nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒10‒27
twenty-one papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Signaling Quality Through Prices in an Oligopoly By Maarten C.W. Janssen; Santanu Roy
  2. Price Discrimination in Two-Sided Markets By Qihong Liu; Konstantinos Serfes
  3. A Retail Benchmarking Approach to Eficient Two-Way Access Pricing By Doh-Shin Jeon; Sjaak Hurkens
  4. Vertical Integration and Exclusivity in Two-Sided Markets By Robin S. Lee
  5. Competition in Prices and Service Level Guarantees By Ramesh Johari; Gabriel Weintraub
  7. Access Price Regulation and Price Discrimination in Intermediate Goods Markets By Claudia Salim
  8. Merger Simulation in Mobile Telephony in Portugal By Lukasz Grzybowski; Pedro Pereira;
  9. Trade Liberalization, Competition and Growth By Omar Licandro; Antonio Navas-Ruiz
  10. Quantifying the Benefits of Entry into Local Phone Service, By Nicholas Economides; V. Brian Viard; Katja Seim
  11. Barriers to Innovation faced by Manufacturing Firms in Portugal: How to overcome it? By Silva, Maria; Leitão, João; Raposo, Mário
  12. Vertical separation vs. independent downstream entry in the Spanish electricity network: An experimental approach By Nikolaos Georgantzis; Enrique Fatas; Carlos Gutierrez-Hita; Aitor Ciarreta
  13. Do Consumers Care About How Prices Are Set? By Courty, Pascal; Pagliero, Mario
  14. Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry By Andrew Sweeting
  15. Net Neutrality on the Internet: A Two-sided Market Analysis By Nicholas Economides; Joacim Tag
  16. Crowding Out or Complementarity in the Telecommunications Market? By Ricardo Ribeiro; João Vareda;
  17. The dynamics of market structure and market size in two health services industries By Timothy Dunne; Shawn D. Klimek; Mark J. Roberts; Yi Xu
  18. Games of Capacities: A (Close) Look to Nash Equilibria By Antonio Romero-Medina; Matteo Triossi
  19. Competition in Mobile Telephony in France and Germany By Lukasz Grzybowski; Chiraz Karamti;
  20. Auctions with a Buy Price: The Case of Reference-Dependent Preferences By Nicholas Shunda
  21. Size, Innovation and Internationalization: A Survival Analysis of Italian Firms By Giorgia Giovannetti; Giorgio Ricchiuti; Margherita Velucchi

  1. By: Maarten C.W. Janssen (Tinbergen Institute and Erasmus University); Santanu Roy (Southern Methodist University)
    Abstract: Firms signal high quality through high prices even if the market structure is highly competitive and price competition is severe. In a symmetric Bertrand oligopoly where products may differ only in their quality, production cost is increasing in quality and the quality of each firm's product is private information (not known to consumers or to other firms), we show that there exist fully revealing equilibria in mixed strategies. In such equilibria, low quality firms enjoy market power when other firms are of high quality. High quality firms charge higher prices than low quality firms but lose business to rival firms with higher probability. Some of the revealing equilibria involve high degree of market power (price close to full information monopoly level) while others are more "competitive". Under certain conditions, if the number of firms is large enough, information is revealed in every equilibrium.
    Keywords: Signaling; Quality; Oligopoly; Incomplete Information.
    JEL: L13 L15 D82 D43
    Date: 2007–10
  2. By: Qihong Liu (Department of Economics, University of Oklahoma); Konstantinos Serfes (LeBow College of Business, Drexel University)
    Abstract: We examine the profitability and the welfare implications of price discrimination in two-sided markets. Platforms have information about the preferences of the agents that allows them to price discriminate within each group. The conventional wisdom from one-sided horizontally differentiated markets is that price discrimination hurts the firms and benefits consumers, prisoners' dilemma. Moreover, it is well-known that the presence of indirect externalities in two-sided markets can intensify the competition. Despite all these, we show that the possibility of price discrimination, in a two-sided market, may actually soften the competition. Therefore, the implications of price discrimination from one-sided markets may not carry over to two-sided markets. This is the case regardless of whether prices are public or private, although private prices boost profits. Our analysis also sheds light on the welfare properties of price discrimination in intermediate goods markets, such as Business-to-Business (B2B) markets.
