nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒08‒14
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Oligopoly with Hyperbolic Demand: A Differential Game Approach By L. Lambertini
  2. Price Discrimination and Audience Composition in Advertising-Based Broadcasting By Roberto Roson
  3. Two plus two equals six: an alternative explanation of why so many goods prices end in nine By Nigel W. Duck
  4. Delegation and Commitment in Durable Goods Monopolies By Tarek Coury; Vladimir P. Petkov
  5. Process and product innovation in a vertically differentiated industry By E. Bacchiega; L. Lambertini; A. Mantovani
  6. Allocating cost reducing investments over competing divisions By Antonio, TESORIERE
  7. Stock price manipulation: The role of intermediaries By Siddiqi, Hammad
  8. Disclosing Multiple Product Attributes By Monic Jiayin Sun;
  9. Dynamics of Consumer Demand for New Durable Goods By Gautam Gowrisankaran; Marc Rysman
  10. Antitrust Guidelines: A Simple Operational Method for Evaluating Horizontal Mergers By D. Dragone; L. Lambertini; A. Mantovani
  11. Testing for competition in the Spanish banking industry: The Panzar-Rosse approach revisited By Luis Gutiérrez de Rozas
  12. Innovation over the Industry Life Cycle By Mark Sanders; Jaap Bos; Claire Economidou
  13. A Markov Switching Model of the Merit Order to Compare British and German Price Formation By Georg Zachmann
  14. Competing for Ownership By Patrick Legros Author-X-Name-First: Patrick; Andrew F. Newman

  1. By: L. Lambertini
    Date: 2007–06
  2. By: Roberto Roson (Department of Economics, University Of Venice Cà Foscari)
    Abstract: Traditionally, media like TV and radio, but also the Internet, have been characterized by free access (by consumers having the necessary hardware), with services supported through advertising revenues. Profitability in these markets depends on the capability of attracting audience. Strategic choices, however, also depend on the relationship with the dual market for advertising services. In this paper, a model is introduced, which has two distinguishing features. First, the multidimensional nature of competition in media markets is acknowledged, through explicit modeling of vertical and horizontal differentiation. Second, the price of advertising depends on the expected audience composition, not simply on its magnitude. It also depends on the broadcasters' capability of effectively price-discriminate among advertising customers. It is found that market equilibria depend on a number of critical factors: the amount and type of price discrimination in advertising, the correlation between formats and audience composition, the relative profitability of the different market segments, and diseconomies of scale in program quality.
    Keywords: Advertising, Media Industries, Broadcasting, Price Discrimination, Television, Radio, Differentiation..
    JEL: L82 M37
    Date: 2007
  3. By: Nigel W. Duck
    Abstract: The prevalence of prices ending in 99 cents is explained as the result of rational consumers rounding prices up. Monopolists are shown to be harmed by this practice whereas consumers may gain. The model is compared with two other models: Basu's (1997) model and one which assumes consumers round prices down.
    Keywords: Consumer rationality, price perception, pricing
  4. By: Tarek Coury; Vladimir P. Petkov
    Abstract: This paper studies a simultaneous-move infinite-horizon delegation game in which the principal of a durable goods monopoly entrusts pricing decisions to a manager who enjoys consuming her monetary rewards but dislikes production effort. The delegation contract allows for continual interference with managerial incentives: in each period the principal rewards the manager according to her performance. We show that when the cost of delegation is low relative to profits, the principal can attain the precommitment price plan in a perfect rational expectations equilibrium. The paper analyzes the robustness of this result under alternative specifications of timing and objectives. We also provide a numerical characterization of the equilibrium strategies for the case of linear-quadratic payoffs.
    Keywords: Durable Goods Monopoly, Delegation, Perfect Rational Expectations Equilibrium
    JEL: L12 D42 C73
    Date: 2007
  5. By: E. Bacchiega; L. Lambertini; A. Mantovani
    Date: 2007–02
  6. By: Antonio, TESORIERE
    Abstract: This paper examines a three-stage model of divisionalization wher, first, two parents firms create independent unts, second, the parents firms allocate cost reducing levels over these units, and third, the resulting uits compete in a Cournot mrket given their current costs of production. The introduction of the cost reduction phase is shown to reduce the incentives toward divisionalization severely, relative to other existing models. Namely, the scope for divisionalization in equilibrium reduces as the marginal cost of the cost reducing investment decreases, and eventually vanishes. A second-best welfare analysis shows that, for any given market structure, the equilibrium investment decisions of the parent firms are socially optimal. In addition, the no divisionalization outcome is sustainable in equilibrium only if it is socially optimal.
    Keywords: Divisionalization; Horizontal Mergers; Research Joint Mergers
    JEL: L11 L13 L22
    Date: 2007–07–30
  7. By: Siddiqi, Hammad
    Abstract: We model stock price manipulation when the manipulator is in the role of an intermediary (broker). We find that in the absence of superior information, the broker can manipulate equilibrium outcomes without losing its credibility with respect to accurate forecasting. The result extends to the case when the broker prefers more investment to come into the market. However, when moderate competition among brokers is introduced then the investors get their favorite outcome. When competition exceeds a certain threshold, neither the brokers nor the investors get their respective favorite outcomes. In any case, if the broker bias for more investment dominates competition, the brokers get their favorite outcome at the expense of investors.
