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on Microeconomics |
| By: | Filippo VERGARA CAFFARELLI (Bank of Italy) |
| Abstract: | Vertical integration followed by quantity competition is studied. In the first stage of the game downstream firms simultaneously decide whether to integrate with one of the upstream suppliers. If firms are not able to observe whether their vertically integrated competitor enters the intermediate-good market then they are indifferent about vertical integration. If the entry choice of the integrated firm is observable then the unique equilibrium involves vertical integration and in-house production of the intermediate good. The importance of entry observability sheds light on the strategic importance of information exchange institutions such as the internet and business fairs. |
| Keywords: | Vertical integration, Cournot competition, Market entry |
| JEL: | L13 L22 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_608_06&r=mic |
| By: | Fumiko Hayashi |
| Abstract: | This paper examines how competition among payment card networks—three-party scheme networks and four-party scheme networks—affects pricing as well as the welfare of various parties. A competing network has an incentive to provide rewards to its card users. By providing more generous rewards than its rival networks, the network can increase its own card transactions because multihoming cardholders—who hold multiple networks’ cards—choose to use its card instead of using its rivals’. Although a monopoly network does not have such an incentive, in a monopoly four-party scheme network, competition among card issuers likely makes issuers provide rewards. Due to rewards, the merchant fees under competition can be higher than the merchant fees set by a monopoly network, unless the majority of cardholders are multihoming. Generally, cardholding consumers are better off under network competition. In contrast, non-cardholding consumers are better off only when network competition reduces merchant fees lower than those under monopoly. The results suggest that policies that simply encourage network competition will likely increase cardholder rewards but will not necessarily lower merchant fees in the U.S. payment card market. Several empirical indicators may possibly tell which direction the U.S. payments system needs to go. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkpw:psrwp06-03&r=mic |
| By: | Paolo Giorgio GARELLA; Martin PEITZ |
| Abstract: | Alliances between competitors in which established firms provide access to proprietary resources, e.g. their distribution channels, are important business practices. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A implicitly certificies the rival's product. Consumers infer that firm B is a competitor with high quality, as otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business practices |
| Keywords: | alliances, brand sharing, asymmetric information, signaling, exclusion, moral hazard, entry assistan |
| JEL: | L15 L13 L24 L42 M21 M31 D43 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mil:wpdepa:2006-41&r=mic |
| By: | Hans Jarle Kind; Marko Koethenbuerger; Guttorm Schjelderup |
| Abstract: | Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known textbook result in one-sided markets is that a government may increase a monopolist's output and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad-valorem tax rate - rather than a subsidy - could increase output and enhance welfare. |
| Keywords: | two-sided markets, ad-valorem taxes, specific taxes, imperfect competition, industrial organization |
| JEL: | D40 D43 H21 H22 L13 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1871&r=mic |
| By: | Schmidt, Klaus M. |
| Abstract: | In this paper we investigate the pricing incentives of IP holders and compare the equilibrium royalty rates charged by vertically integrated IP holders with those of non- integrated IP holders. We show that under many circumstances non-integrated companies are likely to charge lower royalties than their vertically integrated counterparts. The results of this paper are of special relevance for the analysis of competition in CDMA and WCDMA technology licensing, where some IP holders are not vertically integrated into handset and infrastructure manufacturing, while others are. |
| Keywords: | complementary patents; IP rights; licensing; vertical integration |
| JEL: | D43 L15 L41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5987&r=mic |
| By: | Garcia Pires, Armando José |
| Abstract: | Two central results in the strategic trade literature are that governments shall support winners and that there is a policy prisoner dilemma in international subsidy wars (i.e. countries have incentives to support local firms but they would be better off by cooperating to not intervene). We show that exactly the contrary holds when asymmetries between firms are endogenous. Specifically, the incentives to support are bigger for loser firms given that intervention can aim at making them winners (competitiveness shifting effects). As a result the countries that host less competitive firms always prefer intervention. We illustrate this with the Airbus-Boeing case. |
| Keywords: | Airbus; asymmetric firms; Boeing; R&D investment; R&D subsidies |
| JEL: | F13 H52 L13 L52 O31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5979&r=mic |
| By: | Garcia Pires, Armando José |
| Abstract: | Contrary to what has been standard in the international trade literature, we argue that firms' access to international markets should not be just reduced to exogenous factors such as trade costs. Instead, we defend that market access can also be endogenous, since firms can affect international trade patterns by acting strategically against rivals. In particular, we endogenize firms' competitiveness through commitment power advantages of R&D. In this setting we show that: (1) higher efficiency of R&D (like low trade costs) makes trade more easy (given that R&D increases the profitability of exports); (2) firms with higher commitment power in R&D are more competitive (since they have larger incentives to innovate) and as a result these firms also have better access to export markets. |
