nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒08‒14
fourteen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Dynamic Price Dispersion in a Bertrand-Edgeworth Model By Sun, Ching-jen
  2. Dynamic Price Discrimination and Quality Provision Based on Purchase History By Sun, Ching-jen
  3. Consumer protection and the incentive to become informed By Armstrong, Mark; Vickers, John; Zhou, Jidong
  4. Three-Candidate Competition when Candidates Have Valence: The Base Case By Evrenk, Haldun
  5. Matching Own Prices, Rivals' Prices, or Both By Morten Hviid; Greg Shaffer
  6. Licensing probabilistic Patents: The duopoly case. By Vargas Barrenechea, Martin
  7. Adoption of a Cleaner Technology by a Monopoly Under Incomplete Information By Ben Youssef, Slim
  8. Dynamic Markets with Randomly Arriving Agents By Said, Maher
  9. Putting Free-Riding to Work: A Partnership Solution to the Common-Property Problem By Heintzelman, Martin; Salant, Stephen; Schott, Stephan
  10. Optimal Contracting Of New Experience Goods By Deb, Rahul
  11. Why, How and When Do Prices Land? Evidence from the Videogame Industry By Hernández-Mireles, C.; Fok, D.; Franses, Ph.H.B.F.
  12. The Welfare Costs of Unreliable Water Service By Baisa, Brian; Davis, Lucas; Salant, Stephen; Wilcox, William
  13. A Note on the Dynamics of Incentive Contracts By Sun, Ching-jen
  14. Endogenous Entry in Contests By John Morgan; Henrik Orzen; Martin Sefton

  1. By: Sun, Ching-jen
    Abstract: This paper considers a dynamic model of price competition in which sellers are endowed with one unit of the good and compete by posting prices in every period. Buyers each demand one unit of the good and have a common reservation price. They have full information regarding the prices posted by each firm in the market; hence, search is costless. The number of buyers coming to the market in each period is random. We characterize the dynamics of market prices and show that price dispersion persists over time.
    Keywords: Price Dispersion; Search Cost; Bertrand-Edgeworth Model
    JEL: L11 D43
    Date: 2005–10
  2. By: Sun, Ching-jen
    Abstract: This paper develops a general two-period model of product line pricing with customer recognition. Specifically, we consider a monopolist who can sell vertically differentiated products over two periods to heterogeneous consumers. Each consumer demands one unit of the product in each period. In the second period, the monopolist can condition the price-quality offers on the observed purchasing behavior in the first period. In this setup, the monopolist can price discriminate consumers not only by quality, but also by purchase history. Several interesting results are derived. First, we fully characterize the monopolist's optimal pricing strategy when there are two types of consumers, and a simple condition is given to determine whether the monopolist will price discriminate by quality in the first period. We compare it to the case when there is no customer recognition or the firm is able to commit to its future actions. When the type space is a continuum, we show that there is no fully separating equilibrium, and some properties of the optimal contracts (price-quality pairs) are characterized within the class of partitional PBE.
    Keywords: Price discrimination; Supermodularity; Submodularity; Behavior-Based Pricing; Ratchet Effect; Bunching
    JEL: L11 D42
    Date: 2007–10
  3. By: Armstrong, Mark; Vickers, John; Zhou, Jidong
    Abstract: We discuss the impact of consumer protection policies on consumer incentives to become informed of the best deals available in the market. In a market with costly consumer search, we find that imposing a cap on suppliers' prices reduces the incentive to engage in search, with the result that prices paid by consumers (both informed and uninformed) may rise. In a related model where consumers have the ability to refuse to receive marketing, we find that this ability softens price competition and can make all consumers worse off.
    Keywords: Consumer protection; search; price caps; advertising
    JEL: D18 L51 D83
    Date: 2008–08
  4. By: Evrenk, Haldun (Suffolk University, Department of Economics)
    Abstract: We study the Nash Equilibrium of three-candidate unidimensional spatial competition when candidates differ in their non-policy characteristics (valence). If the voters' policy preferences are represented by a strictly convex loss function, and if the voter density is unimodal and symmetric, then a unique, modulo symmetry, local Nash Equilibrium exists under fairly plausible conditions. The global Nash Equilibrium, however, exists when only one candidate has a valence advantage (or disadvantage) while the other two candidates have the same valence
    Keywords: Multi-candidate competition; valence; local Nash Equilibrium
    JEL: C72 H89
    Date: 2008–03–31
  5. By: Morten Hviid (ESRC Centre for Competition Policy and Norwich Law School, University of East Anglia); Greg Shaffer (ESRC Centre for Competition Policy, University of East Anglia, and Simon School of Business, University of Rochester)
    Abstract: Many retailers promise that they will not be undersold by rivals (price-matching guarantees) and extend their promise to include their own future prices (most-favored-customer clauses). This is puzzling because the extant literature has shown that each promise independently has the potential to facilitate supracompetitive prices, and so one might think that the two promises are substitutes. In this paper, we consider why a firm might make both promises in the same guarantee, and show that price-matching guarantees and most-favored-customer clauses complement each other and can lead to higher prices than either one could have facilitated by itself.
