nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒02‒24
fifteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Entry Decision and Pricing Policies By Sílvia Jorge; Cesaltina Pires
  2. Competition vs. Regulation in Mobile Telecommunications By Stennek, Johan; Tangerås, Thomas P.
  3. Discriminatory Limit Pricing By Sílvia Jorge; Cesaltina Pires
  4. Endogenous Capacities and Price Competition: The Role of Demand Uncertainty By de Frutos, Maria-Angeles; Fabra, Natalia
  5. Cost effectiveness of R&D and strategic trade policy By Praveen Kujal; Juan Ruiz
  6. Pricing and Trust By Huck, Steffen; Ruchala, Gabriele K.; Tyran, Jean-Robert
  7. Hedonic price functions By Lars Nesheim
  8. Microfoundations of Two-sided Markets: The Payment Card Example By James McAndrews; Zhu Wang
  9. Anti- versus Pro-Competitive Mergers By Fridolfsson, Sven-Olof
  10. Unicidad del equilibrio de Nash-Cournot con correspondencias de mejor respuesta contractivas By Elvio Accinelli; Edgar Carrera
  11. Network Security: Vulnerabilities and Disclosure Policy By Choi, Jay-Pil; Fershtman, Chaim; Gandal, Neil
  12. Patents, Trade Secrets and the Correlation Among R&D Projects By Bulut, Harun; Moschini, GianCarlo
  13. On Moral Hazard and Joint R&D By Simona Fabrizi; Steffen Lippert
  14. Measuring the Benefits of Mobile Number Portability By Sean Lyons
  15. Does the Good Matter? Evidence on Moral Hazard and Adverse Selection from Consumer Credit Market By Alena Bi\v{c}áková

  1. By: Sílvia Jorge (Universidade de Aveiro); Cesaltina Pires (Universidade de Évora)
    Abstract: We extend the analysis of the impact of firms' pricing policies upon entry to a framework where price competition and differentiated products are present. We consider a model where an incumbent serves two distinct and independent geographical markets and an entrant may enter in one of the markets. Entry under discriminatory pricing is more likely than under uniform pricing when entry is profitable under discriminatory pricing but unprofitable under uniform pricing. Our results show entry under discriminatory pricing may be more, less or equally likely than under uniform pricing. We show that the degree of product substitutability affects the impact of pricing policies upon entry decision.
    Keywords: Entry, Product Differentiation, Discriminatory Pricing, Uniform Pricing
    JEL: D40 L11 L13
    Date: 2007–02
  2. By: Stennek, Johan; Tangerås, Thomas P.
    Abstract: This paper questions whether competition can replace sector-specific regulation of mobile telecommunications. We show that the monopolistic outcome prevails independently of market concentration when access prices are determined in bilateral negotiations. A light-handed regulatory policy can induce effective competition. Call prices are close to the marginal cost if the networks are sufficiently close substitutes. Neither demand nor cost information is required. A unique and symmetric call price equilibrium exists under symmetric access prices, provided that call demand is sufficiently inelastic. Existence encompasses the case of many networks and high network substitutability.
    Keywords: access price competition; entry; network competition; network substitutability; regulation; two-way access
    JEL: L51 L96
    Date: 2007–02
  3. By: Sílvia Jorge (Universidade de Aveiro); Cesaltina Pires (Universidade de Évora)
    Abstract: We consider a two-period framework where a multimarket incumbent firm faces, in one of the markets, a single potential entrant offering a differentiated product. The incumbent has private information about his production cost and may use both pre-entry prices as predatory signals. We find multiple pure strategy perfect bayesian equilibria. Using equilibrium refine- ments, we show that there is always a unique reasonable perfect bayesian equilibrium. Our results show that in some cases this unique equilibrium entails a downward distortion in both low cost incumbent's pre-entry prices. Moreover, we show that this distortion is identical in both markets and increasing with the discount factor, the degree of product substitutability and the efficiency of the entrant.
    Keywords: Entry Deterrence, Product Differentiation, Asymmetric Information, Discriminatory Pricing
    JEL: D40 D82 L11 L12 L13
    Date: 2007–02
  4. By: de Frutos, Maria-Angeles; Fabra, Natalia
    Abstract: This paper analyzes a model of capacity choice followed by price competition under demand uncertainty. Under various assumptions regarding the nature and timing of demand realizations, we obtain general predictions concerning the role of demand uncertainty on equilibrium outcomes. We show that it reduces the multiplicity of equilibria, it may rule out the existence of symmetric equilibria, and it leads to endogenous capacity asymmetries even though firms are ex-ante symmetric. Furthermore, as compared to the certainty equivalent game, demand uncertainty reduces prices and increases consumer surplus, but it also decreases total welfare because of the emergence of idle capacity. By relying on the analysis of firms' reaction functions as well as on the theory of submodular games, we are able to show that a subgame perfect equilibrium always exists and to fully characterize it.
