nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒12‒08
nineteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Spurious Complexity and Common Standards in Markets for Consumer Goods By Alexia Gaudeul; Robert Sugden
  2. Average Cost and Marginal Cost Pricing in Marshall: Textual Analysis and Interpretation By zamparelli, luca
  3. Innovation and Imitation Across Jurisdictions By Amihai Glazer; Hiroki Kondo
  4. The Road to Extinction: Commons with Capital Markets By Jayasri Dutta; Colin Rowat
  5. Barriers to innovation and public policy in Catalonia By Agustí Segarra-Blasco; José García-Quevedo; Mercedes Teruel-Carrizosa
  6. Incentives and uncertainty: an empirical analysis of the impact of demand on innovation By Roberto Fontana; Marco Guerzoni
  7. Endogenous Market Structure and the Business Cycle By Andrea Colciago; Federico Etro
  8. Physical Market Determinants of the Price of Crude Oil and the Market Premium By Chevillon, Guillaume; Rifflart, Christine
  9. Enterprise forms, ownership markets, and capital procurement of the firm. By Kazuhiko Mikami
  10. The strategic interaction between firms and formulary committees: Effects on the prices of new drugs By María García-Alonso; Begoña García-Mariñoso
  11. The gas chain : influence of its specificities on the liberalisation process By Carine Swartenbroekx
  12. Internal and external factors on firms? transfer pricing decisions: Insights from organization studies By Dan Li; Manuel Portugal Ferreira
  13. Monopolistic Screening under Learning By Doing By Dennis Gaertner
  14. Optimal Auctions with Information Acquisition By Xianwen Shi
  15. Collusion Helps Abate Environmental Pollution: A Dynamic Approach.  By L. Lambertini; A. Mantovani; E. Scorcu
  16. Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations By Jaag, Christian
  17. Markets, Institutions, and Transaction Costs: The Endogeneity of Governance By Geoffrey R D Underhill
  18. Dissecting Offshore Outsourcing and R&D: A Survey of Japanese Manufacturing Firms By ITO Banri; TOMIURA Eiichi; WAKASUGI Ryuhei
  19. Retail Market Prices of Fonio Reveal The Demand For Quality Characteristics in Bamako, Mali By Dury, S.; Meuriot, V.; Fliedel, G.; Blancher, S.; Bore Guindo, F.; Drame, D.; Bricas, N.; Diakite, L.; Cruz, J.F.

  1. By: Alexia Gaudeul (School of Economics and Centre for Competition Policy, University of East Anglia); Robert Sugden (School of Economics and Centre for Competition Policy, University of East Anglia)
    Abstract: Behavioural and industrial economists have argued that, because of cognitive limitations, consumers are liable to make sub-optimal choices in complex decision problems. Firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. This paper models a countervailing force. Consumers’ choice problems are simplified if competing firms follow common conventions about tariff structures. Because such a ‘common standard’ promotes price competition, a firm’s use of it signals that its products offer value for money. If consumers recognize this effect, there can be a stable equilibrium in which firms use common standards and set competitive prices.
    Keywords: decision-making, naïve consumers, savvy consumers, price competition, common standard effect, cognitive limitations.
    JEL: D83 L13 L15 L51
    Date: 2007–11
  2. By: zamparelli, luca
    Abstract: This paper proposes a textual analysis of Marshall’s theory of firm pricing behavior under competitive conditions. It considers to what extent average cost and marginal cost pricing rules characterize Marshall’s competitive partial equilibrium, and it shows that the two rules differ for origins and can be reconciled only with great difficulty in a general equilibrium framework.
    Keywords: Marshall; classical competition; perfect competition; marginal and average cost
    JEL: D46 B12 D41 B13
    Date: 2007–09
  3. By: Amihai Glazer (Department of Economics, University of California-Irvine); Hiroki Kondo (Department of Economics, Shinshu University)
    Abstract: We consider cities which can increase the income of landowners or of capital owners by improving the quality of public services. The improvement can come from innovation or from imitation. We find that when cities aim to benefit landowners, too many cities innovate; but too few cities innovate when the city aims to benefit capital owners. Redistribution across cities can ameliorate these inefficiencies.
