nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒01‒23
nineteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Why were FIFA World Cup Tickets so cheap?: Monopoly Pricing, Demand Quality and Two-Sided Markets By Eichhorn, Christoph; Sahm, Marco
  2. Competition in a Pure World of Internet Telephony By Christoph Engel
  3. Access to Bottleneck Inputs under Oligopoly: a Prisoners Dilemma? By Duarte Brito; Pedro Pereira
  4. Asymmetric Information without Common Priors: An Indirect Evolutionary Analysis of Quantity Competition By Werner Güth; Loreto Llorente Erviti; Anthony Ziegelmeyer
  5. Integration and Separation with Costly Demand Information By Elisabetta Iossa; Francesca Stroffolini
  6. Environmental Quality in a Differentiated Duopoly By Y. Hossein Farzin; Ken-Ichi Akao
  7. Equilibrium Nonexistence in Spatial Competition with Quadratic Transportation Costs By Arguedas, Carmen; Hamoudi, Hamid; Saez, Manuel
  9. Market Conduct, Price Interdependence and Echange Rate Pass-Through By Sophocles N. Brissimis; Theodora S. Kosma
  10. Price Points and Price Rigidity By Levy, Daniel; Lee, Dongwon; Chen, Allan (Haipeng); Kauffman, Robert; Bergen, Mark
  11. The Impact on Broadband Access to the Internet of the Dual Ownership of Telephone and Cable Networks By Pedro Pereira; Tiago Ribeiro
  12. Bidding Behavior when One Bidder and the Auctioneer Are Vertically Integrated Implications for the Partial Deregulation of EU Electricity Markets By Silvester van Koten
  13. Quality Upgrades and the (loss) of Market Power in a Dynamic Monopoly Model By James J. Anton; Gary Biglaiser
  14. Monopolistic Group Design with Peer Effects By Simon Board
  15. Competition in the Netherlands By Harold Creusen; Bert Minne; Henry van der Wiel
  16. Bids for the UMTS system: An empirical evaluation of the Italian case By Pasquale L. Scandizzo; Marco Ventura
  17. Controlling Collusion in Auctions: The Role of Ceilings and Reserve Prices By Roy Chowdhury, Prabal
  18. Improving urban transport performances by tendering lots: an econometric estimation of natural monopoly frontiers By William Roy; Yves Croissant
  19. Network Externalities and Durable Goods Consumption: A Test Using Televisions in Rural China By Zhao Rong; Peter Thompson

  1. By: Eichhorn, Christoph; Sahm, Marco
    Abstract: We examine the pricing decision of a multi-product monopolist in a two-sided market where the type structure of buyers on one side of the market is an important determinant of profit on the other side. In this situation it might be optimal to set prices below the maximum sellout price and to ration demand by a random mechanism in the first market to reach a type distribution more favorable for sales in the other market. The model establishes demand quality as an alternative link between markets in addition to standard quantitative effects and explains frequently observed underpricing, e.g. in the (sports) entertainment industry. It also provides an explanation for the effort a monopolist incurs to deter from resale.
    Keywords: Underpricing; Demand Rationing; Resale Deterrence
    JEL: L12 D42 D45
    Date: 2007–01
  2. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: From the angle of competition policy, Voice over IP looks like a panacea. It not only brings better service, but it also increases competitive pressure on former telecommunications monopolists. This paper points to the largely overlooked downside. In a pure world of Internet telephony, there would be no charge for individual calls, nor for telephony, as distinct from other services running over the uniform network. Specifically, establishing property rights for either of these would be costly, whereas these property rights were automatic and free of charge in switched telephony. Giving voice over IP providers classic telephone numbers would enhance systems competition with switched telephony. But this would make it more difficult for clients to swap providers. The anti-competitive caller pays principle would extend to IP telephony.