    Keywords: Price discrimination, Two-sided markets, Indirect network externalities, Market segmentation.
    JEL: D43 L13
    Date: 2007–09
  3. By: Doh-Shin Jeon; Sjaak Hurkens
    Abstract: We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator (or the competition authority) can choose one among the rules to pursue additional objectives such as consumer surplus, network covera
    Keywords: Networks, Access Pricing, Interconnection, Competition
    JEL: D4 K21 L41 L51 L96
    Date: 2007–10–18
  4. By: Robin S. Lee (Harvard Busines School and Department of Economics, Harvard University)
    Abstract: This paper develops techniques to analyze the adoption decisions of both consumers and firms for competing platform intermediaries in two-sided markets, and applies the methodology to empirically measure the impact of vertical integration and exclusive contracting in the sixth-generation of the U.S. videogame industry (2000-2005). I first introduce a framework to structurally estimate consumer demand in these types of hardware-software markets which (i) simultaneously analyzes both hardware and software adoption decisions; (ii) accounts for dynamic issues including the selection of heterogenous consumers across platforms, durability of goods, and agents’ timing of purchases; and (iii) explicitly provides the marginal contribution of an individual software title to each platform’s installed base of users. Demand results show the gains obtained by a platform provider from exclusive access to certain software titles can be large, and failure to account for dynamics, consumer heterogeneity, and multiple hardware purchases significantly biases estimates. I next specify dynamic network formation game to model the adoption decision of hardware platforms by software providers. Counterfactual experiments indicate that vertical integration and exclusivity benefited the smaller entrant platforms and not the dominant incumbent, which stands contrary to the interpretation of exclusivity as primarily a means of foreclosure and entry deterrence.
    Keywords: platform competition, two-sided markets, vertical integration, exclusive contracting, dynamic demand, network formation, videogame industry
    JEL: C61 C63 C73 L13 L14 L42 L86
    Date: 2007–10
  5. By: Ramesh Johari (Management Science and Engineering, Stanford University Author-Workplace-Homepage:; Gabriel Weintraub (Columbia Business School)
    Abstract: In this paper we study the implications of service level guarantees (SLGs) in a model of oligopoly competition where providers compete to deliver a service to congestion-sensitive consumers. The SLG is a contractual obligation on the part of the service provider: regardless of how many customers subscribe, the firm is responsible for investing in infrastructure, capacity, or service quality so that the congestion experienced by all subscribers is equal to the SLG. First, we analyze a game where firms compete by setting prices and SLGs simultaneously. We establish that this game can be reduced to standard oligopoly models of price competition, greatly simplifying the analysis of this otherwise complex competitive scenario. Notably, we find that when costs in the original game are convex, the resulting equivalent pricing game also has convex costs. Further, for a broad class of models exhibiting constant returns to investment, the resulting pricing game is equivalent to a standard price game with constant marginal costs; many loss systems, such as those modeled by the Erlang loss formula, exhibit constant returns to investment. We then consider another commonly used contractual agreement between firms and customers: firms first set prices and investment levels simultaneously, and then consumers choose where to subscribe. In this case, firms provide the best possible service given their infrastructure, but without an explicit guarantee. Using the Nash equilibria of the games played by firms, we compare this competitive model with the model where firms set prices and SLGs, in terms of the resulting prices, service levels, firms' profits, and consumers' surplus.
    Keywords: competition, game theory, congestion, contracting, pricing.
    JEL: D43 L13 L96 M21
    Date: 2007–09
  6. By: Maxim Sinitsyn
    Abstract: This paper revisits the theory of oligopoly pricing and shows that for a large class of demand and cost functions, a mixed strategy equilibrium necessarily implies that each firm’s equilibrium strategy is a discrete distribution over a finite number of prices.
