nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒06‒17
eight papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Firm entry, product repositioning and welfare By Zacharias, Eleftherios
  2. Comparing Cournot and Bertrand Competition in a Unionized Mixed Duopoly By Choi, Kangsik
  3. On Quantity Competition With Switching Costs By Langus, Gregor; Lipatov, Vilen
  4. Asymmetric Price Effects of Competition By Lach, Saul; Moraga-González, José-Luis
  5. Outsourcing versus technology transfer: Hotelling meets Stackelberg By Pierce, Andrea; Sen, Debapriya
  6. A primer on the welfare effects of regulatory reforms in network industries By Lidia CERIANI; Massimo FLORIO
  7. With a little help from my enemy: comparative advertising as a signal of quality By Francesca BARIGOZZI; Paolo Giorgio GARELLA; Martin PEITZ
  8. A fundamental power price model with oligopolistic competition representation By Vazquez, Miguel; Barquín, Julián

  1. By: Zacharias, Eleftherios
    Abstract: We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer's surplus possibly decrease. We first derive the price and the consumer's surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer's surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.
    Keywords: Horizontal differentiation; welfare analysis; product repositioning
    JEL: L13 D43 D60
    Date: 2009
  2. By: Choi, Kangsik
    Abstract: We investigate a differentiated mixed duopoly in which private and public firms can choose to strategically set prices or quantities by facing a union bargaining process. For the case of a unionized mixed duopoly, only the public firm is able to choose a type of contract irrespective of whether the goods are substitutes or complements in the equilibrium. Thus, we show that social welfare under Bertrand competition is always determined by the public firm's dominant strategy, wherein the Bertrand competition entails higher social welfare than the Cournot competition. Moreover, there are multiple Nash equilibria in the contract stage of the game. Finally, our main results hold irrespective of the nature of goods, with the exception of when a sufficiently large parameter of complements is employed, the ranking of private firm's profit is not reversed, which is contrast to the standard findings.
    Keywords: Wage Bargaining; Union; Cournot-Bertrand Competition; Mixed Duopoly.
    JEL: J51 L13 D43 C72 H44
    Date: 2008–09–25
  3. By: Langus, Gregor; Lipatov, Vilen
    Abstract: We build a simple model of quantity competition to analyze the effect of switching costs on equilibrium behavior of duopolists. We characterize the industry structure as a function of initial sales of two firms. Contrary to the literature, initial asymmetries persist in our model even though the firms are identical. When the disparity between initial sales is large, the smaller firm may become very aggressive and get more than half of the market in equilibrium. When the firms have similar initial positions, they tend to be locked in them.
    Keywords: quantity competition; switching costs
    JEL: L11 L13
    Date: 2008
  4. By: Lach, Saul; Moraga-González, José-Luis
    Abstract: This paper examines how the distribution of prices changes with the number of competitors in the market. Using gasoline price data from the Netherlands we find that as competition increases, the distribution of prices spreads out: the low prices go down while the high prices go up, on average. As a result, competition has an asymmetric effect on prices. These findings, which are consistent with a theoretical model where consumers differ in the information they have about prices, imply that consumers' gains from competition depend on their shopping behavior. In our data, all consumers, irrespective of the number of prices they observe, benefit from an increase in the number of gas stations. The magnitude of the welfare gain, however, is greater for those consumers that are aware of more prices. We conclude that an increase in the number of gas stations has a positive but unequal effect on the welfare of consumers in the Netherlands.
    Keywords: gasoline prices; imperfect information; number of firms; price distribution
    JEL: L1
    Date: 2009–06
  5. By: Pierce, Andrea; Sen, Debapriya
    Abstract: This paper considers a Hotelling duopoly with two firms A and B in the final good market. Both A and $B$ can produce the required intermediate good, firm B having a lower cost due to a superior technology. We compare two contracts: outsourcing (A orders the intermediate good from B) and technology transfer (B transfers its technology to A). First we show that an outsourcing order acts as a credible commitment on part of A to maintain a certain market share in the final good market. This generates an indirect Stackelberg leadership effect, which is absent in a technology transfer contract. We show that compared to the situation of no contracts, there are always Pareto improving outsourcing contracts but no Pareto improving technology transfer contracts. Finally, it is shown that whenever both firms prefer one of the two contracts, all consumers prefer the other contract.
    Keywords: Outsourcing; Technology transfer; Hotelling duopoly; Stackelberg effect; Pareto improving contracts
    JEL: L11 L13 D43
    Date: 2009–06–11
  6. By: Lidia CERIANI; Massimo FLORIO
    Abstract: Starting from an industry where production is provided by a public monopolist, we look at the effects on the consumers' surplus of a sequence of reforms in network industry. Using a simple comparative statics framework, we find indifference conditions in consumers' surplus between respectively public monopoly, unregulated private monopoly, regulated private monopoly, vertically disintegrated monopoly, duopoly and liberalized market. The results are determined by the relative size of the x-inefficiencies of the public monopolist, allocative inefficiencies of private monopoly, the cost of unbundling and costs related to establishing a competitive market.
    Keywords: Privatization, unbundling, liberalization, network industries
    JEL: D40 L51 L32 L33
    Date: 2008–07–08
  7. By: Francesca BARIGOZZI; Paolo Giorgio GARELLA; Martin PEITZ
    Abstract: We extend the theory of advertising as a quality signal, using a model where an entrant can choose to advertise by comparing its product to that of an established incumbent. Comparative advertising, comparing quality of one’s own product to that of a rival’s, empowers the latter to file for court intervention if it believes the comparison to be false or misleading. We show that comparative advertising can be a signal in instances where generic advertising is not viable.
    Keywords: Advertising, Quality, signaling, Entry, Competition
    JEL: L15 M37 L13
    Date: 2008–10–16
  8. By: Vazquez, Miguel; Barquín, Julián
    Abstract: Most popular approaches for modeling electricity prices rely at present on microeconomics rationale. They aim to study the interaction between decisions of agents in the market, and usually represent the impact of uncertainty in such decisions in a simplified way. The usual methodology of microeconomics models is the study of the interaction between the profit-maximization problems faced by each of the firms. On the other hand, there is a growing literature that describes the power price dynamics from the financial standpoint, through the statement of a more or less complex stochastic process. However, this theoretical framework is based on the assumption of perfect competition, and therefore the stochastic process may not capture important features of price dynamics. In this paper, we suggest a mixed approach, in the sense that the price is thought of as the composition of a long-term component, where the strategic behavior is represented, and a short-term source of uncertainty that agents cannot take into account when deciding their strategies. The complex distributional implications of the oligopolistic behavior of market players are then given by the long-term-component dynamics, whereas the short-term component captures the uncertainty related to the operation of power systems. In addition, this modeling approach allows for a direct description of the long-term volatility of power markets, which is usually hard to estimate through statistical models.
    Keywords: power markets; pricing models; market power; long-term/short-term decomposition
    JEL: C32 L13 Q40 C15 G13 C72
    Date: 2009–06

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