    Keywords: property right, non-linear pricing, pure bundling, club good, cross-subsidisation, packet switched telephony
    JEL: D D43 H41 K21 K23 L13 L15 L43 L86
    Date: 2007–01
  3. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article, we analyze the incentives of vertically integrated oligopolists to concede access to their bottleneck inputs to an entrant in the downstream retail market. We develop a two-stage model, where in the first stage a downstream entrant negotiates an access price with three vertically integrated incumbents, and in stage 2 firms compete on Salop's circle. The incumbents may be asymmetrically located on the circle, to reflect differences in consumer shares. For some levels of asymmetry, the incumbents face a prisoners dilemma with respect to conceding access to their bottleneck inputs. Entry by a downstream firm may lead to lower retail prices. However, entry may also lead to higher retail prices for the access provider and for the entrant.
    Keywords: Bottleneck Input, Vertical Integration, Oligopoly, Entry
    JEL: L43 L96
    Date: 2006–11
  4. By: Werner Güth; Loreto Llorente Erviti; Anthony Ziegelmeyer
    Abstract: The common prior assumption justifies private beliefs as posterior probabilities when updating a common prior based on individual information. Common priors are pervasive in most economic models of incomplete information and oligopoly models with asymmetrically informed firms. We dispose of the common prior assumption for a homogeneous oligopoly market with uncertain costs and firms entertaining arbitrary priors about other firms’ cost-type to analyze which priors will be evolutionarily stable when truly expected profit measures (reproductive) success. When firms believe that all other firms entertain the same beliefs Nature’s priors are not the only evolutionarily stable priors. In a second model allowing for asymmetric priors Nature’s priors are not even evolutionarily stable.
    Keywords: (Indirect) evolution; Common prior assumption; Cournot competition
    JEL: C72 D43 D82 L13
    Date: 2006–12
  5. By: Elisabetta Iossa (Economics and Finance Section, School of Social Sciences, Brunel University; Centre for Market and Public Organization, (C.M.P.O.), and Universita' Tor Vergata.); Francesca Stroffolini (University of Napoli “Federico II” and CSEF)
    Abstract: We consider an industry characterized by a regulated natural monopoly in the upstream market and Cournot competition with demand uncertainty in the unregulated downstream market. The realization of demand cannot be observed by the regulator, whilst it can be privately observed at some cost by the upstream monopolist. Information acquisition is also unobservable. We study whether it is better to allow the monopolist to operate in the downstream market (integration) or instead to exclude it (separation). We show that asymmetric information on demand favours separation but unobservability of information acquisition favours integration.
    Keywords: Information acquisition, liberalization and separation
    Date: 2007–01–01
  6. By: Y. Hossein Farzin (University of California); Ken-Ichi Akao (Waseda University)
    Abstract: In a duopoly industry with environmentally differentiated products, we examine the effects of introducing a mandatory environmental quality standard on firms’ environmental quality choices, profits, and the average environmental quality offered by the industry. We show that at low standard levels, both firms choose to overcomply regardless of the standard level. At intermediate levels, the mandatory standard can reduce the profit of the low-cost firm while increasing that of the high-cost firm, and that it can lower the industry’s average environmental quality below what it would be without the standard.
    Keywords: Duopoly, Environmental Quality, Mandatory Environmental Standard, Overcompliance, Product Differentiation
    JEL: Q58 L13 L51 D43
    Date: 2006–11
  7. By: Arguedas, Carmen (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.); Hamoudi, Hamid (Departamento de Economía Aplicada y Fundamentos del Análisis Económico II, Universidad Rey Juan Carlos); Saez, Manuel (Departamento de Economía, Universidad Europea de Madrid)
    Abstract: Under quadratic transportation costs, the existence of the sequential first-locate-thenprice equilibrium in spatial competition is well known in the literature. In this paper, we find that the equilibrium may fail to exist under certain restrictions with respect to the location of firms and consumers in the market. This result is valid for both the linear and the circular models
    Keywords: Product differentiation, circular model, linear model, quadratic transportation costs, sequential equilibrium
    JEL: C72 D43
  8. By: William R. Johnson
    Abstract: Technological changes over the past two decades have made it easier to distribute and to copy intellectual property. Creators and owners of intellectual property have responded to these changes with a variety of creative pricing strategies. The paper reviews some of these pricing innovations. Two broad categories of innovations are explored: those that facilitate price discrimination and those that exploit complementarities between di¤erent types of creative works.