| Keywords: | commitment power; endogenous asymmetric firms; market access; R&D investment |
| JEL: | F12 L13 L25 O31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5980&r=mic |
| By: | Hans Jarle Kind; Tore Nilssen; Lars Sørgard |
| Abstract: | We consider a model of a TV oligopoly where TV channels transmit advertising and viewers dislike such commercials. We show that advertisers make a lower profit the larger the number of TV channels. If TV channels are sufficiently close substitutes, there will be underprovision of advertising relative to social optimum. We also find that the more viewers dislike ads, the more likely it is that welfare is increasing in the number of advertising financed TV channels. A publicly owned TV channel can partly correct market distortions, in some cases by having a larger amount of advertising than private TV channels. It may even have advertising in cases where advertising is wasteful per se. |
| Keywords: | television industry, advertising |
| JEL: | L82 M37 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1862&r=mic |
| By: | Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics); Sougata Poddar (Department of Economics, National University of Singapore) |
| Abstract: | We consider a game of endogenous timing of sequential choice of capacity and quantity with observable delay in a mixed duopoly and a private duopoly under two possible time structures. In mixed duopoly, we find that a simultaneous play at the capacity stage or at the quantity stage can never be supported as subgame perfect Nash equilibrium (SPNE); whereas a simultaneous play at each stage turns out to be the unique SPNE in a private duopoly. In mixed duopoly there is multiplicity of equilibria and all SPNEs require sequentiality at the capacity as well as quantity stage. These equilibrium outcomes are invariant with respect to the endogenous time structures. In this context, we also show that the public firm never chooses over (excess) capacity in mixed duopoly, while the private firm never chooses under capacity in both mixed and private duopoly. |
| Keywords: | Endogenous timing, public firm, private firm, over capacity, under capacity |
| JEL: | L13 D43 H42 |
| URL: | http://d.repec.org/n?u=RePEc:nus:nusewp:wp0605&r=mic |
| By: | Claudio Mezzetti; Ilia Tsetlin |
| Abstract: | Theoretical models of multi-unit, uniform-price auctions assume that the price is given by the highest losing bid. In practice, however, the price is usually given by the lowest winning bid. We derive the equilibrium bidding function of the lowest-winning-bid auction when there are k objects for sale and n bidders, and prove that it converges to the bidding function of the highest-losing-bid auction if and only if the number of losers n - k gets large. When the number of losers grows large, the bidding functions converge at a linear rate and the prices in the two auctions converge in probability to the expected value of an object to the marginal winner. |
| Keywords: | Auctions; Lowest-Winning Bid; Highest-Losing Bid; k-th Price Auction; (k+1)-st Price Auction |
| JEL: | D44 D82 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:06/16&r=mic |
| By: | Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Oligopoly has been among the first topics in the experimental economics. Over half a century, some 150 papers have been published. Each individual paper was interested in demonstrating one effect. But in order to do so, experimenters had to specify many more parameters. That way they have generated a huge body of evidence, untapped thus far. This meta-analysis makes this evidence available. More than 100 of the papers lend themselves to calculating an index of collusion. The data bank behind this paper covers some 700 different settings. The experimental results may be normalised as a percentage of the span between the Walrasian and the Pareto outcomes. The same way, results may be expressed as a percentage of the distance between the Nash and the Pareto outcomes. For each and every of the parameters, these two indices make it possible to answer two questions: how far is the market outcome away from the competitive equilibrium? And how good is the Nash prediction? Most importantly, however, the meta-analysis sheds light on how features of the experimental setting interact with each other. Most main effects and many interaction effects are indeed statistically significant. |
| Keywords: | oligopoly, collusion, unilateral effect, experiment |
| JEL: | C91 D21 D43 K21 L13 L41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2006_27&r=mic |
| By: | Tanya Araujo; R. Vilela Mendes |
| Keywords: | agent-based models, innovation, artificial societies |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp312006&r=mic |
| By: | Jaap H. Abbring; Jeffrey R. Campbell |
| Abstract: | This paper considers the effects of raising the cost of entry for potential competitors on infinite-horizon Markov- perfect industry dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last- in first-out expectations: a firm never exits before a younger rival does. When an industry can support at most two firms, we prove that raising barriers to a second producer’s entry increases the probability that some firm will serve the industry and decreases its long-run entry and exit rates. In numerical examples with more than two firms, imposing a barrier to entry stabilizes industry structure. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-29&r=mic |
| By: | Edward L. Glaeser; Gergely Ujhelyi |
