nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒11‒03
eleven papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. A Retail Benchmarking Approach to Efficient Two-Way Access Pricing By Doh-Shin Jeon; Sjaak Hurkens
  2. Exclusionary Pricing and Rebates When Scale Matters By Liliane Karlinger; Massimo Motta
  3. Duopolistic Competition, Taxes, and the Arm's-Length Principle By Korn, Evelyn; Lengsfeld, Stephan
  4. Hedonic Imputed Housing Price Indices from a Model with Dynamic Shadow Prices Incorporating Nearest Neighbour Information By Harry Cominos; Alicia Rambaldi; D.S. Prasada Rao
  5. Non-technological and Technological Innovation: Strange Bedfellows? By Schmidt, Tobias; Rammer, Christian
  6. Spot Price Modeling and the Valuation of Electricity Forward Contracts: the Role of Demand and Capacity By Alvaro Cartea; Pablo Villaplana Conde
  7. Word of Mouth and Recommender Systems: A Theory of the Long Tail By Andres Hervas-Drane; ;
  8. Small is Beautiful but Size Matters: The Asymmetric Impact of Uncertainty and Sunk Costs on Small and Large Businesses By Ghosal, Vivek
  9. Strategy-Proofness and Single-Crossing By Alejandro Saporiti
  10. Small Business Growth: Searching for Stylized Facts By Brian Headd; Bruce Kirchhoff
  11. The Role of Patriotism in Explaining TV Audience of National Team Games - Evidence from Four International Tournaments By Egon Franck; Stephan Nüesch

  1. 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 coverage or investment: for instance, we show that both static and dynamic e±ciency can be achieved at the same time.
    Keywords: Networks, Access Pricing, Interconnection, Competition Policy, Telecommunications, Investment
    JEL: D4 K21 L41 L51 L96
    Date: 2007–10
  2. By: Liliane Karlinger; Massimo Motta
    Abstract: We consider an incumbent firm and a more efficient entrant, both offering a network good to several asymmetric buyers. The incumbent disposes of an installed base, while the entrant has a network of size zero at the outset, and needs to attract a critical mass of buyers to operate. We analyze different price schemes (uniform pricing, implicit price discrimination - or rebates, explicit price discrimination) and show that the schemes which - for given market structure - induce lower equilibrium prices are also those under which the incumbent is more likely to exclude the rival.
    JEL: L11 L14 L42
    Date: 2007
  3. By: Korn, Evelyn; Lengsfeld, Stephan
    Abstract: Numerous (high-tax) countries presume that multinational firms use their transfer-pricing policies to shift profits into countries with lower tax rates. To avoid the corresponding loss in tax revenues, tax authorities develop constantly tightening rules to curb transfer-price distortions. Affected firms include the decision of compliance to these rules into their strategic considerations. In a scenario with arm's-length regulation in two countries, we analyze the transfer-pricing policy of a firm that uses the same transfer price for tax and managerial incentive purposes. Thus, the transfer-pricing policy is driven by three issues: interaction with competitors, minimization of tax burden, and avoidance of punishments. The model shows that tighter transfer-pricing rules may help firms to mitigate competition and to increase their profits and that non-compliance to the arm's-length principle is part of their equilibrium strategy.
    Keywords: transfer prices, taxes, arm's-length principle, one set of books, duopolistic competition, enforcement.
    JEL: H25 L22 M40
    Date: 2007–10
  4. By: Harry Cominos; Alicia Rambaldi; D.S. Prasada Rao (CEPA - School of Economics, The University of Queensland)
    Date: 2007
  5. By: Schmidt, Tobias; Rammer, Christian
    Abstract: Non-technological innovation is an important element of firms’ innovation activities that both supplement and complement technological innovation, i.e. the introduction of new products and new processes. We analyse the spread of nontechnological innovation in firms, their relation to technological innovation, and their effects to firm performance and success with product and process innovation, using data from the German Community Innovation Survey conducted in 2005 (German CIS 4). Non-technological innovation is defined as the introduction of new organisational methods or the introduction of new marketing methods. We find that the determinants of a firm’s propensity to introduce technological and non-technological innovations are very similar and that both types are closely related. There are only small effects of non-technological innovation on a firm’ profit margin, which contrasts the strong effects to be found from technological innovation. However, non-technological innovation spurs success with product and process innovation terms of sales with market novelties and cost reductions from new processes.
    Keywords: organisational innovation, marketing innovation, effects of innovation, CIS 4
    JEL: L25 O30 O31
    Date: 2007
  6. By: Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Pablo Villaplana Conde
    Abstract: We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium.
