nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒09‒16
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Inattentive Consumers and Product Quality By Armstrong, Mark; Chen, Yongmin
  2. Pricing without Priors By Dirk Bergemann; Karl H. Schlag
  3. Robust Monopoly Pricing By Dirk Bergemann; Karl Schlag
  4. When do R&D subsidies boost innovation? Revisiting the inverted U-shape By Kilponen , Juha; Santavirta, Torsten
  5. The Compromise Game: Two-Sided Adverse Selection in the Laboratory By Juan D Carrillo; Thomas R Palfrey
  6. Cournot Versus Supply Functions: What does the Data Tell us? By Willems, B.R.R.; Rumiantseva, I.; Weigt, H.
  7. Patents and Antitrust: Application to Adjacent Markets By Nicholas Economides; William N. Hebert;
  8. Optimal Group Incentives with Social Preferences and Self-Selection By Sabrina Teyssier
  9. Market Imperfections and Wage Inequality By Sandén, Klas
  10. Structural Remedies in Merger Regulation in a Cournot Framework By Andrei Medvedev
  11. Bargaining, fairness, and price rigidity in a DSGE environment By David M. Arseneau; Sanjay K. Chugh
  12. The effects of competition on price dispersion in the airline industry: a panel analysis By Kris Gerardi; Adam Hale Shapiro
  13. Market-Share Contracts with Asymmetric Information By Adrian Majumdar; Greg Shaffer
  14. Convexity on Nash Equilibria without Linear Structure By Francesco Ciardiello

  1. By: Armstrong, Mark; Chen, Yongmin
    Abstract: This paper studies a model in which some consumers shop on the basis of price alone, without attention to potential differences in product quality. A firm may offer a low-quality product to exploit these inattentive consumers. In the unique symmetric equilibrium of the model, firms choose prices with mixed strategies, similarly to Varian (1980) in which some consumers purchase from a random seller without attention to market prices. In our model, though, firms also choose quality stochastically, and there is both price and quality dispersion. Two stylized policy interventions are considered: competition policy, which acts to increase the number of sellers, and market transparency reforms which act to increase the fraction of attentive consumers. With fewer inattentive consumers, firms are less likely to "cheat" (i.e., cut quality) which therefore improves welfare, but profit and consumer surplus can either increase or decrease. When there is a large number of sellers, approximately half the sellers cheat (regardless of the fraction of inattentive consumers), and introducing more sellers boosts consumers surplus and reduces profit, while the impact on welfare is ambiguous.
    Keywords: Oligopoly; Complex Products; Market transparency; Competition Policy
    JEL: L15 D18 L13
    Date: 2007–09
  2. By: Dirk Bergemann (Cowles Foundation, Yale University); Karl H. Schlag (Universitat Pompeu Fabra)
    Abstract: We consider the problem of pricing a single object when the seller has only minimal information about the true valuation of the buyer. Specifically, the seller only knows the support of the possible valuations and has no further distributional information. The seller is solving this choice problem under uncertainty by minimizing her regret. The pricing policy hedges against uncertainty by randomizing over a range of prices. The support of the pricing policy is bounded away from zero. Buyers with low valuations cannot generate substantial regret and are priced out of the market. We generalize the pricing policy without priors to encompass many buyers and many qualities.
    Keywords: Monopoly, Optimal pricing, Regret, Multiple priors, Distribution free
    JEL: C79 D82
    Date: 2007–09
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Karl Schlag
    Abstract: We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version of the problem the seller only knows that demand will be in a neighborhood of a given model distribution. We characterize the optimal pricing policy under two distinct, but related, decision criteria with multiple priors: (i) maximin expected utility and (ii) minimax expected regret. While the classic monopoly policy and the maximin criterion yield a single deterministic price, minimax regret always prescribes a random pricing policy, or equivalently, a multi-item menu policy. The resulting optimal pricing policy under either criterion is robust to the model uncertainty. Finally we derive distinct implications of how a monopolist responds to an increase in ambiguity under each criterion.