    Keywords: Tax competition; Innovation; Interjurisdictional differences
    JEL: R13 H73
    Date: 2007–11
  4. By: Jayasri Dutta (University of Birmingham); Colin Rowat (University of Birmingham)
    Abstract: We study extinction in a commons problem in which agents have access to capital markets. When the commons grows more quickly than the interest rate, multiple equilibria are found for intermediate commons endowments. In one of these, welfare decreases as the resource becomes more abundant, a `re- source curse'. As marginal extraction costs become constant, market access instantly depletes the commons. Without markets - the classic environment - equilibria are unique; extinction dates and welfare increase with the endow- ment. When the endowment is either very abundant or very scarce, market access improves welfare. As marginal costs of extraction from the commons become constant, market access can reduce welfare if the subjective discount rate exceeds the interest rate.
    Keywords: commons, capital markets, perfect foresight, extinction, resource curse, storage
    JEL: C73 D91 O17 Q21
    Date: 2007–01
  5. By: Agustí Segarra-Blasco (Research Group of Industry and Territory (GRIT); Rovira i Virgili University (URV)); José García-Quevedo (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)); Mercedes Teruel-Carrizosa (Research Group of Industry and Territory (GRIT); Rovira i Virgili University (URV))
    Abstract: The present paper analyses the link between firms’ decisions to innovate and the barriers that prevent them from being innovative. The aim is twofold. First, it analyses three groups of barriers to innovation: the cost of innovation projects, lack of knowledge and market conditions. Second, it presents the main steps taken by Catalan Government to promote the creation of new firms and to reduce barriers to innovation. The data set used is based on the 2004 official innovation survey of Catalonia which was taken from the Spanish CIS-4 sample. This sample includes individual information on 2,954 Catalan firms in manufacturing industries and knowledge-intensive services (KIS). The empirical analysis reveals pronounced differences regarding a firm’s propensity to innovate and its perception of barriers. Moreover, the results show that cost and knowledge barriers seem to be the most important and that there are substantial sectoral differences in the way that firms react to barriers. The results of this paper have important implications for the design of future public policy to promote entrepreneurship and innovation together.
    Keywords: Obstacles to innovation, industrial policy, innovation system.
    JEL: O31 O38 D21
    Date: 2007
  6. By: Roberto Fontana (University of Pavia & CESPRI, Bocconi University, Italy); Marco Guerzoni (Schiller Universität)
    Keywords: demand, product innovation, process innovation
    JEL: O31 O33
    Date: 2007–11–01
  7. By: Andrea Colciago; Federico Etro
    Abstract: We introduce endogenous strategic interactions under competition in quantities and in prices together with endogenous entry in a dynamic stochastic general equilibrium model with ?exible prices. The endogenous mark ups depend on the form of competition and on the degree of substitutability between goods, and they vary countercylically while pro?ts are procyclical. Positive temporary shocks to productivity and government spending attract entry. Entry strengthens competition between ?rms, which temporary reduces mark ups and prices: this creates an intertemporal substitution e¤ect which provides an extra boost to consumption. The model outperforms the standard RBC framework in matching impulse response functions and second moments for US data.
    Keywords: Endogenous Market Structure, Firms?Entry, Business Cycle
    JEL: L11 E32
    Date: 2007–11
  8. By: Chevillon, Guillaume (ESSEC Business School); Rifflart, Christine (Sciences-Po Center for Economic Research (OFCE) and National Political Science Foundation)
    Abstract: We analyze the physical, i.e. non financial, determinants of the real price of crude oil by means of an equilibrium correction model over the last two decades. We find that two cointegrating relations affect the change in prices: one refers to OPEC's cartel behavior attempting to control prices using its market power and quotas; the other to the coverage rate of expected future demand by OECD using inventory behaviours. We derive an equation for the change in oil prices which we use to assess the speculative elements of the early millennium price hike. We show that worries alien to the physical markets are the causes of the increase in oil prices and are able to quantify their impact.
