nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒07‒20
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Service provision on a network with endogenous consumption capacity By Nikolaos Georgantzis; Carlos Gutiérrez-Hita
  2. Is Bundling Anticompetitive? By Ioana Chioveanu
  3. Abuse of Dominance and Licensing of Intellectual Property By Rey, Patrick; Salant, David
  4. Are Antitrust Fines Friendly to Competition? An Endogenous Coalition Formation Approach to Collusive Cartels By Alberto ZAZZARO; David BARTOLINI
  5. Capacity restriction by retailers By Ramón Faulí-Oller
  6. Information Sharing Networks in Oligopoly By Sergio Currarni; Francesco Feri
  7. Testing the “Waterbed” Effect in Mobile Telephony By Christos Genakos; Tommaso Valletti
  8. Buyer Power and the “Waterbed Effect” By Roman Inderst; Tommaso M. Valletti
  9. The Buy Price in Auctions with Discrete Type Distributions By Yusuke Inami
  10. On Bundling in Insurance Markets By Maarten C. W. Janssen; Vladimir A. Karamychev
  11. Strategic Consumption Complementarities: Can Price Flexibility Eliminate Inefficiencies and Instability? By E Randon; P Simmons
  12. Lump-Sum Taxes in a R&D Model By Xin Long; Alessandra Pelloni; Robert Waldmann
  13. The role of the interchange fee on the effect of forbidding price discrimination of ATM services By Ramón Faulí-Oller
  14. Corporate Social Responsibility and Wage Discrimination in Unionized Oligopoly By Minas Vlassis; Nick Drydakis

  1. By: Nikolaos Georgantzis (Universitat Jaume I); Carlos Gutiérrez-Hita (Universidad de Alicante)
    Abstract: We present a model in which the consumers' capacity to access a service provided on a network depends negatively on the price charged by the network owner per capacity unit. Several scenarios concerning the structure of the downstream service provision market are studied. First, a monopolist operates in both the network and the service provision stage. Second, we assume duopolistic competition between the network owner and the entrant. Third, we allow for endogenous differentiation of the services provided by the two competitors. Generally speaking, the duopolistic structure does not necessarily enhance consumer surplus. Furthermore, competition in the service provision market may reduce social welfare, either due to excessive differentiation or due to a low network density.
    Keywords: telecommunications markets, regulation, endogenous consumption.
    JEL: D43 L13 L51
    Date: 2008–03
  2. By: Ioana Chioveanu (Universidad de Alicante)
    Abstract: I analyze the implications of bundling on price competition in a market with complementary products. Using a model of imperfect competition with product differentiation, I identify the incentives to bundle for two types of demand functions and study how they change with the size of the bundle. With an inelastic demand, bundling creates an advantage over uncoordinated rivals who cannot improve by bundling. I show that this no longer holds with an elastic demand. The incentives to bundle are stronger and the market outcome is symmetric bundling, the most competitive one. Profits are lowest and consumer surplus is maximized.
    Keywords: Bundling, complementary goods, product differentiation
    JEL: L11 L13
    Date: 2008–03
  3. By: Rey, Patrick; Salant, David
    Abstract: Patent thickets, layers of licenses a firm needs to be able to offer products that embody technologies owned by multiple firms, and licensing policies have drawn increasing scrutiny from policy makers. Patent thickets involve complementary products, which gives rise to double marginalization -- the so-called royalty stacking problem -- and has the potential to retard diffusion of new technologies and reduce consumer welfare. This paper examines the impact of licensing policies of one or more upstream owners essential} intellectual property (IP) on the downstream firms that require access to that IP. The terms under which downstream firms can access this IP affects entry decisions, product diversity, prices and welfare. We consider both the case in which a single party controls the essential IP and the case in which different parties control complementary pieces of essential IP. We compare the outcome of several alternative standard licensing arrangements, such as flat rate access fees, royalty percentages, per unit fees, patent pools and cross-licensing arrangements, with or without vertical integration. We first consider the case where there is a single upstream owner of essential IP. Increasing the number of licenses enhances product variety, which creates added value, but it also intensifies downstream competition, which dissipates profits. We derive conditions under which the upstream IP monopoly will then want to provide an excessive or insufficient number of licenses, relative to the number that maximizes consumer surplus or social welfare. When there are multiple owners of essential IP, royalty stacking can reduce the number of the downstream licensees, but also the downstream equilibrium prices the consumers face. The paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society. Finally, the paper explores the impact of alternative licensing policies. With fixed license fees or royalties expressed as a percentage of the price, an upstream IP owner cannot control the intensity of downstream competition. In contrast, volume-based license fees (i.e., per-unit access fees), do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration. The paper also shows that vertical integration can have little impact on downstream competition and licensing terms when IP owners charge fixed or volume-based access fees.