    Keywords: Stock Price Manipulation; Broker Manipulation; Broker Competition; Broker Bias; Emerging Markets
    JEL: G20 G10 C72 D82
    Date: 2007–07
  8. By: Monic Jiayin Sun (Department of Economics, Boston University);
    Abstract: A product often has many attributes. The seller of the product may choose whether to disclose these attributes to consumers before their purchase. How do multiple attributes of the product jointly determine the seller’s disclosure incentives? I analyze this question by modeling a monopolist whose product is characterized by a vertical quality and a horizontal attribute. The monopolist does not always choose disclosure. When the product’s vertical quality is common knowledge, a monopolist with a higher vertical quality is less likely to disclose the horizontal attribute. When both vertical quality and the horizontal attribute of the product are known only to the monopolist, he is more likely to choose disclosure when the vertical quality is higher. Nevertheless, the monopolist may choose nondisclosure even when his product has the highest possible vertical quality. The results shed light on mandatory disclosure policies and the design of quality surveys.
    Date: 2007–04
  9. By: Gautam Gowrisankaran (Washington University in St. Louis and NBER); Marc Rysman (Department of Economics, Boston University)
    Abstract: This paper specifies and estimates a dynamic model of consumer preferences for new durable goods with persistent heterogeneous consumer tastes, rational expectations about future products and repeat purchases over time. Most new consumer durable goods, particularly consumer electronics, are characterized by relatively high initial prices followed by rapid declines in prices and improvements in quality. The evolving nature of product attributes suggests the importance of modeling dynamics in estimating consumer preferences. We estimate the model on the digital camcorder industry using a panel data set on prices, sales and characteristics. We find that dynamics are a very important determinant of consumer preferences and that estimated coefficients are more plausible than with traditional static models. We use the estimates to investigate the value of new consumer goods and intertemporal elasticities of demand.
    Date: 2007–04
  10. By: D. Dragone; L. Lambertini; A. Mantovani
    Date: 2007–04
  11. By: Luis Gutiérrez de Rozas (Comisión Nacional de Energía (CNE))
    Abstract: The aim of this paper is to assess the level of competition prevailing in the Spanish banking system. The current analysis employs a widely used non-structural methodology put forward by Panzar and Rosse (1987) —the so-called H-statistic— and draws upon a comprehensive panel dataset of Spanish commercial and savings banks covering the period 1986-2005. Standard estimates characterize a hump-shaped profile for the H-statistic throughout the time span under consideration. Nevertheless, a weighted procedure is subsequently performed in order to control for firm size and the number of branches. The estimation outcome reveals a gradual rising path for the H-statistic, thus suggesting a more competitive environment among larger banks. In both settings, a noteworthy increase in the degree of competition is identified at the turn of the eighties, when several liberalization-oriented policy measures came into force. The aforementioned findings discredit the widespread hypothesis which states that concentration impairs competition.
    Keywords: banking, competition, Panzar-Rosse, market structure
    JEL: G21 L13 L10
    Date: 2007–08
  12. By: Mark Sanders; Jaap Bos; Claire Economidou
    Abstract: In this paper, we present a model of the industry life cycle that drives and is driven by R&D. In the model, firms have the option to improve the quality of their output or to invest R&D resources in efficiency gains. Faced with this tradeoff, less mature industries, in which young firms dominate, opt for quality improvements instead of efficiency improvements, whereas more mature industries will do both. This switch is endogenous and depends on the level of quality achieved. We explore these two hypotheses empirically using a panel of manufacturing industries across six European countries over the period 1980-1997. Our empirical results provide support for the model's predictions.
    Keywords: Growth, Life Cycle, Innovation, Stochastic Frontier Analysis, Manufacturing Industries
    JEL: C23 L23 L60 O32 O47
    Date: 2007–06
  13. By: Georg Zachmann
    Abstract: The objective of this paper is to develop a model to determine the price formation of wholesale electricity markets. For that purpose, we model wholesale electricity prices depending on the prices of fuels (coal and natural gas) and of CO2 emission allowances using a Markov Switching Regression. We apply the model to wholesale electricity prices in the UK and in Germany. While British electricity prices are quite well explained by short-run cost factors, we find a decoupling between electricity prices and fuel costs in Germany. This may be evidence that the German electricity generation sector does not work competitively.
    Keywords: Electricity prices, Markov Switching Models
    JEL: L94 C22 D43
    Date: 2007
  14. By: Patrick Legros Author-X-Name-First: Patrick (ECARES, Université Libre de Bruxelles; and CEPR); Andrew F. Newman (Boston University)
    Abstract: We develop a tractable model of the allocation of control in firms in competitive markets, which permits us to study how changes in the scarcity of assets, skills or liquidity in the market translate into control inside the organization. Firms will be more integrated when the terms of trade are more favorable to the short side of the market, when liquidity is unequally distributed among existing firms and following a uniform increase in productivity. The model identifies a price-like mechanism whereby local liquidity or productivity shocks propagate and lead to widespread organizational restructuring.
    Date: 2007–01

This nep-mic issue is ©2007 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.