    JEL: D43 L13
    Date: 2007–06
  7. By: Claudia Salim
    Abstract: We consider a model of a monopolistic network operator who sequentially offers two-parted access charges to symmetric downstream firms. We are particularly interested in analyzing an alternative to current regulatory practice of prescribing access. In particular, we look at the possibility of restraining the input monopolist's market power by endowing downstream firms with a regulatory option: In case they disagree with the contracts proposed to them, downstream firms can claim a regulated access price. It turns out that this form of regulation may prevent foreclosure even though allowing for price discrimination in the intermediary market. It proves itself more beneficial to welfare than the current practice of prescribing access prices above marginal cost. Interestingly, even though one expects discrimination against the first mover, non-discriminatory input prices below cost can occur when the monopolist faces the alternative of a rather strictly cost-oriented regulated access price. Non-discrimination rules will either not become effective or result in less optimal price levels.
    Keywords: Price discrimination, vertical contracting, exclusion, regulatory outside option
    JEL: D43 L13 L14 L42
    Date: 2007
  8. By: Lukasz Grzybowski (Competition Commission, UK); Pedro Pereira (Autoridade da Concorrencia);
    Abstract: This article assesses the unilateral effects on prices of a merger in the Portuguese mobile telephony market. We use aggregate quarterly data from 1999 to 2005 and a nested logit model to estimate the price elasticities of demand and the marginal costs of subscription of mobile telephony. Given these estimates, we simulate the effects of the merger. We find that the available mobile telephony subscription products are close substitutes. The merger may cause substantial price increases, even in the presence of large cost efficiencies. On average, prices increase by 7-10% without cost efficiencies, and by about 6-10% with a 10% marginal cost reduction.
    Keywords: lock-in, merger simulation, mobile telephony, nested logit, network effects
    JEL: L13 L43 L93
    Date: 2007–09
  9. By: Omar Licandro; Antonio Navas-Ruiz
    Abstract: The aim of this paper is to understand whether international trade may enhance innovation and growth through an increase in competition. We develop a two-country endogenous growth model, both countries producing the same set of goods, with firm specific R&D and a continuum of oligopolistic sectors under Cournot competition. Since countries produce the same set of goods, trade openness makes markets more competitive, reducing prices and raising the incentives to innovate. More general, a reduction on trade barriers enhances growth by reducing domestic firms' market power.
    Keywords: Trade openess, competition and growth, R&D
    JEL: F13 F43 O3
    Date: 2007
  10. By: Nicholas Economides (Stern School of Business, NYU); V. Brian Viard (Graduate School of Business, Stanford University); Katja Seim (Stanford University)
    Abstract: In this paper, we evaluate the consumer welfare effects of entry into residential local phone service in New York State. Residential local phone service competition was an important goal of the 1996 Telecommunications Act. We provide a detailed evaluation of its effects on consumer welfare using household-level data on service choices from the third quarter of 1999 to the first quarter of 2003. Our results indicate that as a result of entry households that subscribe to one of the entrants' services gain on average an equivalent of $2.33 per month in overall welfare from local telecommunications services, or 6.2% of the households' average bill. Averaged across all households including those that remain with the incumbent, households gain the equivalent of $0.83 per month, although benefits vary dramatically across households. Since residential local phone service is sold under a menu of nonlinear tariffs, we develop a method for estimating a mixed discrete/continuous demand model. The econometric model incorporates the simultaneity of the discrete plan and continuous consumption choices by consumers. We allow for flat-rate plans, bundling of services, and unobservable firm quality. Taking advantage of the detailed nature of the data, we decompose the households' overall gains from entry and find that benefits due to firm differentiation and new plan introductions exceed those from price effects.
    Keywords: Entry, Nonlinear Pricing, Telecommunications, Discrete/Continuous Demand
    JEL: D43 K23 L11 L13 L96
    Date: 2007–10
  11. By: Silva, Maria; Leitão, João; Raposo, Mário
    Abstract: This paper aims to identify the barriers to innovation that influence the innovation capability of Portuguese industrial firms. The literature review about innovation makes use of two references approaches: (i) the systemic; and (ii) the networks and inter-organizational relationships. The database is obtained through the Community Innovation Survey II (CIS II) conducted by EUROSTAT. Furthermore, from the results several public policies are proposed in order to overcome the restraining factors of the entrepreneurial innovative capability.