    Keywords: power prices, demand, capacity, forward premium, forward bias, market price of capacity risk, market price of demand risk, PJM, England and Wales, Nord Pool
    Date: 2007–11
  7. By: Andres Hervas-Drane (Harvard Business School and Universitat Autònoma de Barcelona); ;
    Abstract: I present a model where consumers face a search problem within a pool of heterogeneous experience goods supplied by a monopolist. Consumers are endowed with a taste profile that determines their probability of matching with any given product, but arrive to the market uninformed and cannot identify which products are more likely to yield a match. Consumers may search for a match by drawing products from the assortment or by seeking recommendations from other consumers. Product evaluations prior to purchase and recommendations are both shown to arise endogenously, increasing consumer participation and the concentration of sales. Introducing taste heterogeneity reveals that such effects are more pronounced for consumers endowed with the prevalent taste in the population. Insights are derived on the mechanisms driving concentration in artistic markets, the impact of recommender systems such as those implemented by Amazon and other online retailers, and their implications for the Long Tail debate. The model is suited for markets where product choices are driven by taste, such as music, cinema, literature and video game entertainment.
    Keywords: Taste, Search, Product Recommendations, Sales Concentration, Long Tail
    JEL: C78 D42 D83 L15 M31
    Date: 2007–10
  8. By: Ghosal, Vivek
    Abstract: Against the backdrop of the theories developed in the real options and financing constraints literatures, this paper examines the impact of profit uncertainty and sunk costs on firms’ entry and exit decisions. For our empirical analysis, we compile an extensive dataset containing information on 267 U.S. manufacturing industries over a 30-year period containing industry-specific information on the number of firms and establishments, the size distribution of establishments, measures of sunk capital costs and profit uncertainty, among others. Our dynamic panel data estimates show that greater uncertainty about profits, especially in conjunction with higher sunk costs, results in (1) a marked decrease in the number of small firms and establishments; (2) a less skewed size distribution of firms and establishments; and (3) a marginal increase in industry output concentration. In sharp contrast, large establishments seem virtually unaffected. The results point to uncertainty in conjunction with sunk costs fundamentally affecting firms’ decision-making and altering the structure of industries by putting smaller businesses at a disadvantage.
    Keywords: Uncertainty; sunk costs; real options; financing constraints; decision-making; small businesses.
    JEL: L40 G10 O30 L11 D80
    Date: 2007–07
  9. By: Alejandro Saporiti (School of Social Sciences, University of Manchester, Arthur Lewis Building, M13 9PL Manchester, United Kingdom)
    Abstract: This paper analyzes collective choices in a society with strategic voters and single-crossing preferences. It shows that, in addition to single-peakedness, single-crossingness is another meaningful domain which guarantees the existence of non-manipulable social choice functions. A social choice function is shown to be anonymous, unanimous and strategy-proof on single-crossing domains if and only if it is an extended median rule with n-1 parameters distributed on the end points of the feasible set of alternatives. Such rules are known as positional dictators, and they include the median choice rule as a particular case. As a by-product, the paper also provides an strategic foundation for the so called "single-crossing version" of the Median Voter Theorem, by showing that the median ideal point can be implemented in dominant strategies through a simple mechanism in which each agent honestly reveals his preferences.
    Keywords: Strategy-proofness; single-crossing; median voter; positional dictators
    JEL: D70 D71
    Date: 2007–10
  10. By: Brian Headd; Bruce Kirchhoff
    Abstract: Using special tabulations from the U.S. Census Bureau, we use aggregate data to follow a cohort of firms over 10 years from their formation and the universe of existing firms to track their growth/decline in employment. We created a table to show the employment change categories for a cohort of new single establishment firms drawn from the 1992 universe of single establishment firms from 1992 to 2002. We also created tables to show the employment change categories for the universe of single establishment firms in the cohort defining declining and growing firms as separate sub-cohorts. Some industry detail is also described. We offer propositions related to firm growth and use data contained in the tables to seek verification.
    Date: 2007
  11. By: Egon Franck; Stephan Nüesch (Institute for Strategy and Business Economics, University of Zurich; Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Existing studies about the determinants of the so-called couch potato audience in sports concentrate on the quality of the sporting contest which involves both the absolute playing strength of the competing teams and the relative evenness of the competition. Regarding national team competitions, however, we expect that the TV audience should also be driven by patriotism. Analyzing the couch potato audience of all matches during the FIFA World Cup 2006 in Switzerland, we find strong evidence that the TV ratings are highly affected by the size of the groups of foreign residents affiliated to the teams playing on the field. Whereas absolute playing strength impacts on the TV ratings too, the effect of evenness of the competition is insignificant.
    Keywords: TV audience, soccer, FIFA World Cup, patriotism
    JEL: L83
    Date: 2007

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