    Keywords: Patents; Vertical Integration
    JEL: D43 L22 L40
    Date: 2008
  4. By: Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); David BARTOLINI ([n.a.])
    Abstract: A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the Authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the social optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and equilibrium binding agreements. Then we extend the analysis to the case of n symmetric firms and a generic rule of coalition formation. Finally, we consider the case of asymmetric firms and show that our results still hold for an industry populated by one Stackelberg leader and two followers.
    Keywords: antitrust policy, coalition formation, collusive cartels
    JEL: C70 L40 L41
    Date: 2008–07
  5. By: Ramón Faulí-Oller (Universidad de Alicante)
    Abstract: A monopolist retailer facing two suppliers producing two symmetric and independent goods improves its bargaining position by commiting to sell only one good. We analyze if this advantage extends to the case where there are two undierentiated retailers competing in the same market. With linear supply contracts, we have partial capacity restriction in the sense that only one retailer commits to sell only one good. Then, we have that if retailers were to merge, welfare would decrease because the merger reduces the variety of goods available to consumers.
    Keywords: Retailing, mergers, variety
    JEL: L13 L41 L42
    Date: 2008–03
  6. By: Sergio Currarni (Department of Economics, University Of Venice Cà Foscari); Francesco Feri (University of Innsbruck)
    Abstract: We study the incentives of oligopolistic firms to share private information on demand parameters. Differently from previous studies, we consider bilateral sharing agreements, by which firms commit at the ex-ante stage to truthfully share information. We show that if signals are i.i.d., then pairwise stable networks of sharing agreements are either empty or made of fully connected components of increasing size. When linking is costly, non complete components may emerge, and components with larger size are less densly connected than components with smaller size. When signals have different variances, incomplete and irregular network can be stable, with firms observing high variance signals acting as "critical nodes". Finally, when signals are correlated, the empty network may not be pairwise stable when the number of firms and/or correlation are large enough.
    Keywords: Information sharing, oligopoly, networks, Bayesian equilibrium
    JEL: D43 D82 D85 L13
    Date: 2008
  7. By: Christos Genakos (Selwyn College, University of Cambridge & Centre for Economic Performance, London School of Economics); Tommaso Valletti (Faculty of Economics, University of Romza "Tor Vergata")
    Abstract: This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the “waterbed” effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile telephony industry. Using a uniquely constructed panel of mobile operators’ prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that the waterbed effect is strong, but not full. We also provide evidence that both competition and market saturation, but most importantly their interaction, affect the overall impact of the waterbed effect on prices.
    Date: 2008–07–11
  8. By: Roman Inderst (University of Frankfurt); Tommaso M. Valletti (University of Rome "Tor Vergata")
    Abstract: We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the “waterbed effect”). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified “waterbed effect” holds irrespective of whether a firm grows by acquisition or “organically” by becoming more efficient.
    Date: 2008–07–10
  9. By: Yusuke Inami (Graduate School of Economics, Kyoto University)
    Abstract: This paper considers second-price, sealed-bid auctions with a buy price where biddersf types are discretely distributed. We characterize all equilibria, restricting our attention to equilibria where bidders whose types are less than a buy price bid their own valuations. Budish and Takeyama (2001) analyzed the two-bidder, two-type framework, and showed that if bidders are risk-averse, a seller can obtain a higher expected revenue from the auction with a certain buy price than from the auction without a buy price. We extend their revenue improvement result to the n-bidder, two-type framework. However, in case of three or more types, biddersf risk aversion is not a sufficient condition for the revenue improvement. Our example illustrates that even if bidders are risk-averse, a seller cannot always obtain a higher expected revenue from the auction with a buy price.
