nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒07‒07
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Collusion and research joint ventures By Kaz Miyagiwa
  2. Introducing Competition and Deregulating the British Domestic Energy Markets: a Legal and Economic Discussion By Michael Harker; Catherine Waddams Price
  3. Congestion management under uncertainty in a two-airport system By Achim I. Czerny
  4. Relative Performance Evaluation, Risk Aversion and Entry. By Jean-Daniel Guigou; Bruno Lovat; Gwenaël Piase
  5. Holdup and repeated interaction: the case of complementary monopoly By Kaz Miyagiwa
  6. A Test of Perpetual R and D Races By Yves Breitmoser; Jonathan H. W. Tan; Daniel John Zizzo
  7. Surcharging as a Facilitating Practice By Luke Garrod
  8. Collusion via Resale By Garratt, Rod; Troger, Thomas; Zheng, Charles Zhoucheng
  9. Regular Adjustment. Theory and Evidence By Jerzy Konieczny; Fabio Rumler
  10. Competitive Market Mechanisms as Social Choice Procedures By Hammond, Peter J.
  11. Do subsidies have positive impacts upon R&D and innovation activities at the firm level? By Tommy Clausen
  12. Welfare implications of Calvo vs. Rotemberg pricing assumptions By Giovanni Lombardo; David Vestin
  13. How and when do markets tip? Lessons from the Battle of the Bund By Estelle Cantillon; Pai-Ling Yin
  14. Marshall's Theory of Value and the Strong Law of Demand By Donald J. Brown; Caterina Calsamiglia

  1. By: Kaz Miyagiwa
    Abstract: We examine whether cooperation in R&D leads to product market collusion. Suppose firms compete in a stochastic R&D race while maintaining the collusive equilibrium in a repeated-game framework. Innovation creates a cost asymmetry and destabilizes the collusive equilibrium. Firms forming an R&D joint venture can maintain cost symmetries through technology sharing agreement, thereby stabilizing collusion. The stability of post-discovery collusion makes collusion stable in pre-discovery periods. However, formation of R&D cooperatives may increase social welfare because firms share an efficient technology. Interestingly, a welfare improvement is less likely if innovation leads to a large cost reduction.
    Date: 2007–03
  2. By: Michael Harker (Centre for Competition Policy, University of East Anglia); Catherine Waddams Price (Centre for Competition Policy, University of East Anglia)
    Abstract: In this article we chart the development of competition and deregulation of the British retail energy markets, explaining the evolution of competitive constraints when consumers are introduced to supplier choice for the first time. In the context of rising real energy prices for consumers, and continued market power on the part of the incumbents, we address the question of whether the control of pricing practices through the ex post provisions of the general competition law is sufficient to protect consumers. We also explore the issue of whether reliance solely on these provisions is desirable given the uncertainty which surrounds the application of the Chapter II prohibition (governing abuse of dominance), specifically in respect of price discrimination in final markets. We conclude that the outcome of the liberalisation experiment in terms of delivering benefits for consumers is unclear.
    Keywords: Energy markets, deregulation, monopoly, competition, dominance, market power, consumer switching, switching behaviour, price rebalancing, ex post and ex ante regulation
    JEL: K21 K23 I38 L12 L41 L51 L94 L95
    Date: 2006–11
  3. By: Achim I. Czerny (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: Congestion pricing and slot constraints can be used to manage airport congestion. We analyze the effect of uncertainty and complementary airport demand on the choice of regulation instruments. Analysis is based on a model including a single airport and uncertain passenger benefits that is gradually extended such that it includes a two-airport system and uncertain congestion costs. We demonstrate that uncertainty favors the use of congestion pricing while demand complementarity can favor the use of slot constraints. However, congestion pricing is always the right choice from a welfare perspective. We show that unregulated monopolistic airports also choose prices as instruments, but, that monopoly charges are too high.