    Keywords: Innovation; Entrepreneurial Innovative Capability.
    JEL: O38 O31
    Date: 2007–10–23
  12. By: Nikolaos Georgantzis (LEE/LINEEX, Universitat Jaume I and University of Cyprus); Enrique Fatas (LINEEX and Applied Economics Department, University of Valencia); Carlos Gutierrez-Hita (Elx University); Aitor Ciarreta
    Abstract: We present experimental results from a series of sessions organized using the Power Market simulator; a software designed to realistically replicate the Spanish Electricity Market. In the experiments reported here we compare the status quo to two alternative treatments which represent alternative market structures. In one of them, labeled as vertical separation, we assume that power generating firms and electricity distributors-endsuppliers belong to separate business groups. In the second, we study the effect of entry by independent end-suppliers. Both alternative scenarios dominate the status quo in terms of market efficiency, whereas the latter of them dominates the former.
    Keywords: Experimental economics, Spanish Electricity Market, vertical relations.
    JEL: C90 L43 L51 L53 L94
    Date: 2007–09
  13. By: Courty, Pascal; Pagliero, Mario
    Abstract: Using a survey approach, we ask consumers to reveal their preferences over pricing schemes that may differ in terms of the average price of consumption, the amount of price variation, and the probability of being rationed. We find that consumers dislike pricing schemes that vary prices more but that they are willing to trade off price variation and rationing. Surprisingly, they are not willing to trade off an increase in price variation for a decrease in expected prices. We discuss the implications of these findings for firm pricing policies.
    Keywords: antagonism; Consumer demand; demand fluctuation; fairness; rationing
    JEL: A12 D01 D12
    Date: 2007–10
  14. By: Andrew Sweeting
    Abstract: The ability of firms to reposition their products can determine the effects of demand shocks, mergers and policy interventions in differentiated product markets. This paper estimates a dynamic oligopoly model to measure repositioning costs in the commercial radio industry. Based on a set of markets where industry revenues were around $88 billion, I find that stations may have spent as much as $6 billion on repositioning. However, repositioning costs are not large enough to prevent radio markets adapting quite quickly to demand shocks.
    JEL: L1 L13 L82
    Date: 2007–10
  15. By: Nicholas Economides; Joacim Tag
    Date: 2007
  16. By: Ricardo Ribeiro (STICERD, The London School of Economics and Political Science); João Vareda (Faculdade de Economia, Universidade Nova de Lisboa,);
    Abstract: There is a substantial number of cases where the a priori relationship between products is not at all clear in the sense that although apparent to be clear substitutes may turn out to be in fact complements, or vice-versa. This paper aims to study the relationship between fixed and mobile telephony in the United Kingdom and, in particular, address the question if mobile communications crowded out fixed telephony or if, on the other hand, the two types of communications are in fact complements. We estimate a structural continuous-choice demand model following Pinkse et al. (2002), Pinkse and Slade (2004), and Slade (2004) and we find that at the current diffusion stage, fixed and mobile communications appear to be complements. Given that the model is micro-founded, we also address the question of how the evolution of the price differential between the two types of communication may, respectively, affect the welfare of consumers and firms. We find that the continuation of these price trends have substantial welfare benefits for subscribers and at the same time have no significant impact on the profits for firms. Finally, we present some economic policy implications, especially about the need to (de)regulate telecommunications provision.
    Keywords: Telecommunications, Mobile, Fixed, Demand, Substitution, Complementarity
    JEL: C13 D12 L51 L96
  17. By: Timothy Dunne; Shawn D. Klimek; Mark J. Roberts; Yi Xu
    Abstract: The relationship between the size of a market and the competitiveness of the market has been of long-standing interest to IO economists. Empirical studies have used the relationship between the size of the geographic market and both the number of firms in the market and the average sales of the firms to draw inferences about the degree of competition in the market. This paper extends this framework to incorporate the analysis of entry and exit flows. A key implication of recent entry and exit models is that current market structure will likely depend upon the history of past participation. The paper explores these issues empirically by examining producer dynamics for two health service industries, dentistry and chiropractic services.