    Keywords: pricing, intellectual property
    JEL: D4 O34
    Date: 2005–04
  9. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Theodora S. Kosma (Bank of Greece, Economic Research Department)
    Abstract: This paper develops an international oligopoly model where foreign and domestic firms simultaneously choose their pricing strategies under the assumption of non-zero conjectural variations. The model captures the links between domestic and foreign producers’ prices and establishes a relationship between the price of domestically produced goods and the exchange rate, which appears to be important for the determination of exchange rate pass-through. It is also found that the equilibrium pass-through elasticity can be less than, equal to or greater than one depending on exporting and domestic firms’ conjectural variations. The empirical implications of the model are tested with the Johansen multivariate cointegration technique using data for Japanese firms’ exports to the US market. The results indicate that US producer prices are indeed influenced by the prices of their Japanese competitors and that the pass-through elasticity is less than one.
    Keywords: Money demand; Exchange rate pass-through; Conjectural variations; Translog expenditure function; Multivariate cointegration
    JEL: C32 F39 L13
    Date: 2006–12
  10. By: Levy, Daniel; Lee, Dongwon; Chen, Allan (Haipeng); Kauffman, Robert; Bergen, Mark
    Abstract: We offer new evidence on the link between price points and price rigidity using two datasets. One is a large weekly transaction price dataset, covering 29 product categories over an eight-year period from a large U.S. supermarket chain. The other is from the Internet, and includes daily prices over a two-year period for 474 consumer electronic goods covering ten product categories, from 293 different Internet retailers. Across the two datasets, we find that (i) 9 is the most frequently used price-ending for the penny, dime, dollar and the ten-dollar digits, (ii) the most common price changes are in multiples of dimes, dollars, and ten-dollars, (iii) 9-ending prices are at least 24% (and as much as 73%) less likely to change in comparison to prices ending with other digits, and (iv) the average size of the price change is higher if the price ends with 9 in comparison to non-9-ending prices. This link between price points and price rigidity is robust across a wide range of prices, products, product categories, and retail formats. We offer a behavioral explanation for the findings.
    Keywords: Price Point; 9-Ending Price; Price Rigidity; Rational Inattention; E-Commerce
    JEL: M30 E12 L16 M21 D80 E31
    Date: 2007–01–11
  11. By: Pedro Pereira (Autoridade da Concorrência); Tiago Ribeiro (Indera)
    Keywords: Broadband, Structural Separation, Prices
    JEL: L25 L51 L96
    Date: 2006–08
  12. By: Silvester van Koten
    Abstract: When a bidder (referred to as the privileged bidder) is residual claimant to a part of the revenue from an auction with two bidders whose valuations are independently and identically distributed, bidding incentives are changed. Specifically, the privileged bidder will bid more aggressively to increase the auction revenue. Indeed, the privileged bidder is more likely to win the auction and the good is sold for a higher price. However, since the auction is now inefficient, welfare is decreased. These results are of interest for regulators of the EU electricity industry. The extant EU regulatory framework allows for profits from new cross-border transmission lines (socalled interconnectors) to be unregulated and for incumbent Vertically Integrated Utilities (VIUs) to have ownership of generating and transmission activities. When electricity generators have to secure transmission rights in an auction, the VIU, because of its combined ownership of generation and transmission activities, is in the position of a privileged bidder. The VIU will secure a higher profit, while competing electricity generators will earn less because they are less likely to gain transmission rights and, in any case, pay a higher price for it.
    Keywords: Asymmetric auctions, bidding behavior, electricity markets, regulation,vertical integration.
    JEL: L43 L51 L94 L98
    Date: 2006–12
  13. By: James J. Anton (Duke University); Gary Biglaiser (University of North Carolina)
    Date: 2007–01
  14. By: Simon Board
    Abstract: In a range of settings, private firms manage peer effects by sorting agents into different groups, be they schools, neighbourhoods or teams. This paper considers such a firm, which controls group entry by setting a series of anonymous prices. We show that private provision systematically leads to two distortions relative to the efficient solution: first, agents are segregated too finely; second, too many agents are excluded from all groups. We demonstrate that these distortions are a consequence of anonymous pricing and do not depend upon the nature of the peer effects. This general approach also allows us to assess the way the `returns to scale' of peer technology and the cost of group formation affect the optimal group structure.
