nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒05‒10
ten papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Simulating Sequential Search Models with Genetic Algorithms: Analysis of Price Ceilings, Taxes, Advertising and Welfare By Ian McCarthy
  2. Mixed Bundling and Mergers By Laurent Granier; Marion Podesta
  3. Oligopolistic Non-Linear Pricing and Size Economies By Carlo Reggiani
  4. Costly Buyer Search in Laboratory Markets with Seller Advertising By Timothy N. Cason; Shakun Datta
  5. Uncertainty in Spatial Duopoly with Possibly Asymmetric Distributions: a State Space Approach By Kieron J. Meagher; Klaus G. Zauner
  7. Co-Development of Open Innovation Strategy and Dynamic Capabilities as a Source of Corporate Growth By Alar Kolk; Kristi Püümann
  8. Volatility-price relationships in power exchanges: A demand-supply analysis By Sandro Sapio
  9. The Dynamics of Firm Growth - a re-examination By Lööf, Hans
  10. Optimal Dynamic Auctions By Mallesh Pai; Rakesh Vohra

  1. By: Ian McCarthy (Indiana University Bloomington)
    Abstract: This paper studies advertising, price ceilings and taxes in a sequential search model with bilateral heterogeneities in production and search costs. We estimate equilibria using a genetic algorithm (GA) applied to over 100 market scenarios, each differing based on the number of firms, number of consumers, existence of price ceilings or taxes, costs of production, costs of advertising, consumers' susceptibility to advertising and consumers' search costs. We compare our equilibrium results to those of the standard theoretical consumer search literature and analyze the welfare effects of advertising, price ceilings and sales taxes. We find that price ceilings and uninformative advertising can improve welfare, especially if search costs are sufficiently high.
    Keywords: Sequential Search Models, Genetic Algorithms, Price Ceilings, Taxes, Advertising, Welfare
    JEL: C63 D21 D43 D73 D83 M37
    Date: 2008–04
  2. By: Laurent Granier; Marion Podesta
    Abstract: Does bundling trigger mergers? We observe mergers between firms belonging to independent industries. These mergers enable firms to bundle. Indeed, many telephone firms, internet access providers or cable TV operators merge. Thus, the merged firms can provide bundles. Therefore, the question is the following: can bundling strategies allowed by a two-market merger create an incentive to merge? We consider two horizontally differentiated markets. The correlation of reservation prices is the sole link between these two markets. In this framework, we show that bundling strategies create incentives to form multi-markets firms. Merger decisions are endogenous in our model.
    Keywords: Product Bundling, Endogenous Mergers, Multi-Market Contacts
    Date: 2008
  3. By: Carlo Reggiani
    Abstract: The effects of non-linear pricing are determined by the relationship between the demand and the technological structure of the market. This paper focuses on a model in which firms supply a homogeneous product in two different sizes. Information about consumers' reservation prices is incomplete and the production technology is characterized by size economies. Four equilibrium regions are identified depending on the relative intensity of size economies with respect to consumers' evaluation of a second unit of the good. The desirability of non-linear pricing varies across different equilibrium regions.
    Keywords: non-linear pricing, size economies, supply technology.
    JEL: D43 L11 L13
    Date: 2008–05
  4. By: Timothy N. Cason; Shakun Datta
    Abstract: In this laboratory experiment sellers simultaneously post prices and choose whether to advertise. Buyers then decide whether to buy from a seller whose advertisement they have received, or engage in costly sequential search to obtain price quotes from other sellers. In the unique symmetric equilibrium, sellers either charge a high unadvertised price or randomize in an interval of lower advertised prices. Increases in either search or advertising costs raise equilibrium prices, and equilibrium advertising intensity decreases with lower search costs and higher advertising costs. Our results are consistent with most of these comparative static predictions, and sellers also post lower advertised than unadvertised prices as predicted. In all treatments, however, sellers price much lower than the equilibrium interval and earn very low profits. Although buyers’ search decisions are approximately optimal, sellers advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium that features significant seller market power.
    Keywords: Experiment, Posted offer, Market power, Mixed strategy, Uncertainty, Shopping
    JEL: D43 D83 L13
    Date: 2008–04
  5. By: Kieron J. Meagher; Klaus G. Zauner
    Abstract: In spatial competition firms are likely to be uncertain about consumer locations when launching products either because of shifting demograph- ics or of asymmetric information about preferences. Realistically distri- butions of consumer locations should be allowed to vary over states and need not be uniform. However, the existing literature models location uncertainty as an additive shock to a uniform consumer distribution. The additive shock restricts uncertainty to the mean of the consumers loca- tions. We generalize this approach to a state space model in which a vector of parameters gives rise to different distributions of consumer tastes in dif- ferent states, allowing other moments (besides the mean) of the consumer distribution to be uncertain. We illustrate our model with an asymmetric consumer distribution and obtain a unique subgame perfect equilibrium with an explicit, closed-form solution. An equilibrium existence result is then given for the general case. For symmetric distributions, the unique subgame perfect equilibrium in the general case can be described by a simple closed-form solution.
