nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒01‒05
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Constrained Monopoly Pricing with Random Participation By Basaluzzo, Gabriel; Miravete, Eugenio J
  2. On the consistent use of linear demand systems if not all varieties are available By Höffler, Felix
  3. Competition with asymmetric switching costs By Sebátian Infante; Nicolás Figueroa; Ronald Fischer
  4. Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition By Robert Feenstra; Hong Ma
  5. Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets By James E. Prieger; Wei-Min Hu
  6. A note on successive oligopolies and vertical mergers By Jean J., GABSZEWICZ; Skerdilajda, ZANAJ
  7. The make-or-buy choice in a mixed oligopoly: a theoretical investigation By R. Cellini; L. Lambertini
  8. Tie-Breaking Rules and Divisibility in Experimental Duopoly Markets By Puzzello, Daniela
  9. Hawks and doves in segmented markets : a formal approach to competitive aggressiveness By Claude, DASPREMONT; Rodolphe, DOS SANTOS FERREIRA; Jacques, THEPOT
  10. Estimating Demand for Cellular Phone Service under Nonlinear Pricing By Huang, Ching-I
  12. Stock Price Manipulation: The Role of Intermediaries By Siddiqi, Hammad
  13. The gas chain : influence of its specificities on the liberalisation process By Carine Swartenbroekx
  14. International Schumpeterian Competition and Optimal R&D subsidies By Giammario Impullitti

  1. By: Basaluzzo, Gabriel; Miravete, Eugenio J
    Abstract: We present a flexible model of monopoly nonlinear pricing with endogenous participation decisions of heterogeneous consumers. We make use of the moments that define the few self-selecting tariff options that are commonly used to implement the optimal nonlinear tariff to estimate how demand and cost variables affect the pricing strategies offered by incumbent monopolists in several early U.S. local cellular telephone markets through the different elements of the theoretical model: marginal costs, average price sensitivity of demand, indexing parameters governing the distribution of the two-dimensional type components, support of the distribution of types, and costs associated to the commercialization of tariff options. The sources of identification are the position and shape of each tariff offered by monopolists, the actual number and features of the tariff options used to implement them, as well as a measure of market penetration in each cellular market during the first and last quarter of monopoly regime. We use our model and the structural estimates to provide a performance comparison (profit+welfare) of nonlinear tariffs relative to linear (uniform), optimal two-part, Coasian marginal cost-plus fixed fee, and flat tariffs. We furthermore evaluate the potential welfare gains of implementing universal service requirements.
    Keywords: Nonlinear vs. Linear Pricing; Random Participation; Universal Service
    JEL: C63 D43 D82 L96
    Date: 2007–12
  2. By: Höffler, Felix
    Abstract: Linear demand formulations for price competition in horizontally differentiated products are sometimes used to compare situations where additional varieties become available, e. g. due to market entry of new firms. We derive a consistent demand system to analyze such situations.
    Keywords: Horizontal product differentiation; preferences for variety; market entry
    JEL: D1 L1
    Date: 2007–10–27
  3. By: Sebátian Infante; Nicolás Figueroa; Ronald Fischer
    Abstract: We analyze the effects of asymmetric switching costs on two identical firms that produce an homogeneous good and compete in prices. Both firms inherit a fraction of themarket which is “locked-in” by the switching costs. When switching costs are low, firms face a tradeoff between charging a high price to their locked in customers, or pricing aggressively in order to attract the rival’s market share. We characterize the (pure and mixed) equilibrium strategies and the associated payoffs for any pair of switching costs in the unit square.
    Date: 2007
  4. By: Robert Feenstra; Hong Ma
    Abstract: In this paper we develop a monopolistic competition model where firms exercise their market power across multiple products. Even with CES preferences, markups are endogenous. Firms choose their optimal product scope by balancing the net profits from a new variety against the costs of "cannibalizing" their own sales. With identical costs across firms, opening trade leads to fewer firms surviving in each country but more varieties produced by each of those firms. With heterogeneous costs, the number of firms surviving in equilibrium is quite insensitive to the market size. When trade is opened, more firms initially enter, but the larger market size reduces the cannibalization effect and expands the optimal scope of products. As a result, the less efficient firms exit, and the larger market is accommodated by more efficient firms that produce more varieties per firm on average.
    JEL: F12 L1
    Date: 2007–12
  5. By: James E. Prieger (Pepperdine University School of Public Policy); Wei-Min Hu (Peking University Shenzhen Graduate School of Business)
    Abstract: Our study extends the empirical literature on whether vertical restraints are anticompetitive. We focus on exclusive contracting in platform markets, which feature indirect network effects and thus are susceptible to applications barriers to entry. Theory suggests that exclusive contracts in vertical relationships between the platform provider and software supplier can heighten the entry barriers. We test these theories in the home video game market. We measure the impact on hardware demand of the indirect network effects from software. We find that although network effects are present, the marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to a market structure dominated by one system protected by a hedge of complementary software. Our investigation suggests that bargaining power enjoyed by the best software providers and the skewed distribution of game revenue prevents the foreclosure of rivals through exclusive contracting.