    Keywords: Cointegration; Forecast; Market Premium; Oil Price
    JEL: C53 Q40
    Date: 2007–06
  9. By: Kazuhiko Mikami (Department of Economics, Royal Holloway, University of London and Department of Applied Economics, University of Hyogo, Kobe, Hyogo, Japan)
    Abstract: It is often argued that cooperative firms are financially less viable than ivestor-owned firms. From a fundamental point of view, however, this does not seem a fair comparison, since the market for firm ownership is usually only available to investor-owned firms in our economy. This paper examines potential roles of the market for ownership rights to cooperative firms, particularly in capital procurement of the firm. We sho that, with a well-functioning membership market, consumer cooperatives are not necessarily financially weaker than investor-owned firms. The consumer cooperative can thus be a promising alternative to the investor-owned firm when the latter type of firm induces some serious market failure in the product market.
    Keywords: enterprise form, owndership market, capital procurement
    JEL: P13 P51
    Date: 2007–07
  10. By: María García-Alonso (Department of Economics, University of Kent); Begoña García-Mariñoso (Department of Economics, City University, London)
    Abstract: We study the strategic interaction between the pricing decisions of a pharmaceutical firm and the reimbursement decisions of a government agency which grants reimbursement rights to patients for whom new drugs are most cost-effective. If the reimbursement decision precedes pricing, the agency only reimburses some patients if the drug’s private and public health benefits diverge. This is, there are consumption externalities and the variable cost of the drug exceeds the alternative’s. Contrarily, if the firm can commit to a price before reimbursement, a strategic effect implies that by setting a sufficiently high price, the firm can make the agency more willing to reimburse than without commitment.
    Keywords: Drug formularies, subsidies.
    JEL: I10 I18 L65 H42
    Date: 2007–11
  11. By: Carine Swartenbroekx (National Bank of Belgium, Microeconomic Information Department)
    Abstract: Like other network industries, the European gas supply industry has been liberalised, along the lines of what has been done in the United Kingdom and the United States, by opening up to competition the upstream and downstream segments of essential transmission infrastructure. The aim of this first working paper is to draw attention to some of the stakes in the liberalisation of the gas market whose functioning cannot disregard the network infrastructure required to bring this fuel to the consumer, a feature it shares with the electricity market. However, gas also has the specific feature of being a primary energy source that must be transported from its point of extraction. Consequently, opening the upstream supply segment of the market to competition is not so obvious in the European context, because, contrary to the examples of the North American and British gas markets, these supply channels are largely in the hands of external suppliers and thus fall outside the scope of EU legislation on the liberalisation and organisation of the internal market in gas. Competition on the downstream gas supply segment must also adapt to the constraints imposed by access to the grid infrastructure, which, in the case of gas in Europe, goes hand in hand with the constraint of dependence on external suppliers. Hence the opening to competition of upstream and downstream markets is not "synchronous", a discrepancy which can weaken the impact of liberalisation. Moreover, the separation of activities necessary for ensuring free competition in some segments of the market is coupled with major changes in the way the gas chain operates, with the appearance of new markets, new price mechanisms and new intermediaries. Starting out from a situation where gas supply was in the hands of vertically-integrated operators, the new regulatory framework that has been set up must, on the one hand, ensure that competitive forces can be given free rein, and, on the other hand, that free and fair competition helps the gas chain to operate coherently, at lower cost and in the interests of consumers, for whom the stakes are high as natural gas is an important input for many industrial manufacturing processes, even a "commodity" almost of basic necessity.
    Keywords: network industries, gas industry, gas utility, liberalisation, regulation, deregulation, market structure, European gas supply, oligopoly, OPEG.
    JEL: D23 D43 L13 L43 L95 L97
    Date: 2007–11
  12. By: Dan Li (Kelley School of Business - Indiana University); Manuel Portugal Ferreira (Instituto Politécnico de Leiria)
    Abstract: Well understood in economics, accounting, finance, and legal research, transfer pricing has rarely been comprehensively explored in organization management literature. This paper explores some theoretical explanations of transfer pricing within multidivisional firms drawing insights from various organizational theories - primarily institutional theory, transaction cost economics, and social networks - to develop a conceptual model of transfer pricing. This model focuses on the nature of multidivisional firms' internal transfers, internal and external technological environments, and internal and external social environments. We highlight the importance of transfer pricing as a key strategic dimension to understand intra-firm flows and their associated costs.