    Keywords: Monopoly, Optimal pricing, Robustness, Multiple priors, Regret
    JEL: C79 D82
    Date: 2005–07
  4. By: Kilponen , Juha (Bank of Finland Research); Santavirta, Torsten (Helsinki School of Economics)
    Abstract: We show theoretically that a proportional R&D subsidy accelerates innovation activity at all degrees of competition in the modern Schumpeterian growth model, but less so at high degrees of competition. We then use company-level data on patenting activity, product market competition and R&D subsidies of Finnish firms during 1990–2001 to test the theoretical prediction. The empirical findings can be summarized as follows. Firstly, we find relatively strong evidence in favour of the inverted U-shape between competition and innovation. Secondly, we find some evidence that a direct R&D subsidy increases innovative activity at all but very high degrees of competition. This can be interpreted so mean that the R&D subsidy reinforces the Schumpeterian effect due to the negative cross-effect of R&D subsidy and competition. This is evident from the finding that an increase in the R&D subsidy steepens the inverted U relationship when competition is fierce.
    Keywords: competition; innovation; R&D subsidies; patents
    JEL: D40 H25 L10 O31
    Date: 2007–09–12
  5. By: Juan D Carrillo; Thomas R Palfrey
    Date: 2007–09–03
  6. By: Willems, B.R.R.; Rumiantseva, I.; Weigt, H. (Tilburg University, Center for Economic Research)
    Abstract: The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.
    Keywords: supply function equilibrium;Cournot competition;electricity markets
    JEL: L94 L13 C72 D43
    Date: 2007
  7. By: Nicholas Economides (Stern School of Business, New York University); William N. Hebert (Calvo & Clark LLP);
    Abstract: We examine the intersection of patents and antitrust where a patent holder uses the monopoly power it possesses in the market for a patented product to exclude competitors in an adjacent market and attempt to monopolize or monopolize the adjacent market. The present scheme for awarding patents cannot judge when the issuance of a patent will lead to the appropriate balance between innovation and efficiency. Where a patent holder’s invention uses an interface with adjacent products, the patent holder may be tempted to extend its patent monopoly into adjacent markets that depend upon the interface with the patented invention. Economic theory suggests that it is inappropriate to immunize a patent holder from antitrust liability when it attempts to extend its patent monopoly into adjacent markets, because it could decrease consumer surplus. Courts have expressed their reluctance to scrutinize a patent holder’s innovations and design changes, because of the potential benefits of the innovations and their reluctance to second-guess the marketplace. However, applying traditional antitrust principles, courts have found that monopolists could be liable for unlawfully extending their monopoly positions into adjacent markets in the areas of computer peripherals and software applications; aftermarkets for replacement parts, service and maintenance of durable goods; design changes to medical devices; and changes in drug formulas. While the patent laws provide a spur to innovation by granting limited monopoly rights, the antitrust laws curb the excessive reach of these monopoly rights by acting as a check on excessive expansion of the scope of the patent grant.
    Keywords: patents, antitrust, adjacent markets, complementarity, innovation, efficiency, aftermarkets
    JEL: K21 Q31 Q34 L42 L40 L12
    Date: 2007–08
  8. By: Sabrina Teyssier (GATE CNRS)
    Abstract: In this paper, we analyze group incentives when a proportion of agents feel in- equity aversion as defined by Fehr and Schmidt (1999). We define a separating equilibrium that explains the co-existence of multiple payment schemes in firms. We show that a tournament provides strong incentives to agents who only care about their own payo¤ but that it is not efficient when agents are inequity averse. In fact, inequity averse agents are attracted by a revenue-sharing scheme in which the joint production is equally distributed, under the constraint that selfish agents have no incentive to join the revenue sharing organization. If the market is perfectly flexi- ble, this separating equilibrium induces a high effort level for both types of agents. Pareto gains are achieved by offering organizational choice to agents and the optimal contract is thus to propose both payment schemes to agents and to allow them to self-select into the different payment schemes.