    Keywords: Location, Product Differentiation, Uncertainty, Hotelling
    JEL: C72 D43 D81 L10 L13 R30 R39
    Date: 2008–04
  6. By: Jaan Masso; Priit Vahter
    Abstract: There is growing interest in modelling the relationship between innovation and productivity in developing and transition econo¬mies due to their attempts to establish knowledge-based economies and to increase business R&D. Our paper investigates whether there is a signi¬ficant relationship between technological innovation and pro¬ductivity in the manufacturing sector of Estonia. We use firm-level data for the analysis from two waves of Community Innovation Surveys (CIS3 and CIS4) from 1998–2000 and 2002–2004, which is then combined with financial data about firms from the Estonian Business Register in order to study the effect of innovation at higher leads. We apply a structural model that in¬volves a system of equations on innovation expenditure, inno¬vation outcome and productivity. Our results show that during 1998–2000 only product innovation increased productivity, while in 2002–2004 only process innovation had a positive effect on productivity. This can probably be explained by the different macroeconomic conditions in the two periods.
    Keywords: productivity; innovation; Estonia
    JEL: O31 O33 C31 O10
    Date: 2008
  7. By: Alar Kolk (Institute of Strategy and International Business, Helsinki University of Technology); Kristi Püümann (School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: Companies need to be innovative in terms of their business models and technologies to achieve superior performance. As market conditions require innovation to be open, firms develop dynamic capabilities to generate and realise such open strategies. Even though corporate growth in rapidly changing environment is related to opening up innovation as well as developing dynamic capabilities, there is a necessity for appropriate management of openness of innovation strategies as well as management of the dynamics of capabilities. Therefore this paper suggests that firms need to find a balance point between development of their organisational capabilities and openness of their innovation strategies. Co-development of firms´ dynamic capabilities together with Open Innovation Strategies enables firms to maximise their performance.
    Keywords: open innovation; open business model; innovation strategies; dynamic capabilities; corporate growth
    JEL: L29 O30 O31 O32
    Date: 2008
  8. By: Sandro Sapio
    Abstract: The evidence of volatility-price dependence observed in previous works (Karakatsani and Bunn 2004; Bottazzi, Sapio and Secchi 2005; Simonsen 2005) suggests that there is more to volatility than simply spikes. Volatility is found to be positively correlated with the lagged price level in settings where market power is likely to be particularly strong (UK on-peak sessions, the CalPX). Negative correlation is instead observed in markets considered to be fairly competitive, such as the NordPool. Prompted by these observations, this paper aims to understand whether volatility-price patterns can be mapped into different degrees of market competition, as the evidence seems to suggest. Price fluctuations are modelled as outcomes of dynamics in both sides of the market - demand and supply, which in turn respond to shocks to the underlying preference and technology fundamentals. Negative volatility-price dependence arises if the market dynamics is accounted for by common shocks which affect valuations uniformly. Positive dependence is related to the impact of asymmetric shocks. The paper shows that under certain conditions, these volatility-price patterns can be used to identify the exercise of market power. Identification is however ruled out if all shocks affect valuations uniformly.
    Keywords: Electricity, Market, Volatility, Supply Curve, Demand Curve, Fundamentals, Shocks
    Date: 2008–04–11
  9. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This article provides evidence that shed further light on the dynamic relationships between finance, physical investment, R&D, productivity and profit. Estimating relationships for 5,289 observations on Swedish manufacturing firms with 50 or more employees over the 1992-2000 periods, the following substantial empirical findings emerge. First, physical investments are sensitive to both internal financing (profit) and external financing (expressed as leverage, or the ratio of debt over equity and debt) while R&D is only weakly affected by the firm’s finance conditions. Second, no robust correlation between knowledge investments and ordinary investments can be established. Third, R&D has a strong effect on productivity and profit. The reverse relationship is fragile and typically insignificant. The causality between physical capital and productivity is bidirectional, while increased profit leads to more capital but not the vice versa.
    Keywords: Financial constraints; R&D; Investments; Productivity; Panel data
    JEL: O31 O32
    Date: 2008–04–28
  10. By: Mallesh Pai; Rakesh Vohra
    Abstract: We consider a dynamic auction problem motivated by the traditional single-leg, multi-period revenue management problem. A seller with C units to sell faces potential buyers with unit demand who arrive and depart over the course of T time periods. The time at which a buyer arrives, her value for a unit as well as the time by which she must make the purchase are private information. In this environment, we derive the revenue maximizing Bayesian incentive compatible selling mechanism.
    Keywords: dynamic mechanism design, optimal auctions, virtual valuation, revelation principle
    JEL: D44 C72 C73
    Date: 2008–03

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