    Keywords: theory, value, transfer pricing, intra-firm flows, multidivisional firm
    JEL: F3 H2 M1 M2 M4
    Date: 2007–11
  13. By: Dennis Gaertner (Socioeconomic Institute, University of Zurich)
    Abstract: This paper investigates the design of incentives in a dynamic adverse selection framework when agents’ production technologies display learning effects and agents’ rate of learning is private knowledge. In a simple two-period model with full commitment available to the principal, we show that whether learning effects are over- or under-exploited crucially depends on whether learning effects increase or decrease the principal’s uncertainty about agents’ costs of production. Hence, what drives the over- or underexploitation of learning effects is whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). Furthermore, we show that if divergence in costs through learning effects is strong enough, learning effects will not be exploited at all, in a sense to be made precise.
    Keywords: Asymmetric Information, Learning by Doing, Regulation
    JEL: D82 L14 L43 L51 O31
    Date: 2007–12
  14. By: Xianwen Shi
    Abstract: This paper studies optimal auction design in a private value setting with endogenous information acquisition. First, we develop a general framework for modeling information acquisition when a seller wants to sell an object to one of several potential buyers who can each gather information about their valuations prior to participation. We then show that under certain conditions, standard auctions with a reserve price remain optimal, but the optimal reserve price lies between the mean valuation and the standard reserve price in Myerson (1981). We provide sufficient conditions under which the value of information to the seller is positive, and also characterize the necessary and sufficient conditions under which equilibrium information acquisition in private value auctions is socially excessive. The key to the analysis is the insight that buyer incentives to acquire information become stronger as the reserve price moves toward the mean valuation.
    Keywords: optimal auctions, information acquisition, rotation order, informational efficiency
    JEL: C70 D44 D82 D86
    Date: 2007–12–03
  15. By: L. Lambertini; A. Mantovani; E. Scorcu
    Date: 2007–11
  16. By: Jaag, Christian
    Abstract: We discuss the ongoing liberalization process in the market for addressed letter mail in Switzerland. The core of the paper is an assessment of the liberalization's impact on the financial viability of various universal service obligations with and without access to the incumbent's downstream delivery network for customers and competitors. We propose a simple calibrated model of the Swiss letter market offering theoretical insights into the mechanics of market opening along with quantitative conclusions bearing direct policy relevance. The extent of the entrants' market coverage and the equilibrium in the resulting price competition are endogenously determined. Our simulations suggest caution in introducing full market opening. For the scenarios considered, the model shows that either the burden of the USO must be reduced (e.g. with respect to the frequency and the coverage of delivery and / or through price differentiation). Alternatively, other means of assuring financial stability of Swiss Post must be sought, be it through external funds or demand stimulation through new producs, possibly in the worksharing domain.
    Keywords: Liberalization; Mail; Universal Service Obligation
    JEL: H4 L52 H44
    Date: 2007–10–06
  17. By: Geoffrey R D Underhill (Universiteit van Amsterdam)
    Abstract: Much of the literature contrasts the dynamics of free markets with the ‘political’ dynamics of governance. The distinction portrays the process of ‘economic’ competition as separate from the deployment of private political resources to affect the terms of competition in line with agent preferences. This yields a distorted view of the ways in which real-world economic agents compete with each other, and the market-governance/state-market dichotomy creates more confusion than it clarifies, failing to account for the empirical observation that complex market systems and institutions of governance cannot be found apart. Even as an analytical distinction, the dichotomy blinds us to the ways in which states are active constituents of the market place, and the ways in which market actors and their constituencies are part of the wider process of governance shaping the terms of competition. This paper will extend the transaction cost approach and the insights of institutional economics to demonstrate in theoretical terms that the emergence of the institutions of governance is endogenous to the utility-maximising behaviour of economic agents. Utility-maximising behaviour and conflict over the terms of competition in the market generate both the formal and informal institutions and processes of governance such as regulation and dispute settlement. The paper then presents a conceptual model for understanding the essential integration of market and governance processes, the ‘state-market condominium’, in which markets are not just about what firms do in competition with each other, but are conceptualized as an ensemble of regulatory authority operating simultaneously through policy processes and the competitive interaction of firms. Contrasting forms of market correspond to political compromises based on the preferences of interacting agents. The model hypothesises reflexively that conflict over the terms of competition in markets generates changes in actor preferences concerning regulation and governance, and that the outcome of conflict over divergent actor preferences concerning governance and regulation generates changes in market structures. Changes in preferences concerning governance therefore are intimately bound up with preferences concerning market structure. This approach brings the work of economists and political scientists closer together.