| Abstract: | The government has responded to misleading advertising by banning it, engaging in counter-advertising and taxing the product. In this paper, we consider the social welfare effects of those different responses to misinformation. While misinformation lowers consumer surplus, its effect on social welfare is ambiguous. Misleading advertising leads to overconsumption but that may be offsetting the under-consumption associated with monopoly prices. If all advertising is misinformation then a tax or quantity restriction on advertising maximizes social welfare. Other policy interventions are inferior and cannot improve on a pure advertising tax. If it is impossible to tax misleading information without also taxing utility increasing advertising, then combining taxes or bans on advertising with other policies can increase welfare. |
| JEL: | A1 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12784&r=mic |
| By: | Jaap H. Abbring; Jeffrey R. Campbell |
| Abstract: | This paper extends the static analysis of oligopoly structure into an infinite- horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first- out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms’ equilibrium entry and survival decisions. Bresnahan and Reiss’s (1993) empirical analysis of oligopolists’ entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game- theoretic foundation for that structure. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-28&r=mic |
| By: | Kristina Shampan'er; Dan Ariely |
| Abstract: | When faced with a choice of selecting one of several available products (or possibly buying nothing), a standard theoretical perspective suggests that the option with the highest benefitcost difference will be chosen. This analysis applies to all prices including the price of zero. In contrast, we propose that decisions about free products are different than simply subtracting costs from benefits, and that in fact the benefits associated with free products are perceived to be higher. We test this idea by contrasting the demands for two products (types of chocolate) across conditions that maintain the cost-benefit difference for the goods, but vary on whether the price of the cheaper good in the set is priced at a low positive price or at zero. Contrary to a standard cost -benefit perspective, the results show that, in the zero-price condition, the proportion of participants choosing the less attractive chocolate dramatically increases, while the proportion of participants choosing the more attractive chocolate dramatically decreases. Thus, individuals seem to act as if pricing a good as free not only decreases its cost, but also adds to its benefits. After documenting this basic effect, we propose and test several possible psychological antecedents of the effect: Social norms, Mapping difficulty, and Affect. The results suggest Affect as the most likely source of the effect. |
| Keywords: | Pricing |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:06-16&r=mic |
| By: | Dubois, Pierre; Hernandez-Perez, Adriana; Ivaldi, Marc |
| Abstract: | This paper analyzes the demand and cost structure of the French market of academic journals, taking into account its intermediary role between researchers, who are both producers and consumers of knowledge. This two sidedness feature will echoes similar problems already observed in electronic markets - payment card systems, video game consoles, etc. - such as the chicken and egg problem, where readers won’t buy a journal if they do not expect its articles to be academically relevant and researchers, that live under the mantra 'Publish or Perish', will not submit to a journal with either limited public reach or weak reputation. After the merging of several databases, we estimate the aggregated nested logit demand system combined simultaneously with a cost function. We identify the structural parameters of this market and find that price elasticities of demand are quite large and margins relatively low, indicating that this industry experiences competitive constraints. |
| Keywords: | differentiated products models; media industry; two-sided platforms |
| JEL: | L11 L82 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5990&r=mic |
| By: | Axel Ockenfels; David Reiley; Abdolkarim Sadrieh |
| Abstract: | The economic literature on online auctions is rapidly growing because of the enormous amount of freely available field data. Moreover, numerous innovations in auction-design features on platforms such as eBay have created excellent research opportunities. In this article, we survey the theoretical, empirical, and experimental research on bidder strategies (including the timing of bids and winner's-curse effects) and seller strategies (including reserve-price policies and the use of buy-now options) in online auctions, as well as some of the literature dealing with online-auction design (including stopping rules and multi-object pricing rules). |
| JEL: | D44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12785&r=mic |
| By: | Pascal Billand (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne]); Christophe Bravard (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - [Université Jean Monnet - Saint-Etienne]) |
| Abstract: | Ce papier s'intéresse à un jeu d'oligopole “à la Cournot” récurrent, où les firmes adaptent leur quantité en imitant les meilleurs stratégies présentes dans leur mémoire. Il s'agit de déterminer les états stochastiquement stables. Plusieurs approches sont présentées pour traiter cette question. Elles se distinguent par le contenu de la mémoire des firmes. Nous notons que cette mémoire joue un rôle clé dans la sélection des états stochastiquement stables. Il apparaît que l'équilibre de Cournot-Nash n'est généralement pas l'unique état stochastiquement stable, voire n'appartient pas à l'ensemble des états stochastiquement stables. |
| Keywords: | Imitation, Oligopole de Cournot, jeux évolutionnaires |
| Date: | 2006–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:ujm-00121658_v1&r=mic |
| By: | Dubois, Pierre; Vukina, Tomislav |
