nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒04‒09
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Oligopoly Model of a Debit Card Network By Manchev, Peter
  2. Two Tales on Resale By Felix Höffler; Klaus M. Schmidt
  3. Price Competition and Product Differentiation when Goods have Network Effects By Klaus Conrad
  4. The Effects of the Asymmetry of Information Intrafirms on Oligopolistic Market Outcomes By Testuya Shinkai; Makoto Okamura
  5. Price Competition and Product an environmental friendly substitute is available. By Klaus Conrad
  6. Capacity Expansion in Markets with Intertemporal Consumption Externalities By Hiroshi Kitamura
  7. Entry and Market Selection of Firms: A Laboratory Study By Jordi Brandts; Ayça Ebru Giritligil
  8. Access Pricing and Entry in the Postal Sector By Francis Bloch; Axel Gautier
  9. Pricing behaviour under competition in the UK electricity supply industry By Giulietti, Monica; Otero, Jesus; Waterson, Michael
  10. R&D Competition with Radical and Incremental Innovation. By Maria Rosa Battaggion; Daniela Grieco
  11. Rationing-Based Price Discrimination By Ruhai Wu; Xianjun Geng; Andrew B. Whinston
  12. A Simple Business-Cycle Model with Schumpeterian Features By Luis F. Costa; Huw D. Dixon
  13. Generic entry into a regulated pharmaceutical market By Iván Moreno Torres; Jaume Puig; Joan-Ramon Borrell-Arqué
  14. The Pricing of Academic Journals: A Two-Sided Market Perspective By Doh-Shin Jeon; Jean-Charles Rochet

  1. By: Manchev, Peter
    Abstract: The paper builds an oligopoly model of a debit card network. It examines the competition between debit card issuers. We show that there is an optimal pricing for the debit card network, which maximizes all issuer's revenues. The paper also shows that establishing a link between debit card networks averages the costs provided that there is no growth in the customer's usage of the networks, resulting from the link.
    Keywords: debit card; payment networks; switch fees; access pricing
    JEL: G21 L13
    Date: 2006–07–28
  2. By: Felix Höffler (Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany.; Klaus M. Schmidt (Department of Economics, University of Munich, Ludwigstrasse 28, 80539 Muenchen, Germany.
    Abstract: In some markets vertically integrated firms sell directly to final customers hut also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard "retail minus X regulation" may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.
    Keywords: Resale regulation, wholesale, spatial product differentiation, non-spatial product differentiation, vertical restraints
    JEL: D43 L11 L42 L51
    Date: 2007–03
  3. By: Klaus Conrad (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be one with either the firm offering the conventional engine as the only producer, or one with the firm offering the new technology as the only producer, or one where both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important.
    JEL: L11 Q38 H23 L62
  4. By: Testuya Shinkai (Kwansei Gakuin University); Makoto Okamura (Hiroshima University)
    Abstract: We consider an oligopoly with a principal-agent relationship, in which a firm's marginal cost is decreasing in a manager's managerial effort and is subject to an additive uncertainty. Two types of firms operate: one displays symmetric information between the owner and the manager, another presents asymmetric information. We show that if the marginal cost's derivative of the manager is sufficiently small, then the expected effort level in an asymmetric information firm exceeds that in a symmetric one. We also show that the expected total output and consumer surplus may reduce at equilibrium, as the number of symmetric information firms increases.
    Keywords: asymmetric information, incentive scheme, competition effort, oligopoly
    JEL: D82 L13
    Date: 2006–04
  5. By: Klaus Conrad (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: When deciding to buy differentiated products, a compromise is sometimes made between preferred characteristics of the good and its environmental properties. In this paper we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spacial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game where at the first stage each firm chooses the characteristic of its product. At the second stage each firm chooses its price. The unique equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way we determined the choice of environmental characteristics by a welfare maximizing authority. The result of this analysis is that characteristics differ under private decision making and social one. It can be shown, however, that it is possible to choose environmental policy instruments in order to stimulate private firms to produce the social optimal qualities.