    Keywords: demand uncertainty; investment; price competition; submodular game
    JEL: D43 D80 L11
    Date: 2007–02
  5. By: Praveen Kujal (Universidad Carlos III de Madrid); Juan Ruiz (Banco de España)
    Abstract: This paper analyzes the incentives for governments to impose export subsidies when firms invest in a cost saving technology before market competition. Governments first impose an export subsidy or a tax. After observing export policy, firms invest in cost reducing R&D and subsequently compete in the market. Governments subsidize exports under Cournot competition. Under Bertrand competition, export subsidies are positive whenever R&D is sufficiently cost-effective at reducing marginal costs, and negative otherwise. The trade policy reversal found in models without endogenous sunk costs disappears if R&D is sufficiently cost-effective. Thus, output subsidies seem more robust than implied by the recent literature.
    Keywords: product differentiation, strategic trade policy, policy reversals, r&d
    JEL: F12 F13 L13
    Date: 2007–02
  6. By: Huck, Steffen; Ruchala, Gabriele K.; Tyran, Jean-Robert
    Abstract: We experimentally examine the effects of flexible and fixed prices in markets for experience goods in which demand is driven by trust. With flexible prices, we observe low prices and high quality in competitive (oligopolistic) markets, and high prices coupled with low quality in non-competitive (monopolistic) markets. We then introduce a regulated intermediate price above the oligopoly price and below the monopoly price. The effect in monopolies is more or less in line with standard intuition. As price falls volume increases and so does quality, such that overall efficiency is raised by 50%. However, quite in contrast to standard intuition, we also observe an efficiency rise in response to regulation in oligopolies. Both, transaction volume and traded quality are, in fact, maximal in regulated oligopolies.
    Keywords: experience goods; markets; moral hazard; price competition; reputation; Trust
    JEL: C72 C90 D40 D80 L10
    Date: 2007–02
  7. By: Lars Nesheim (Institute for Fiscal Studies)
    Abstract: A hedonic price function describes the equilibrium relationship between characteristics of a product and its price. They are used to predict prices of new goods, to adjust for quality change in price indexes, and to measure consumer and producer valuations of differentiated products. They emerge as market outcomes from both competitive and non-competitive markets. The functional form is determined by the distribution of buyers and their preferences, the distribution of sellers and their costs, and the structure of competition in the market.
    Date: 2006–09
  8. By: James McAndrews; Zhu Wang
    Abstract: This paper provides a theory of two-sided market dynamics with arguably better microfoundations. These alternative microfoundations focus on observable heterogeneities of both sides of the market in a competitive framework. The theory is rich in empirical predictions and is less dependent on a particular form of imperfect competition than other approaches. Our findings in the payment card example point to adoption costs and the distribution of consumer incomes and firm sizes as the key determinants of the shares of costs borne by each side. This result provides clear implications for industry dynamics and sheds light on the puzzle of asymmetric pricing.
    Keywords: Technology Adoption; Two-sided Market; Asymmetric Pricing
    JEL: L10 D40 O30
    Date: 2007–01
  9. By: Fridolfsson, Sven-Olof (Research Institute of Industrial Economics)
    Abstract: In a framework where mergers are mutually excluding, I show that firms pursue anti- rather than (alternative) pro-competitive mergers. Potential outsiders to anti-competitive mergers refrain from pursuing pro-competitive mergers if the positive externalities from anti-competitive mergers are strong enough. Potential outsiders to pro-competitive mergers pursue anti-competitive mergers if the negative externalities from the pro-competitive mergers are strong enough. Potential participants in anti-competitive mergers are cheap targets due to the risk of becoming outsiders to pro-competitive mergers. Firms may even pursue an unprofitable and anti-competitive merger, when alternative mergers are profitable and pro-competitive.
    Keywords: Anti- and Pro-Competitive Mergers; Consumers' Welfare; Coalition Formation; Endogenous Split of Surplus
    JEL: L12 L13 L41
    Date: 2007–02–05
  10. By: Elvio Accinelli (Departamento de Economía, Universidad Autónoma Metropolitana); Edgar Carrera (Dipartimento di Economia, Facoltà di Economia, Richard M. Goodwin, Università di Siena.)