    Date: 2007–06
  18. By: ITO Banri; TOMIURA Eiichi; WAKASUGI Ryuhei
    Abstract: This paper summarizes main descriptive results from the survey on a wide range of offshore outsourcing and R&D. This survey covers more than five thousand large-sized firms across all manufacturing industries in Japan. The principal findings are as follows. Merely 21% of the firms are outsourcing offshore. Nearly two-thirds of the cases, firms are outsourcing production-related tasks to East Asia. More than one-third of the cases, especially often in R&D and customer supports, tasks are outsourced to own offshore affiliates within the boundary of multinational firm. Offshore R&D is often integrated with corporate headquarters and is motivated for supporting the production and sales in the local market. The survey also covers firm's evaluation of the intellectual property rights protection in 56 countries.
    Date: 2007–11
  19. By: Dury, S.; Meuriot, V.; Fliedel, G.; Blancher, S.; Bore Guindo, F.; Drame, D.; Bricas, N.; Diakite, L.; Cruz, J.F.
    Abstract: African consumers' expectations concerning the quality of food products are great. In spite of constrained budgets, we showed that market retail prices revealed quality preferences of the consumers and not just production costs. In very poor countries like Mali, food innovation is limited by the very low purchasing power of the population. However, technological food product or process innovations are possible and sometimes valuable. Demand driven innovation may lead to open new markets, opportunities for small and medium scale enterprises and to improve consumers' welfare. Based on this assumption, technical research was done to provide new food products. In this paper, we used both sensory tests and a hedonic price approach, to estimate the consumers' demand for different characteristics of fonio, a West African cereal, and showed that poor consumers have quality requirements and pay for them. We showed that the shadow price or hedonic price paid for quality characteristics is small but significant. A comparison between sensory tests and a market study showed a convergence between what people say they prefer and what they really pay for. Results were consistent and showed directions for technological improvement of the product and its production process. The partial least square method was used to estimate hedonic prices of the different modalities of fonio quality traits. This method was interesting since it solved the ordinary least square method's colinearity problems. ...French Abstract : Les attentes des consommateurs africains concernant la qualité de l'alimentation sont importantes malgré des budgets très contraints. Nous montrons ici que les prix de marchés révèlent des préférences qualitatives et non seulement des coûts de production. Dans des pays très pauvres comme le Mali, l'innovation technologique est limitée par le très faible pouvoir d'achat de la population. Cependant les innovations technologiques sont possibles et parfois payantes. L'innovation en réponse à une demande peut permettre d'ouvrir de nouveaux marchés, de donner des opportunités aux petites et moyennes entreprises et d'améliorer le bien-être des consommateurs. Sur la base de cette hypothèse, la recherche technologique s'applique à fournir de nouveaux produits. Dans cet article, en utilisant à la fois des tests de dégustation et une analyse des prix hédoniques, nous estimons la demande des consommateurs pour différentes caractéristiques du fonio, une céréale d'Afrique de l'Ouest. Nous montrons que des consommateurs pauvres ont des exigences de qualité et paient de fait pour les satisfaire. Nous montrons que les prix hédoniques ou shadow prices payés pour les caractéristiques qualitatives sont faibles mais significatifs. La comparaison des tests sensoriels et de l'étude de marché montre une convergence entre ce que les gens disent et ce pour quoi ils paient réellement. Les résultats sont cohérents et montrent des directions pour l'amélioration technologique des produits et des procédés de transformation. La méthode des moindres carrés ordinaires a été utilisée pour l'estimation des prix hédoniques des différentes modalités des attributs de qualité du fonio. Cette méthode est intéressante car elle résout les problèmes de colinéarité.
    JEL: D12 L15 O33 Q11
    Date: 2007

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.