    Keywords: Airports, slots, uncertainty, demand complementarity, stochastic correlation
    JEL: D42 L93
    Date: 2007
  4. By: Jean-Daniel Guigou; Bruno Lovat; Gwenaël Piase
    Abstract: We study the relations between compensation schemes and risk aversion of managers in a strategic framework. We first show that the use of relative performance evaluation (RPE) in compensation contracts reduces the equilibrium profits of Cournot firms if managers are not too risk averse. Second, we introduce entry issues in our model. We then show that forbidding RPE can favour competition.
    Keywords: Executive Compensation, Relative Performance Evaluation, Moral Hazard, Market Structure.
    JEL: D43 D82 D86
    Date: 2007
  5. By: Kaz Miyagiwa
    Abstract: Suppose consumers buy complementary goods sequentially from several monopolists. If prices cannot be contracted on, there may be no sale in a one-shot game due to the holdup problem. Dynamic interaction of agents attenuates the problem. In equilibrium, the first and the last monopolist capture the entire monopoly profit while the other monopolists break even. Vertical integrations that exclude the last monopolist neither lower the price nor increase social welfare. On the other hand, partial integrations that include the last monopoly can reduce the combined profit and hence may never occur despite the welfare-improving potential.
    Date: 2007–02
  6. By: Yves Breitmoser (Institute of Microeconomics, European University Viadrina); Jonathan H. W. Tan (Institute of Microeconomics, European University Viadrina); Daniel John Zizzo (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper presents an experimental study of dynamic indefinite horizon R and D races with uncertainty and multiple prizes. The theoretical predictions are highly sensitive: small parameter changes determine whether technological competition is sustained over time of converges into a market structure with an entrenched leadership and lower aggregate R and D research. The subjects' strategies are far less sensitive. In three out of four treatments (with the exception being a control treatment), the R and D races tend to converge to entrenched leadership. Investment is highest when rivals are close, and there is evidence of average over-investment.
    Keywords: R&D race, innovation, dynamics, experiment
    JEL: C72 C91 O31
    Date: 2006–07
  7. By: Luke Garrod (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper shows how separately itemised surcharges potentially facilitate collussion during a temporary cost shock if firms commit to their duration. A duopoly model with price-matching punishments shows that if firms set higher prices they only receive punishment during the shock because they expect prices to fall in the future regardless of a deviation. When it is likely that costs will fall in the future, the price-matching punishment is too small to increase prices, so firms maintain rigid prices. When it is unlikely that costs will fall the punishment is harsh enough to sustain marginally higher supracompetitive prices. However, if firms commit to surcharges for the shock's duration they are able to set even higher prices, because surcharges effectively commit firms to a price decrease and so threaten a harsher punishment after the cost shock has ended.
    Keywords: Surcharge, facilitating practice, collusion
    JEL: L31 L41
    Date: 2006–10
  8. By: Garratt, Rod; Troger, Thomas; Zheng, Charles Zhoucheng
    Abstract: The English auction is susceptible to tacit collusion when post-auction inter-bidder resale is allowed. We show this by constructing a continuum of equilibria where, with positive probability, one bidder wins the auction without any competition and divides the spoils by optimally reselling the good to the other bidders. Such equilibria support a collusive bidding pattern without requiring the colluders to make any commitment on bidding behavior or post-bidding spoil-division. The equilibria are valid for any number of asymmetric or symmetric bidders, arbitrary reserve prices, and various resale market rules. In symmetric environments, these equilibria interim Pareto dominate (among bidders) the standard value-bidding equilibrium.
    Keywords: auction, resale, collusion, English auction
    JEL: D4
    Date: 2007–06–30
  9. By: Jerzy Konieczny; Fabio Rumler
    Abstract: We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks) or on a stateregular basis (e.g. set prices ending in a 9), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. We provide sufficient conditions under which, when policymakers differ with respect to the shape of the benefit function (as in Konieczny and Skrzypacz, 2006), the frequency of adjustments across markets is negatively correlated with the incidence of regular adjustments. On the other hand, if policymakers differences are due to the level of adjustment costs (as in Dotsey, King and Wolman, 1999), then the correlation is positive. To test the model we apply it to optimal pricing policies. We use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. We find that the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment.