    Keywords: mechanism design, peer effects, public goods
    JEL: D82 H40 L12
    Date: 2007–01–14
  15. By: Harold Creusen; Bert Minne; Henry van der Wiel
    Abstract: Competition in the Dutch market sector as a whole probably slightly declined during 1993- 2001. Within the market sector, a large variety in competition development exists. Competition changes have been rather small in many industries competition, but a considerable number of industries experienced a sharp rise or strong fall in competition. These findings are puzzling in light of regulatory reforms that have been implemented in the period observed. Yet, econometric analysis suggests that regulatory reforms could have intensified competition. However, strong growth of market demand has weakened competition and it counterbalanced to some extent the impact of regulatory reforms. If demand grows more rapidly than supply, then incumbent firms compete less aggressively. This should attract new competitors if entry barriers are low. Although entry has a positive effect on competition, its contribution has been negligible or even slightly negative. The analysis is based on two competition indicators. The model considerably explains the development of both indicators at the industry level. However, several determinants have statistically insignificant coefficients, particularly the estimated coefficients of entry and exit rates.
    Keywords: competition; measurement; competition policy
    JEL: D4 L1 L5
    Date: 2006–12
  16. By: Pasquale L. Scandizzo (University of Rome, Tor Vergata, Italy); Marco Ventura (ISAE, Institute for Studies and Economic Analyses,Department of Law and Economics, Rome, Italy)
    Abstract: The aim of this paper is to analyze the licensing of the telecommunication spectrum as a public good and the search for equilibrium prices through bilateral bargaining and multilateral bidding. It develops a general model of price setting under dynamic uncertainty and applies it to the Italian auction for Universal Mobile Telecommunications System (UMTS). The empirical application shows that the model can be used both to determine the base price as well as other desirable characteristics to organize an auction and to better understand, after the auction is closed, what really happened in terms of the critical factors involved. After recalling some basic concepts on spectrum rights and reviewing the general experience with UMTS auctions in europe, the formal model and its application are presented. The results confirm certain views on the Italian auction, which are widely shared but were never tested before, namely that: (i) given the initial price, the number of licenses offered for the bidding should have been fewer, or alternatively, (ii) given the number of licenses, the base price should have been higher and (iii) the main bidder underpaid for the license. The model also allows us to quantify the bidders’ reservation price and the State and the bidders’ implicit bargaining powers.
    Keywords: UMTS; Auction; Real Options; Licence.
    Date: 2006–12–10
  17. By: Roy Chowdhury, Prabal
    Abstract: We examine a simple model of collusion under a single-object second-price auction. Under the appropriate parameter conditions, in particular as long as collusion is neither too easy, nor too difficult, we find that the optimal policy involves both an effective ceiling, as well as a reserve price.
    Keywords: Auctions; ceilings; collusion; reserve prices.
    JEL: D44 C72
    Date: 2006–12
  18. By: William Roy (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); Yves Croissant (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat])
    Abstract: Recently, some cities decided to divide their transport network into several attractive and accessible parts (this procedure is called allotment) in order to reduce urban transit costs. Gains obtained by introducing more competition for the market should be compared with costs associated with cutting the network into several parts, and this question is crucially linked with the measure of returns to scale. In this paper, we estimate a translog cost function on a panel of French urban transit networks. Our main conclusion is that scale economies are exhausted for a production corresponding to a city of about 200,000 inhabitants and that allotment, in terms of scale economies, would reduce costs for the seven biggest cities of our sample.
    Keywords: urban public transport industry, panel data, natural monopoly, allotment
    Date: 2007–01–05
  19. By: Zhao Rong (Department of Economics, Florida International University); Peter Thompson (Department of Economics, Florida International University)
    Abstract: We document the existence of a network externality in the purchase of color television sets in rural China in which increases in ownership reduce the propensity of non-owners to purchase. We construct a model of the timing of a durable good in the presence of an externality, and test its key implications using Chinese household survey data.
    Keywords: Durables, network externalities, rural china.
    JEL: D12 R21
    Date: 2007–01

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