nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒02‒23
eight papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Dynamic Efficiency of Product Market Competition By Jeroen Hinloopen; Jan Vandekerckhove
  2. Existence Advertising, Price Competition, and Asymmetric Market Structure By B. Curtis Eaton; Ian MacDonald; Laura Meriluoto
  3. Signaling Quality through Prices in an Oligopoly By Maarten C.W. Janssen; Santanu Roy
  4. Nonparametric Estimation of the Costs of Non-Sequential Search By José Luis Moraga-González; Zsolt Sándor; Matthijs R. Wildenbeest
  5. Exclusive Quality By Argenton, C.
  6. Product innovation and imitation in a duopoly with differentiation by attributes By Reynald-Alexandre Laurent
  7. Interactions between competition and consumer policy By Armstrong, Mark
  8. On the optimality of the full cost pricing By Jacques Thépot; Jean-Luc Netzer

  1. By: Jeroen Hinloopen (Universiteit van Amsterdam, and Katholieke Universiteit Leuven); Jan Vandekerckhove (Kath. Universiteit Leuven)
    Abstract: We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers' surplus.
    Keywords: Bertrand competition; Cournot competition; process R&D; efficiency
    JEL: L13
    Date: 2007–12–17
  2. By: B. Curtis Eaton; Ian MacDonald; Laura Meriluoto
    Abstract: We examine a duopoly pricing game where some customers know of no firms, others know of only one firm, and some know of both firms. Firms have constant and identical marginal costs, sell homogenous goods and choose prices simultaneously. Customers observe the prices of the firms that are known to them. We show that there is no equilibrium in pure price strategies for this game. We find a mixed strategy equilibrium, and show that it has intuitively appealing comparative static properties. We then examine the two stage game in which firms advertise their existence in stage 1 to create their customer bases, and in stage 2 play the pricing game described above. The equilibrium to the two stage game is asymmetric, and far from the Bertrand equilibrium.
    Keywords: Existence advertising, price dispersion, Bertrand paradox, information, duopoly
    JEL: D43 D80
    Date: 2008–02–01
  3. By: Maarten C.W. Janssen (Erasmus University Rotterdam); Santanu Roy (Southern Methodist University, Dallas, Texas)
    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: 2007–10–22
  4. By: José Luis Moraga-González (University of Groningen, and CESifo); Zsolt Sándor (Universidad Carlos III de Madrid); Matthijs R. Wildenbeest (Kelley School of Business, Indiana University)
    Abstract: We study a consumer non-sequential search oligopoly model with search cost heterogeneity. We first prove that an equilibrium in mixed strategies always exists. We then examine the nonparametric identification and estimation of the costs of search. We find that the sequence of points on the support of the search cost distribution that can be identified is convergent to zero as the number of firms increases. As a result, when the econometrician has price data from only one market, the search cost distribution cannot be identified accurately at quantiles other than the lowest. To solve this pitfall, we propose to consider a richer framework where the researcher has price data from many markets with the same underlying search cost distribution. We provide conditions under which pooling the data allows for the identification of the search cost distribution at all the points of its support. We estimate the search cost density function directly by a semi-nonparametric density estimator whose parameters are chosen to maximize the joint likelihood corresponding to all the markets. A Monte Carlo study shows the advantages of the new approach and an application using a data set of online prices for memory chips is presented.
    Keywords: consumer search; oligopoly; search costs; semi-nonparametric estimation
    JEL: C14 D43 D83 L13
    Date: 2008–01–04
  5. By: Argenton, C. (Tilburg University, Center for Economic Research)
    Abstract: In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a more efficient rival, contrary to what happens in the homogenous product case. Indeed, because of differentiation, the incumbent?s inferior product is not eliminated upon entry. As a result, a retailer who considers rejecting the exclusivity clause expects to earn much less than the incumbent?s monopoly rents. Thus, in equilibrium, the incumbent can offer high enough an upfront payment to induce all retailers to sign on the contract and achieve exclusion.
    Keywords: vertical differentiation;exclusive dealing;contracts;naked exclusion;monopolization.
    JEL: L12 L42
    Date: 2008
  6. By: Reynald-Alexandre Laurent
    Abstract: This paper considers a probabilistic duopoly in which products are described by their specific attributes, this form of differentiation embodying the horizontal and vertical dimensions. Consumers make discrete choices and follow a random decision rule based on these attributes. A three-stage game is studied in which firms develop new attributes for their products (innovation), then may imitate the attributes of the competing product and finally compete in price. At the equilibrium, the firm selling the less appreciated product is generally incited to imitate its rival. Confronted to a threat of imitation, the benchmark firm sometimes decreases strategically its attribute index in order to diminish its unit cost of innovation and the differentiation on the market, deterring the imitation in this way. This strategy is efficient when imitation costs are sufficiently concave. In the opposite case, it is preferable for the benchmark firm to accept the imitation. Thus, according to the shape of imitation costs, equilibria with "deterrence" or with "accommodation" occur, completing the current typology of strategic responses to a threat of imitation.
    Date: 2008
  7. By: Armstrong, Mark
    Abstract: This paper discusses complementarities and tensions between competition policies and consumer protection policies. The paper argues that markets will often supply adequate customer protection without the need for extra public intervention. Special areas where intervention might be needed are discussed, including the need to combat deceptive marketing and the need to provide additional market transparency (about both headline prices and shrouded product attributes). A few instances are presented of how more intense competition can worsen the outcomes for (some) consumers. Situations in which poorly designed consumer policies can harm consumers are discussed, including how they can be used to protect incumbent suppliers, how they can relax competition between oligopolists, how they can reduce consumer choice, how they can focus on one aspect of market performance at the expense of others, and how they can lead consumers to take insufficient care in the market.
    Keywords: Competition policy; consumer protection; fraud; market transparency; add-on pricing
    JEL: D18 M30 L15
    Date: 2008–02
  8. By: Jacques Thépot (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur); Jean-Luc Netzer
    Abstract: Most companies prefer to use absorption costing rule rather than marginal cost pricing. This article is aimed at defining the absorption costing rule as deriving from a principal-agent formulation of two tier organizations : (i) the upstream unit fixes the production capacity and uses it as a cost driver to compute the average cost (ii) the downstream unit operates on the market and chooses the output level on the basis of the average cost. Absorption costing results in two policies to be used according to the magnitude of the fixed cost. When the fixed cost is low, the capacity is fully used and a full cost pricing policy holds; when the fixed cost is high, a partial cost pricing policy holds since only a part of the fixed cost is passed on. The absorption costing rule competes with three pricing rules related to this two-tier structure and various payoffs functions associated to the decision levels: the separation, the tranfer pricing and the integration These rules are analyzed in the Cournot oligopoly case and comparisons in terms of profits are made. Except in the monopoly case, there exists a wide range of values of the fixed cost, for which the full cost pricing dominates all the other rules. In addition, there exists a specific value of the fixed cost for which the full cost pricing duplicates the monopoly and then leads to the first best solution of the Cournot oligopoly.
    Keywords: Full cost pricing, imperfect competition.
    JEL: D4 L22 M41
    Date: 2007

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