    Keywords: antitrust, vertical restrictions, exclusive contracts, platform markets, home video game industry, software and hardware markets, two-sided markets
    JEL: L14 K21 L42
    Date: 2007–11
  6. By: Jean J., GABSZEWICZ; Skerdilajda, ZANAJ
    Abstract: In this paper we analyze how the technology used by downstream firms can influence input and output market prices. We show via an example that both these prices increase under a decreasing returns technology while the countrary holds when the technology is constant.
    Keywords: successive oligopolies, vertical integration, technology, foreclosure
    JEL: D43 L1 L22 L42
    Date: 2007–12–06
  7. By: R. Cellini; L. Lambertini
    Date: 2007–11
  8. By: Puzzello, Daniela
    Abstract: This experimental study investigates pricing behavior of sellers in duopoly markets with posted prices and market power. The two treatment variables are given by tie breaking rules and divisibility of the price space. The first treatment variable deals with the rule under which demanded units are allocated between sellers in case of a price tie. A change in divisibility is modeled by making the sellers' price space finer or coarser. The main finding is that the incidence of perfect collusion is significantly higher under the sharing tie breaking rule than under the random (coin-toss) one, especially when the price space is less divisible.
    Keywords: Collusion; Tie Breaking Rules; Divisibility; Bertrand model.
    JEL: C9 L1
    Date: 2007
    Abstract: Competitive aggressiveness is analyzed in a simple spatial oligopolistic competition model, where each one of two firms supplies two connected markets segments, one captive the other contested. To begin with, firms are simply assumed to maximize profit subject to two constraints, one related to competitiveness, the other to market feasibility. The competitive aggressiveness of each firm, measured by the relative implicit price of the former constraint, is then endogenous and may be taken as a parameter to characterize the set of equilibria. A further step consists in supposing that competitive aggressiveness is controlled by each firm through its manager hiring decision, in a preliminary stage of a delegation game. When competition is exogenously intensified, through higher product substitutability or through larger relative size of the contested market segment, competitive aggressiveness is decreased at the subgame perfect equiibrium. This decrease partially compensates for the negative effect on profitability of more intense competition
    Date: 2007–12–06
  10. By: Huang, Ching-I
    Abstract: Cellular phone carriers typically offer complicated nonlinear tariffs. Consumers make a discrete choice among several rate plans. Each plan has a nonlinear price schedule, and price is usually lower for in-network calls. I present an empirical framework to estimate demand under such nonlinear pricing schemes by using parsimonious data and apply the estimation method to analyze the cellular phone service market in Taiwan. Based on the estimated model, I evaluate the impacts of termination-based pricing schemes on the market structure. While the existence of in-network discounts causes considerable tipping effects on market shares, the effects come primarily from reducing the average prices, not from the difference between in-network and off-network prices. There is no evidence showing that termination-based pricing by itself has significant effects on market structure.
    Keywords: termination-based price discrimination; optional rate plans; cellular phone service; structural estimation
    JEL: L96 L11 C35 L15
    Date: 2007–10
  11. By: Xu, Jin
    Abstract: We consider a Stackelberg model under demand slope uncertainty in an environment where the follower owns information advantage. Specifically, we show that the second mover obtains higher expected profit than the first mover when the leader only knows the prior beliefs and the follower gains the posterior probabilities. This result tells us that the leadership advantage is dominated by the information advantage when demand fluctuation is important.
    JEL: L13 L15 D43
    Date: 2007–12–20
  12. 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 credibility with respect to accurate forecasting. This result extends to the case when the broker prefers more investment to come into the market. However, when competition among brokers is introduced then the investors get their favorite outcome in the absence of superior information. This result has important implications for encouraging broker competitions in developing markets. Many developing markets are still not demutualized; hence broker level competition is limited in such markets.
    Keywords: Stock Price Manipulation; Broker Manipulation; Broker Competition; Broker Bias; Emerging Markets; Market Microstructure
    JEL: G1 G2 G3
    Date: 2007–12
  13. 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
  14. By: Giammario Impullitti
    Abstract: This paper studies the welfare effects of international competition in the market for innovations, and analyzes how competition affects the costs and the benefits of cooperative and non-cooperative R&D subsidies. I set up a two-country quality-ladder growth model where the leader, the home country, has R&D firms innovating in all sectors of the economy, and the follower, the foreign country, shows innovating firms only in a subset of industries. The measure of the set of sectors where R&D workers from both countries compete for innovation determines the scale of international Schumpeterian competition. Both governments engage in a strategic R&D subsidy game and respond optimally to changes in competition. For a given level of subsidies, increases in foreign competition raise the quality of goods available (growth effect) and lowers domestic profits (business-stealing effect); the overall effect of competition on domestic welfare depends on the relative strength of these two counteracting forces. When governments play a strategic subsidy game, increases in foreign competition trigger a defensive innovation policy mechanism that raises the optimal domestic R&D subsidy. Cooperation in subsidies leads both countries to set higher subsidies. Finally, while cooperation is beneficial for the global economy, there exists a threshold level of competition below which the home country experiences welfare losses under cooperation.
    Keywords: international competition, endogenous technical change, growth theory, strategic R&D subsidies, international policy cooperation
    JEL: O41 O31 O38 F12 F43
    Date: 2007

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