    Keywords: facilitating practices, low-price guarantees, antitrust policy
    JEL: L11 L13 L41
    Date: 2008–07
  6. By: Vargas Barrenechea, Martin
    Abstract: In this work we study licensing games of non drastic innovations under the shadow of probabilistic patents. We study the situation of a insider innovator that get a new reduction cost innovation and acts in a duopoly market under Cournout competition. When the property rights are not ironclad the potential licensee additional to the option of use the backstop technology instead of the new technology ,has the option of infringe the patent. Under infringement the patent holder can sue the infringer in a court and if its successful could get a order of damages payment. Then when the infringer decides about what kind of technology to use the infringement is always better than to use the backstop technology then a difference of the ironclad licensing games probabilistic rights, change the threats points and makes attractive for the patent holder just to license big innovations under the Lost Profit rule.
    Keywords: Patents; innovation economics; probabilistic property rights; damage rules
    JEL: L0 K42 C72
    Date: 2008–08
  7. By: Ben Youssef, Slim
    Abstract: We consider a model consisting of a monopolistic firm producing a certain good with pollution. This firm can adopt a cleaner technology within a finite time by incurring an investment cost decreasing exponentially with the adoption date. At each period of time, the firm is regulated by an emission tax which induces the socially optimal pollution and production levels, and a lump sum tax on profit. The firm is induced to adopt the cleaner technology at the socially optimal date by an appropriate innovation subsidy. In the incomplete information context, the firm has private information concerning the cost of acquiring the new technology. By an appropriate contract consisting of an adoption date and a R&D subsidy depending on the value of the innovation cost parameter announced by the firm, the regulator can induce the latter to reveal the true value of its private information in compensation of a socially costly intertemporal informational rent. However, the socially optimal adoption date of incomplete information is delayed with respect to the complete information one.
    Keywords: cleaner technology; adoption date; incomplete information
    JEL: H57 D62 D82 O32
    Date: 2008–06
  8. By: Said, Maher
    Abstract: We develop a model of a dynamic market with randomly arriving participants. Both buyers and sellers arrive probabilistically over time. The valuation of each buyer for each object is independently distributed and private information to each buyer. Equilibrium prices are determined by a sequence of second-price auctions. We examine the manner in which equilibrium behavior and payoffs are influenced by both current market conditions and anticipated future dynamics.
    Keywords: Dynamic markets; Random arrivals; Endogenous option value; Sequential auctions; Stochastic equivalence.
    JEL: D44 D83 C73
    Date: 2008–08–05
  9. By: Heintzelman, Martin; Salant, Stephen; Schott, Stephan
    Abstract: The common-property problem results in excessive mining, hunting, and extraction of oil and water. The same phenomenon is also responsible for excessive investment in R&D and excessive outlays in rent-seeking contests. We propose a "Partnership Solution" to eliminate or at least mitigate these excesses. Each of N players joins a partnership in the first stage and chooses his effort in the second stage. Under the rules of a partnership, each member must pay his own cost of effort but receives an equal share of the partnership's revenue. The incentive to free-ride created by such partnerships turns out to be beneficial since it naturally offsets the excessive effort inherent in such problems. In our two-stage game, this institutional arrangement can, under specified circumstances, induce the social optimum in a subgame-perfect equilibrium: no one has a unilateral incentive (1) to switch to another partnership (or create a new partnership) in the first stage or (2) to deviate from socially optimal actions in the second stage. The game may have other subgame-perfect equilibria, but the one associated with the ``Partnership Solution'' is strictly preferred by every player. We also propose a modification of the first stage which generates a unique subgame-perfect equilibrium. Antitrust authorities should recognize that partnerships can have a less benign use. By organizing as competing partnerships, an industry can reduce the ``excessive'' output of Cournot oligopoly to the monopoly level. Since no partner has any incentive to overproduce in the current period, there is no need to deter cheating with threats of future punishments.