    Keywords: Incentives, performance pay, revenue sharing, self-selection, social preferences, tournament
    JEL: D63 D82 J31 J33 M52
    Date: 2007–04
  9. By: Sandén, Klas (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper investigates the relationship between various market imperfections and the skill premium. The model in this paper assumes perfectly competitive labor markets but distorted product and financial markets. The model predicts that the skill premium is positively correlated with market power, modeled using preference for variety, and shorter product cycles. The effect from financial market distortions or taxes on financial income is ambiguous. Positive external effects among firms developing new goods decrease the skill premium. <p>
    Keywords: Wage Inequality; Monopolistic Competition; Innovation
    JEL: D33 D43 D50 D91 D92 J31 L13 O31
    Date: 2007–09–10
  10. By: Andrei Medvedev (Centre for Competition Policy, University of East Anglia)
    Abstract: To prevent possible abuse of market power, an antitrust agency can force merging firms to divest some of their assets. The divested assets can be sold via auction either to existing competitors or to a new entrant. Divestiture of assets extends the range of parameters when a merger satisfies a consumer surplus standard and should be approved. If the agency takes a more active stance toward the selection of a purchaser of the assets (e.g. to exclude an incumbent from the auction), then it could lead to a favourable outcome for consumers and merging firms.
    Keywords: Merger regulation, structural remedies, divestiture
    JEL: D43 K21 L51
    Date: 2007–08
  11. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: A growing body of evidence suggests that an important reason why firms do not change prices nearly as much as standard theory predicts is out of concern for disrupting ongoing customer relationships because price changes may be viewed as "unfair". Existing models that try to capture this concern regarding price-setting are all based on goods markets that are fundamentally Walrasian. In Walrasian goods markets, transactions are spot, making the idea of ongoing customer relationships somewhat difficult to understand. We develop a simple dynamic general equilibrium model of a search-based goods market to make precise the notion of a customer as a repeat buyer at a particular location. In this environment, the transactions price plays a distributive role as well as an allocative role. We exploit this distributive role of prices to explore how concerns for fairness influence price dynamics. Using pricing schemes with bargaining-theoretic foundations, we show that the particular way in which a "fair" outcome is determined matters for price dynamics. The most stark result we find is that complete price stability can arise endogenously. There are issues about which models based on standard Walrasian goods markets are silent.
    Date: 2007
  12. By: Kris Gerardi; Adam Hale Shapiro
    Abstract: This paper analyzes the effects of market structure on price dispersion in the airline industry, using panel data from 1993 through 2006. The results found in this paper contrast with those of Borenstein and Rose (1994), who found that price dispersion increases with competition. We find that competition has a negative effect on price dispersion, in line with the textbook treatment of price discrimination. Specifically, the effects of competition on price dispersion are most significant on routes that we identify as having consumers characterized by relatively heterogeneous elasticities of demand. On routes with a more homogenous customer base, the effects of competition on price discrimination are largely insignificant. We conclude from these results that competition acts to erode the ability of a carrier to price discriminate, resulting in reduced overall price dispersion.
    Date: 2007
  13. By: Adrian Majumdar (Centre for Competition Policy, University of East Anglia); Greg Shaffer (Simon School of Business, University of Rochester)
    Abstract: In this paper, a dominant supplier and competitive fringe supply goods to a common buyer who has private information about the state of demand. We give conditions under which market-share contracts are profitable, and we show that, in some cases, the full-information outcome can be obtained (unlike in standard screening models, where the agents earns an information rent in the high state and demand is distorted in the low state). Our results also inform the antitrust debate on bundling, fidelity rebates and all-units discounts. We provide a new motive for a dominant firm to bundle its own product with a competitively supplied product (with ambiguous consequences for welfare), and we show that the market-share contracts, which are a subset of fidelity rebates, are more profitable than all-units discounts.
    Keywords: Adverse selection, screening, bundling, fidelity rebates, all-units discounts
    JEL: L13 L41 L42
    Date: 2007–09
  14. By: Francesco Ciardiello
    Abstract: To give sucient conditions for Nash Equilibrium existence in a continuous game is a central problem in Game Theory. In this paper, we present two games in which we show how the continuity and quasi-concavity hypotheses are unconnected one to each other. Then, we relax the quasiconcavity assumption by exploiting the multiconnected convexity's concept (Mechaiekh & Others, 1998) in spaces without any linear structure. These results will be applied to two non-zero-sum games lacking the classical assumptions and more recent improvements (Ziad, 1997), (Abalo & Kostreva, 2004). As a minor result, some counterexamples about relationship between some continuity conditions due to Lignola (1997), Reny (1999) and Simon (1995) for Nash equilibria existence are obtained.
    Keywords: Nash Equilibria Existence; Fixed Point Theorem; Generalized Convexity; 2 Person Game; 3 Person Game; Symmetric Game; Generalized Continuity.
    JEL: C72 C62
    Date: 2007–07

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