    Keywords: Auction; Buy price; Risk aversion
    JEL: C72 D44
    Date: 2008–07
  10. By: Maarten C. W. Janssen; Vladimir A. Karamychev
    Abstract: This paper analyzes the welfare consequences of bundling different risks in one insurance contract in markets where adverse selection is important. This question is addressed in the context of a competitive insurance model a la Rothschild and Stiglitz (1976) with two sources of risk. Accordingly, there are four possible types of individuals and many incentive compatibility constraints to be considered. We show that the effect of bundling on these incentive compatibility constraints is such that bundling always yields a welfare improvement, and this result only holds when all four types have strictly positive shares in the population. Due to the competition between insurance companies, these benefits accrue to consumers who potentially have fewer contracts to choose from, but benefit from the better sorting possibilities due to bundling.
    JEL: G22 D82
    Date: 2008–07
  11. By: E Randon; P Simmons
    Abstract: Generally, two facts occur with strategic complementarities and fixed prices: i) the equilibria are multiple, and ii) if the complementarities are strong, the law of demand is violated and the equilibrium is unstable. In this paper, we analyse the effect of price flexibility on these features as well as on market welfare properties. Assuming an exchange economy with H agents consuming two goods with one strategic complement, we show that flexibility of prices may remove both the multiplicity of the equilibria and the instability of behaviour when the externalities are strong. The equilibrium with beneficial externality is shown to be Pareto optimal while the equilibrium with detrimental externality requires corrections
    Keywords: Externalities, Strategic Interaction, Stability
    JEL: D62 C72 D50
    Date: 2008–07
  12. By: Xin Long (Faculty of Economics, University of Rome "Tor Vergata"); Alessandra Pelloni (Faculty of Economics, University of Rome "Tor Vergata"); Robert Waldmann (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: Is it possible to increase growth and welfare by raising taxes and disposing of the tax revenues? We show this may indeed be the case in a simple model with endogenous technical change, represented by an increase in the variety of intermediate goods.
    Date: 2008–07–14
  13. By: Ramón Faulí-Oller (Universidad de Alicante)
    Abstract: We consider whether banks should be allowed to set different ATM prices to their customers depending on whether they hold an account on the bank. In Massoud and Bernhardt (2002), without considering an interchange fee, a ban on price discrimination on ATM services increases total surplus. In the present model that considers an interchange fee, the effect of a ban on price discrimination depends on the way the interchange is fixed. If it is fixed to maximize the profits of banks, forbidding price discrimination reduces total surplus. However, if the interchange is fixed to maximize total surplus, banning price discrimination increases total surplus.
    Keywords: ATM, surcharge, foreign fee, interchange fee, collusion.
    JEL: L13 G21
    Date: 2008–03
  14. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Nick Drydakis (Department of Economics - University of Crete, Greece)
    Abstract: The European labour markets are characterized by the existence of trade unions with extensive coverage whereas wage contracts are typically determined through decentralized firm-union bargaining. On the other hand, as it particularly refers to migrant and ethnic minority groups, equally-skilled workers often face lower reservation wages. We argue that these facts may lead unions to opt for discriminatory wage contracts across groups of employees. At the same time firms may nonetheless opt for non-discrimination in wages insofar as they would profitably “advertise” it as an exertion of corporate social responsibility (csr). We show that, if the consumers’ valuation of non-discrimination is sufficiently high, the latter strategies would as well be compatible with the unions’ best interest in the equilibrium. Otherwise, we propose that to efficiently combat wage discrimination policy makers should instead of firms undertake csradvertisement in the event of non-discrimination. Yet, such an antidiscrimination policy would always entail a net loss in social welfare.
    Keywords: Unions, Oligopoly, Discriminatory Wage Contracts, Antidiscrimination Policy, Corporate Social Responsibility.
    JEL: C72 L15 L21 L22
    Date: 2008

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