| Abstract: | The objective of this paper is to develop an analytical framework for estimation of the parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity in preferences. We show that allowing the principal to strategically distribute the production inputs across heterogenous agents as part of the contract design, the principal is able to change what appears to be a uniform contract into individualized contracts tailored to fit agents' preferences or characteristics. Using micro level data on swine production contract settlements, we find that contracting farmers are heterogenous with respect to their risk aversion and that this heterogeneity affects the principal's allocation of production inputs across farmers. Relying on the identifying assumption that contracts are optimal, we obtain the estimates of a lower and an upper bound of agents' reservation utilities. We show that farmers with higher risk aversion have lower outside opportunities because of lower reservation utilities. |
| Keywords: | agency contracts; heterogeneity; moral hazard; optimal incentives; risk aversion |
| JEL: | D82 K32 L24 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6011&r=mic |
| By: | Franco Malerba; Richard Nelson; Luigi Orsenigo; Sidney Winter |
| Abstract: | In this paper we present a history-friendly model of the changing vertical scope of computer firms during the evolution of the computer and semiconductor industries. The model is "history friendly", in that it attempts at replicating some basic, stylized qualitative features of the evolution of vertical integration on the basis of the causal mechanisms and processes which we believe can explain the history. The specific question addressed in the model is set in the context of dynamic and uncertain technological and market environments, characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. The model illustrates how the patterns of vertical integration and specialization in the computer industry change as a function of the evolving levels and distribution of firms’ capabilities over time and how they depend on the co-evolution of the upstream and downstream sectors. Specific conditions in each of these markets - the size of the external market, the magnitude of the technological discontinuities, the lock-in effects in demand - exert critical effects and feedbacks on market structure and on the vertical scope of firms as time goes by. Length 32 pages |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:esi:evopap:2006-19&r=mic |
| By: | Laurent Simula (EHESS); Alain Trannoy (EHESS, Greqam-Idep) |
| Abstract: | This paper examines how allowing individuals to emigrate to pay lower taxes changes the optimal non-linear income tax scheme in a Mirrleesian economy. Type-dependent par- ticipation constraints are borrowed from contract theory. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three social criteria are distinguished according to the agents whose welfare matters. Mobility signi.cantly alters the closed-economy results qualitatively, but also quantitatively as veri.ed by simulations. A curse of the middle-skilled occurs in the .rst-best. In the second-best, the middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Moreover, preventing emigration of the highly-skilled is not necessarily optimal. |
| Keywords: | Optimal Taxation, Income Tax, Emigration, Participation Constraints |
| JEL: | H21 H31 D82 F22 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iep:wpidep:0610&r=mic |
| By: | Marcos Gallacher; Alfredo Sesé |
| Abstract: | The provision of airport services results in a web of contractual relationships between the main contractor and other firms. The existence of multiple services offered in airports allows several contractual alternatives to be chosen. In particular, the main contractor may choose to carry out these under his own management (“vertical integration”) or alternatively transfer them so they are under the control of another firm (“dis-integration”). The advantages of either alternatives depends on a host of factors. This paper analyzes the impact on vertical integration of: (a) difficulties in controlling labor and (b) the need for specialized knowledge on specific business processes. The paper shows that, in general, the decision to integrate a process is inversely related to the above two factors. The paper also analyzes the relevance of dis-integration as a tool for the reduction of business risks. We find that – for this industry – decisions relative to dis-integration do not appear to be justified as a tool for managing risks (income variability) of the firm. |
| JEL: | L2 D2 L8 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:336&r=mic |
| By: | Volodymyr Bilotkach; Yuriy Gorodnichenko; Oleksandr Talavera; Igor Zubenko |
| Abstract: | Using a sample of fare quotes for non-stop travel from New York to London, this paper investigates the dynamics of offered fares as the departure date nears. We find that the general trend is toward fare increase at an accelerated rate as the departure date approaches. Clear differences in price-setting strategies among the carriers competing on a particular route are documented. |
| Keywords: | airline industry, price dynamics |
| JEL: | L93 D21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp645&r=mic |
| By: | Peter J. Klenow; Jonathan L. Willis |
| Abstract: | In the U.S. and Europe, prices change somewhere between every six months and once a year. Yet nominal macro shocks seem to have real effects lasting well beyond a year. "Sticky information" models, as posited by Sims (2003), Woodford (2003), and Mankiw and Reis (2002), can reconcile micro flexibility with macro rigidity. We simulate a sticky information model in which price setters do not update their information on macro shocks as often as they update their information on micro shocks. Compared to a standard menu cost model, price changes in this model reflect older macro shocks. We then examine price changes in the micro data underlying the U.S. CPI. These price changes do not reflect older information, thereby exhibiting a similar response to that of the standard menu cost model. However, the empirical test hinges on staggered information updating across firms; it cannot distinguish between a full information model and a model where firms have equally old information. |
| Keywords: | Prices |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-13&r=mic |