    JEL: L11 Q38 H23
  6. By: Hiroshi Kitamura (Graduate School of Economics, Osaka University)
    Abstract: This paper analyzes market capacity expansion in the presence of intertemporal consumption externalities such as consumer learning, networks, or bandwagon effects. The externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S-shaped time patterns of market capacity expansion that is slow from the social viewpoint. On the other hand, using an introductory price, a monopolist plans an initially larger, but eventually smaller, amount of market cultivation than a competitive market capacity expansion.
    Keywords: Intertemporal consumption externalities; S-shaped diffusion; Market structure; Introductory price.
    JEL: D11 L11 L14
    Date: 2007–04
  7. By: Jordi Brandts; Ayça Ebru Giritligil
    Abstract: We study competition in experimental markets in which two incumbents face entry by three other firms. Our treatments vary with respect to three factors: sequential vs. block or simultaneous entry, the cost functions of entrants and the amount of time during which incumbents are protected from entry. Before entry incumbents are able to collude in all cases. When all firms' costs are the same entry always leads consumer surplus and profits to their equilibrium levels. When entrants are more efficient than incumbents, entry leads consumer surplus to equilibrium. However, total profits remain below equilibrium, due to the fact that the inefficient incumbents produce too much and efficient entrants produce too little. Market behavior is satisfactory from the consumers' standpoint, but does not yield adequate signals to other potential entrants. These results are not affected by whether entry is simultaneous or sequential. The length of the incumbency phase does have some subtle effects.
    Keywords: Market selection, Imperfect competititon, Entry, Experiments
    JEL: C72 D43 D83 L13
    Date: 2006–09–01
  8. By: Francis Bloch; Axel Gautier
    Abstract: Postal markets have been open to competition for a long time. But, with a few exceptions, the competitors of the incumbent postal operator are active on the upstream segments of the market -preparation, collection, outward sorting and transport of mail products. With the further steps planned in the liberalization process, there are new opportunities to extend competition to the downstream segments of the market -the delivery of mails. In the future, two business models will be possible for the new postal operators: (1) access: where the firm performs the upstream operations and uses the incumbent’s delivery network and (2) bypass where the competing firm controls the entire supply chain and delivers mails with its own delivery network. These two options have different impacts on welfare and the profit of the incumbent operator. The choice between access and bypass depends on the entrant's delivery cost relative to the cost of buying access to the incumbent operator (the access price). In this paper, we derive optimal -welfare maximizing- stamp and access prices for the incumbent operator when these prices have an impact on the delivery method chosen by the entrant. We show how prices should be re-balanced when the entry method is considered as endogenous i.e. affected by the incumbent's prices.
    Date: 2006
  9. By: Giulietti, Monica (Aston Business School); Otero, Jesus (Universidad del Rosario, Colombia); Waterson, Michael (University of Warwick)
    Abstract: This paper investigates the evolution of electricity prices for domestic customers in the UK following the introduction of competition. The empirical analysis is based on a panel data set containing detailed information about electricity supply prices over the period 1999 to 2006. The analysis aims to test theoretical hypotheses about the nature of consumers’ switching and search costs. The econometric analysis of persistence and price dispersion provides only limited support for the view that the market is becoming more competitive and also indicates that there remain significant potential benefits to consumers from searching alternative suppliers.
    Keywords: electricity supply ; price competition ; convergence ; dynamic panels ; crosssectional dependency
    JEL: L43 L13 L94 C22 C23
    Date: 2007
  10. By: Maria Rosa Battaggion (Department of Economics, University of Bergamo); Daniela Grieco (Bocconi University)
    Abstract: Recent empirical evidence about innovation shows that established firms rarely invest in radical innovation but incrementally improve the existing technology. Revolutionary breakthroughs are more likely to be introduced by new entrants. These stylized facts motivate a renewed attention of the debate on incentives to innovate. In this stream of the literature our paper emphasizes the importance of distinguishing between degrees of innovativeness when comparing an incumbent’s and an entrant’s incentives to invest in innovation. The model presented captures the peculiarity of a radical innovation with respect of an incremental one along three dimension: risk, impact on the existing market and capability of opening up a new market. The results reflect the empirical evidence and emphasize the role of substitutability between markets in determining the strength of this effect.