    Keywords: Markets ; Industrial organization ; Service industries
    Date: 2007
  18. By: Antonio Romero-Medina; Matteo Triossi
    Abstract: The paper studies two games of capacity manipulation in hospital-intern markets. The focus is on the stability of Nash equilibrium outcomes. We provide minimal necessary and sufficient conditions guaranteeing the existence of pure strategy Nash Equilibria and the stability of outcomes.
    Keywords: Stable Matchings, Capacity, Nash Equilibrium, Cycles.
    JEL: C71 C78 D71 D78 J44
    Date: 2007
  19. By: Lukasz Grzybowski (Competition Commission, UK); Chiraz Karamti (Telecom Paris - ENST);
    Abstract: This paper provides an insight into the antitrust investigation initiated by the French competition authority, which found that mobile operators exchanged strategic information and agreed to fix market shares in years the 2000-2002. The empirical analysis is based on the comparison of mobile markets in France and Germany and uses aggregate industry-level data on subscriptions and prices. The penetration of mobile phones at the end of 1999 was higher in France than in Germany, but this situation was reversed by the end of 2002. In the same time period, minimum prices of mobile services in France, computed for a defined low-usage basket, were on average by about 58% lower than the corresponding prices in Germany. The results of binomial logit demand estimation suggest two explanations for this situation. First, there is a significant difference between price elasticities of demand in these two countries. Second, consumers seem to perceive mobile telephony as a substitute to fixed-line connection in France and as a complement in Germany. However, in a separate reduced-form estimation we do not find a significant effect of prices for fixed-line services on mobile prices in either country. Furthermore, the estimation results suggest that the share-fixing agreement in France could have slowed down subscriptions, but we fail to find that it had an adverse effect on prices.
    Keywords: mobile telephony, binomial logit, reduced-form, share-fixing
    JEL: L13 L43 L93
    Date: 2007–09
  20. By: Nicholas Shunda (University of Connecticut)
    Abstract: In an auction with a buy price, the seller provides bidders with an option to end the auction early by accepting a transaction at a posted price. The "Buy-It-Now" option on eBay is a leading example of an auction with a buy price. This paper develops a model of an auction with a buy price in which bidders use the auction's reserve price and buy price to formulate a reference price. The model both explains why a revenue-maximizing seller would want to augment her auction with a buy price and demonstrates that the seller sets a higher reserve price when she can affect the bidders' reference price through the auction's reserve price and buy price than when she can affect the bidders' reference price through the auction's reserve price only. Introducing a small reference-price effect can shrink the range of buy prices bidders are willing to exercise. The comparative statics properties of bidding behavior are in sharp contrast to equilibrium behavior in other models where the existence and size of the auction's buy price have no effect on bidding behavior.
    Keywords: Auction, Buy price, Internet, Reference-dependence?
    JEL: D44 D82 L86
    Date: 2007–10
  21. By: Giorgia Giovannetti (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Giorgio Ricchiuti (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Margherita Velucchi (Università degli Studi di Firenze, Dipartimento di Statistica “G. Parenti”)
    Abstract: The birth of new enterprises and their survival in the market are often seen as a crucial variable of economic growth and competitiveness in a modern economy. This paper focuses on business demography of Italian firms, using a merged dataset between Capitalia-Reprint and AIDA, to identify the relationships among firms’ characteristics their demographic dynamics and survival. We show that size and technological level increases survival probability. Internationalized firms show higher failure risk: on average the competition is stronger on international markets, forcing firms to be more efficient. Finally, a long lasting successful internationalized firm is a high-tech, large and innovating firm.
    Keywords: Business Demography, Survival, Competitiveness, Internationalization
    JEL: C41 L11 L25 F21
    Date: 2007

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