nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒07‒05
seven papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Reference Dependence and Market Competition By Zhou, Jidong
  2. Open Versus Closed Platforms By Tåg, Joakim
  3. Natural concentration in industrial research collaboration By Bastian Westbrock
  4. Game-theoretical, Strategic forward Contracting in the Electricity Market By Holmberg, Pär
  5. Seller Competition by Mechanism Design By Damianov, Damian
  6. Efficiency and the Provision of Open Platforms By Tåg, Joacim
  7. Noncooperative Collusion and Price Wars with Individual Demand Fluctuations By Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries

  1. By: Zhou, Jidong
    Abstract: This paper studies the implications of consumer reference dependence in market competition. If consumers take some product (e.g., the first product they have considered) as the reference point in evaluating others and exhibit loss aversion, then the more "prominent" firm whose product is taken as the reference point by more consumers will randomize its price over a high and a low one. All else equal, this firm will on average earn a larger market share and a higher profit than its rival. The welfare impact is that consumer reference dependence could harm firms and benefit consumers by intensifying price competition. Consumer reference dependence will also shape firms' advertising strategies and quality choices. If advertising increases product prominence, ex ante identical firms may differentiate their advertising intensities. If firms vary in their prominence, the less prominent firm might supply a lower-quality product even if improving quality is costless.
    JEL: D11 L13 M37 D43
    Date: 2008–05
  2. By: Tåg, Joakim (Research Institute of Industrial Economics (IFN))
    Abstract: This paper studies an industry in which firms can choose to provide open or closed platforms. Open platforms, as opposed to closed, are extendable so third-party producers can develop extensions for them. Building on a two-sided market model, I show that firms might prefer to commit to keeping their platforms closed despite the fact that opening the platform is costless and open platforms are more valuable to consumers. The reason is that opening the platform may lead to intensified competition for consumers.
    Keywords: Platforms; Software; Two-sided Markets
    JEL: D40 D42 D43 L10 L12 L13 L14
    Date: 2008–04–12
  3. By: Bastian Westbrock
    Abstract: Empirical work suggests that the network of research and development alliances is asymmetric, with a small number of firms involved in the majority of partnerships. This paper relates the structure of the collaboration network to a fundamental characteristic of the demand for research output: the benefits of knowledge accumulation create private and social incentives for a concentration of collaborative activities. I theoretically investigate the formation of bilateral collaborative links in two different industry settings, one socially managed, the other oligopolistic. I find that in both cases a concentrated network is the typical equilibrium structure as well as the socially efficient structure.
    Keywords: R&D collaboration, market structure, networks
    JEL: D43 D85 L13
    Date: 2008–06
  4. By: Holmberg, Pär (Research Institute of Industrial Economics (IFN))
    Abstract: Forward sales is a credible commitment to aggressive spot market bidding, and it mitigates producers’ market power in electricity markets. Still it can be profitable for a producer to make such a commitment if it results in a soft response from competitors in the spot market (strategies are substitutes). The optimal contracting level of a risk-neutral producer is determined by the extent to which strategies are substitutes and the slope of the residual demand in the forward market. Conditions under which strategies are substitutes are identified for a two-stage game with supply function competition and capacity constrained producers.
    Keywords: Supply Function Equilibrium; Forward Market; Strategic Contracting; Arbitrage; Strategic Substitutes; Oligopoly; Electricity Market
    JEL: C72 D43 D44 G13 L13 L94
    Date: 2008–06–24
  5. By: Damianov, Damian
    Abstract: In the market game presented here, sellers offer trade mechanisms to buyers, and buyers randomize over the sellers they visit. The distribution of buyers across sellers is endogenous and depends on all of the transaction opportunities existing in the market. Sellers choose from a broad class of trade mechanisms; the only constraints imposed on mechanisms is that they are direct, incentive compatible, and anonymous. In the (subgame perfect) equilibrium of this market, sellers hold auctions with an efficient reserve price but charge an entry fee. The entry fee depends on the number of buyers and sellers, the distribution of buyer valuations, and the buyer cost of entering the market. As the size of the market increases, the entry fee decreases and vanishes in the limit. The model sheds light on the endogenous formation of trading institutions in decentralized markets.
    Keywords: competition; mechanism design; auctions
    JEL: D44 D82
    Date: 2008–06–23
  6. By: Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: Private firms may not have efficient incentives to allow third-party producers to access their platform or develop extensions for their products. Based on a two-sided market model, I discuss two reasons for why. First, a private firm may not be able to internalize all benefits from cross-group externalities arising with third-party extensions. Second, firms may have strategic incentives to shut out third-parties because it relaxes competition.
    Keywords: Platforms; Two-sided Markets; Open versus Closed
    JEL: D40 L10
    Date: 2008–04–28
  7. By: Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries (METEOR)
    Abstract: We analyze whether noncooperative collusive equilibria are harder to sustain when individual demand levels are not fixed but are able to fluctuate. To do this, we extend a Bertrand type model of price competition to allow for fluctuating market shares when prices are equal. We find that, the larger the market share fluctuations may be, the higher the discount factor should be to sustain a collusive equilibrium in trigger strategies. The intuition behind this is fairly straightforward. When individual demand in the collusive state is suddenly low, the gains from collusion go down. Moreover, the firm with the low demand can capture a larger share of the market by deviating from the collusive strategy. The incentive to deviate therefore becomes larger when the individual market share decreases. We also look at the existence of a specific type of semi-collusive equilibrium when individual market shares are either common knowledge or private knowledge. We find that there exist equilibria in which competitive periods (price wars) occur with probability 1 and on the equilibrium path.
    Keywords: mathematical economics;
    Date: 2008

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