    Date: 2007–01
  11. By: Ruhai Wu (Department of Economics, College of Business, Florida Atlantic University); Xianjun Geng (Department of Information Systems and Operations Management, University of Washington Business School); Andrew B. Whinston (Department of Information, Risk, and Operations Management, McCombs School of Business, University of Texas, Austin)
    Abstract: This paper provides a theory of rationing where rationing functions as an effective mechanism for second degree price discrimination by a monopoly seller. When a seller charges multiple prices on homogenous products to all consumers, supply at the lowest price is limited and rationed among consumers. The supply shortage differentiates products sold at the lowest price and those sold at a higher price. When high-valuation consumers identify themselves at the higher price, the seller may extract more consumer surplus and increase his profit. In the paper, we address two common rationing-based price discrimination strategies, multiple-price menu and premium advance selling.. We also show that rationing-based price discrimination can be combined with other classical price discrimination strategies to further increase the seller’s profit.
    Keywords: rationing, price discrimination
    JEL: D42 L12
    Date: 2006–12
  12. By: Luis F. Costa (ISEG/Technical University of Lisbon and UECE); Huw D. Dixon (University of York)
    Abstract: We develop a dynamic general equilibrium model of imperfect competition where a sunk cost of creating a new product regulates the type of entry that dominates in the economy: new products or more competition in existing industries. Considering the process of product innovation is irreversible, introduces hysteresis in the business cycle. Expansionary shocks may lead the economy to a new ‘prosperity plateau,’ but contractionary shocks only affect the market power of mature industries
    Keywords: Entry, Hysteresis, Mark-up
    JEL: E62 L13 L16
    Date: 2007–02–02
  13. By: Iván Moreno Torres; Jaume Puig; Joan-Ramon Borrell-Arqué
    Abstract: The aim of this paper is to analyse empirically entry decisions by generic firms into markets with tough regulation. Generic drugs might be a key driver of competition and cost containment in pharmaceutical markets. The dynamics of reforms of patents and pricing across drug markets in Spain are useful to identify the impact of regulations on generic entry. Estimates from a count data model using a panel of 86 active ingredients during the 1999–2005 period show that the drivers of generic entry in markets with price regulations are similar to less regulated markets: generic firms entries are positively affected by the market size and time trend, and negatively affected by the number of incumbent laboratories and the number of substitutes active ingredients. We also find that contrary to what policy makers expected, the system of reference pricing restrains considerably the generic entry. Short run brand name drug price reductions are obtained by governments at the cost of long run benefits from fostering generic entry and post-patent competition into the markets.
    Keywords: Entry; Generic Drugs; Pharmaceutical industry; Reference pricing
    JEL: I11 L11 L65
    Date: 2007–02
  14. By: Doh-Shin Jeon; Jean-Charles Rochet
    Abstract: More and more academic journals adopt an open-access policy, by which articles are accessible free of charge, while publication costs are recovered through author fees. We study the efficient pricing of an academic journal from a two-sided market perspective and the consequences of the open access policy on the journal’s quality standard. When the journal’s objective is to maximize social welfare, open access is optimal if and only if the positive externalities generated by its diffusion exceed the marginal cost of distribution. This condition is satisfied in particular for an electronic journal for which the marginal cost of distribution is zero. However, we show that if the journal is run by a not-for-profit association that has a different objective (such as maximizing the utility of its readers or the impact of the journal), the move from the traditional reader-pays model to the open-access model may result in a decrease in quality standard below the socially efficient level. In some cases, it may even lead to a reduction in readership size.
    Keywords: Academic Journals, Open-Access, Reader-Pays, Two-Sided Market, Endogenous Quality
    JEL: D42 L44 L82
    Date: 2007–03

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