical theory of firm. The results of our model have shown that additional factors like firm’s net worth position, sensitivity of managers to bankruptcy, firm’s ability to raise new equity, softness of the budget constraint and degree of uncertainty about the future prices may play an important role for firm’s optimal output considerations.
    Keywords: firm; uncertainty; attitude to risk; capital structure; soft budget constraint
    JEL: D21 D81 G32
    Date: 2005

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