    Abstract: In this work we obtain new conditions to uniqueness of Nash equilibrium in the Cournot oligopoly model. These conditions assure that the reaction functions are contractions and they are not reduced to the obtained ones by Rosen, inasmuch as they do not demand the strict concavity of the bene¯t functions
    Keywords: mejor respuesta, contraccion, equilibrio de Cournot, unicidad
    JEL: C72
    Date: 2006–11
  11. By: Choi, Jay-Pil; Fershtman, Chaim; Gandal, Neil
    Abstract: Software security is a major concern for vendors, consumers, and regulators since attackers that exploit vulnerabilities can cause substantial damages. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only the consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper develops a setting that examines the economic incentives facing software vendors and users when software is subject to vulnerabilities. We consider a firm that sells software which is subject to potential security breaches. The firm needs to set the price of the software and state whether it intends to disclose vulnerabilities and issue updates. Consumers differ in their value of the software and the potential damage that hackers may inflict and need to decide whether to purchase the software as well as whether to install updates. Prices, market shares, and profits depend on the disclosure policy of the firm. The paper analyzes the market outcome and derives the conditions under which a firm would disclose vulnerabilities. It then examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities. The paper discusses the incentives to invest in product security by investigating how a decline in the number of vulnerabilities and an increase in the probability that the firm will identify vulnerabilities ex-post (before hackers) affect disclosure policy, price and profits.
    Keywords: disclosure policy; Internet security; software vulnerabilities
    JEL: L10 L63
    Date: 2007–02
  12. By: Bulut, Harun; Moschini, GianCarlo
    Abstract: In patent race models, firms' noncooperatively chosen research projects typically display too much correlation. But when there are multiple intellectual property rights protection instruments, we find that the paths chosen in an R&D race can move towards the social optimum.
    Keywords: Intellectual property rights; Parallel R&D; Patent races
    Date: 2007–02–22
  13. By: Simona Fabrizi (Keele University, Centre for Economic Research and School of Economic and Management Studies); Steffen Lippert (Department of Commerce, Albany Campus, Massey University)
    Abstract: This paper analyzes how the determinants of two entrepreneurs’ choice whether to conduct product innovation R&D projects alone, or in a cross license agreement, or in a research joint venture depend on the intrinsic nature of the R&D projects. Results show that in fundamental research -- which is considered to be affected by moral hazard behavior of the researchers -- there is a systematic bias toward conducting R&D projects alone and against making use of synergies in an RJV. Furthermore, from a social standpoint, in non-fundamental research -- which is considered not to be affected by moral hazard behavior of the researchers -- too few RJVs and too few cross license agreements are chosen; whereas in fundamental research too few RJVs, and too many cross license agreements are chosen.
    Keywords: Monetary policy, zone of discretion, intermediate inflation target.
    JEL: D23 D82 L24 O31 O32
    Date: 2007–01
  14. By: Sean Lyons (Department of Economics, Trinity College)
    Abstract: Increasing numbers of countries require mobile telephone networks to offer mobile number portability (MNP). MNP allows customers who wish to switch mobile operator to keep their mobile numbers, avoiding the costs of switching to new numbers. Ex ante assessments suggest that MNP should reduce switching costs and strengthen competition. In this paper, we test MNP’s impact on market outcomes using international time-series cross-section data. We find that MNP significantly increases average mobile telephony retail prices and churn (a proxy for switching).
    JEL: L51 L96
    Date: 2006–05
  15. By: Alena Bi\v{c}áková
    Abstract: Default rates on instalment loans vary with type of the good purchased. Using an Italian dataset of instalment loans between 1995-1999, we first show that the variation persists even after controlling for contract and individual-specific characteristics, and for the potential selection bias due to credit rationing. We explore whether the residual variation in the default rates across the different types of goods is due to unobserved individual heterogeneity (selection effect) or due to the effect of the specific characteristics of the good (good effect). We claim that the two effects may be interpreted as adverse selection and moral hazard. We exploit the data on multiple contracts per individual to disentangle the two effects, and find that most of the variation is explained by the selection effect. Individuals who buy motorcycles on credit are more likely to default on any loan, while those buying kitchen appliances, furniture and computers are more likely to repay, compared to average. We conclude that there is asymmetric information in the consumer credit market, mostly in the form of adverse selection.
    Keywords: consumer credit, default, adverse selection, moral hazard
    JEL: D12 D14 D82
    Date: 2007

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