    Keywords: Optimal pricing, attractive prices, menu costs
    JEL: E31 L11 E52 D01
    Date: 2007–06
  10. By: Hammond, Peter J. (Department of Economics, University of Warwick)
    Abstract: A competitive market mechanism is a prominent example of a non-binary social choice rule, typically defined for a special class of economic environments in which each social state is an economic allocation of private goods, and individuals' preferences concern only their own personal consumption. This chapter begins by discussing which Pareto efficient allocations can be characterized as competitive equilibria with lump-sum transfers. It also discusses existence and characterization of such equilibria without lump-sum transfers. The second half of the chapter focuses on continuum economies, for which such characterization results are much more natural given that agents have negligible influence over equilibrium prices.
    Date: 2007
  11. By: Tommy Clausen (Centre for Technology, Innovation and Culture, University of Oslo)
    Abstract: The main aim in this paper is to analyze whether “research” and “development” subsidies influence private R&D activity. The results show that “research” subsidies stimulate private R&D activity while “development” subsidies substitute private R&D activity.
    Date: 2007–07
  12. By: Giovanni Lombardo (Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); David Vestin (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
    Abstract: This paper compares the welfare implications of two widely used pricing assumptions in the New-Keynesian literature: Calvo-pricing vs. Rotemberg- pricing. We show that despite the strong similarities between the two assumptions to a first order of approximation, in general they might entail different welfare costs at higher order of approximation. In the special case of non-distorted steady state, the two pricing assumptions imply identical welfare losses to a second order of approximation. JEL Classification: E3, E5.
    Keywords: Calvo price adjustment; Rotemberg price adjustment; welfare; inflation; second-order approximation.
    Date: 2007–06
  13. By: Estelle Cantillon (FNRS, ECARES and CEPR, Université Libre de Bruxelles, CP 114, 50, Avenue F.D. Roosevelt, 1050 Brussels, Belgium.); Pai-Ling Yin (Harvard Business School, Soldiers Field Boston, Massachusetts 02163, USA.)
    Abstract: In a famous episode of financial history which lasted over eight years, the market for the future on the Bund moved entirely from LIFFE, a London-based derivatives exchange, to DTB, a Frankfurt-based exchange. This paper studies the determinants of the observed dynamics, using a novel panel dataset that contains individual trading firms'membership status at each exchange together with other firms characteristics, and pricing, marketing and product portfolio strategies by each exchange. Our data allows us to distinguish between different explanations for the observed phenomenon. Our results indicate that the main driver was a "market coverage" effect: thanks to the combination its electronic market structure and EU-wide access deregulation, DTB increased the relevant size of the market for exchange members and disproportionately attracted those firms who originally did not exist or used to submit their orders through a broker. Differential liquidity and product portfolio strategies by the exchanges played a secondary role. JEL Classification: G21, G28, L13, L43.
    Keywords: Exchange competition, tipping, electronic trading, open outcry, network effect, Bund, adoption cost.
    Date: 2007–06
  14. By: Donald J. Brown (Department of Economics, Yale University); Caterina Calsamiglia (Universitat Autonoma de Barcelona)
    Abstract: We show that all the fundamental properties of competitive equilibrium in Marshall's theory of value, as presented in Note XXI of the mathematical appendix to his Principles of Economics (1890), derive from the Strong Law of Demand. This is, existence, uniqueness, optimality, global stability of equilibrium prices with respect to tantonnement price adjustment and refutability follow from the cyclical monotonicity of the market demand function in the Marshallian general equilibrium model.
    Keywords: Partial equilibrium analysis, Short run equilibrium, Strong law of demand, Cyclical monotonicity, Legendre-Frenchel duality
    JEL: B13 C62 D11 D51
    Date: 2007–07

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