    Keywords: partnerships;common property;tragedy of the commons;cartels
    JEL: Q5 L12
    Date: 2008–07–29
  10. By: Deb, Rahul
    Abstract: We model new experience goods in the context of dynamic mechanism design. These are goods for which an agent is unsure of her valuation but can learn it through consumption experience. We consider a dynamic environment with a single buyer and seller in which contracting occurs over T periods, where each time the agent consumes the object, she receives a signal which allows her to revise her valuation. In this setting, experimentation with the product is strategic both for the buyer and seller. We derive the efficient and seller optimal contracts and compare them. We present a simple two period example which highlights some of the key features of the model. Finally, the methodology developed in the paper can be used to design efficient and optimal contracts in a multi-buyer setting with learning, where each buyer has single unit demand and there is a single object for sale in each period.
    Keywords: Dynamic mechanism design; new experience goods; bandit problems
    JEL: D86 D44 D82 D83 C73
    Date: 2008–08–04
  11. By: Hernández-Mireles, C.; Fok, D.; Franses, Ph.H.B.F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We examine how new products are priced over time, where we particularly look at sharp decreases in prices. New durable products like fashion, apparel, and videogames often show a significant price cut some time after the product’s introduction. We call this a price landing and we examine its drivers. Theory predicts that competitive effects or underperforming sales are drivers for such price landings. To our knowledge, however, a systematic empirical study of price landing is unavailable. To examine the drivers of significant price cuts of a new product, we consider a rich dataset concerning sales and prices of 1195 newly released videogames. Prior literature suggests that own sales, competitive sales, competitive prices or simply time could be such drivers. In this paper we put these suggestions to an empirical test. We put forward a mixture model that covers a set of pricing equations with the price landing moment and its speed as key parameters. Second, in a hierarchical model we explain the apparent heterogeneity across the products. Our main finding is that it is not sales thresholds but competition and time itself that makes managers decide to seriously cut prices.
    Keywords: pricing;pricing models;new products
    Date: 2008–07–22
  12. By: Baisa, Brian; Davis, Lucas; Salant, Stephen; Wilcox, William
    Abstract: Throughout the developing world, many water distribution systems are unreliable. As a result, it becomes necessary for each household to store its own water as a hedge against this uncertainty. Since arrivals of water are not synchronized across households, serious distributional inefficiencies arise. We develop a model describing the optimal intertemporal depletion of each household’s private water storage when it is uncertain when water will next arrive to replenish supplies. The model is calibrated using survey data from Mexico City, a city where many households store water in sealed rooftop tanks known as tinacos. The calibrated model is used to evaluate the potential welfare gains that would occur if alternative modes of water provision were implemented. We estimate that most of the potential distributional inefficiencies can be eliminated simply by making the frequency of deliveries the same across households which now face haphazard deliveries. This would require neither costly investments in infrastructure nor price increases.
    Keywords: Water Supply Uncertainty; Water Storage; Distributional Inefficiency
    JEL: O12
    Date: 2008–07
  13. By: Sun, Ching-jen
    Abstract: Laffont and Tirole [3] show that when the uncertainty about the agent's ability is small, the equilibrium must involve a large amount of pooling, but it is not necessary to be a partition equilibrium. They construct a nonpartition continuation equilibrium for a given first-period menu of contracts and conjecture that this continuation equilibrium need not be suboptimal for the whole game under small uncertainty. We show that, irrespective of the amount of uncertainty, this nonpartition continuation equilibrium generates a smaller payoff for the principal than a different menu of contracts with a partition continuation equilibrium. In this sense, Laffont and Tirole's menu of contracts, giving rise to a nonpartition continuation equilibrium, is not optimal. An intuition behind this result is provided that may shed some light on the problem of dynamic contracting without commitment.
    Keywords: Incentive Contracts; Dynamic Contracting; Commitment; Partition Equilibrium; Ratchet Effect; Bunching.
    JEL: D86 L51
    Date: 2007–08
  14. By: John Morgan (Haas School of Business, University of California-Berkeley); Henrik Orzen (School of Economics, University of Nottingham); Martin Sefton (School of Economics, University of Nottingham)
    Abstract: We report the results of laboratory experiments on rent-seeking contests with endogenous participation. Theory predicts that (a) contest entry and rent-seeking expenditures increase with the size of the prize; and (b) earnings are equalized between the contest and the outside option. While the directional predictions offered in (a) are supported in the data, the level predictions are not. Prediction (b) is not supported in the data: When the prize is large, contest participants earn more than the outside option. When the prize is small, contest participants earn less. Previous studies of gender and contest competition suggest that females should (a) not perform as well in the contest; and (b) enter at a lower rate. We find some support for (a) but not for (b). Women participate in the contest at the same rate as men.
    Keywords: Contests; Competition; Entry; Experiments
    JEL: C9 D4 D72
    Date: 2008–07

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