nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒07‒17
sixteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Downstream merger and welfare in a bilateral oligopoly By George Symeonidis
  3. On cost restrictions in spatial competition models with heterogeneous firms By Marco Alderighi; Claudio A. Piga
  4. Non-price Competition, Real Rigidities and Inflation Dynamics By Francesco Turino
  5. On Reputational Rents as an Incentive Mechanism in Competitive Markets By Bernardita Vial;; Felipe Zurita.
  6. Social Identity, Competition, and Finance: A Laboratory Experiment By Stefan Bauernschuster; Oliver Falck; Niels Daniel Grosse
  7. Hospital Markets and the Effect of Competition on Quality By Alfons Palangkaraya; Jongsay Yong
  8. Fatigue in dynamic tournaments By Dmitry Ryvkin
  9. Market Power in Pollution Permit Markets By Juan Pablo Montero
  10. The High/Low Divide: Self-Selection by Values in Auction Choice By Radosveta Ivanova-Stenzel; Timothy Salmon
  11. Technology diffusion and growth By Erzo G.J. Luttmer
  12. Alternative Ways of Measuring and Interpreting Worker Flows By Corseuil, Carlos H. L.
  13. Decision-making Procedures: A General Theory and Its Field Experimental Test By Aldashev, Gani; Kirchsteiger, Georg; Sebald, Alexander
  14. The Efficiency of Comparative Causation By Francesco Parisi; Ram Singh
  15. Heterogeneous adaptive expectations and cobweb phenomena By Domenico Colucci; Vincenzo Valori
  16. Competing on Good Politicians By Galasso, Vincenzo; Nannicini, Tommaso

  1. By: George Symeonidis
    Abstract: I analyse the effects of a downstream merger in a differentiated oligopoly when there is bargaining between downstream firms and upstream agents (firms or unions). Bargaining outcomes can be observable or unobservable by rivals. When competition is in quantities, upstream agents are independent and bargaining is over a uniform input price, a merger between downstream firms may raise consumer surplus and overall welfare. However, when competition is in prices or the upstream agents are not independent or bargaining is over a two-part tariff or bargaining covers both the input price and the level of output, the standard welfare results are restored: a downstream merger always reduces consumer surplus and overall welfare.
    Date: 2009–07–13
  2. By: Yan Liu; Guangâ€Zhen Sun
    Abstract: We develop a framework, extending the conventional duopoly model by replacing the Hotelling line with a simplex in highâ€dimension spaces, to study the competition and access regulation of multiple networks. We first characterize the competitive equilibrium when the substitutabilities of the networks are not too high, or the access charges are nearly costâ€based. We then analyse how the equilibrium market shares respond to marginal variations in the access charges under various regimes of access regulation, and thereby examine the efficiency implications of such regulation regimes. In particular, we analyze the asymmetric scenario in which some networks are incumbent and some are entrants. It is shown that some existing results of the duopoly do not extend to a multiâ€firm setting, largely because regulation of multiple networks is structurally far richer.
    Keywords: Telecommunications, oligopoly, network competition, access regulation.
    JEL: L96 L51 D43
    Date: 2009–06
  3. By: Marco Alderighi (University of Valle d'Aosta, Italy.); Claudio A. Piga (Dept of Economics, Loughborough University)
    Abstract: This paper investigates the properties of two types of cost restrictions that guarantee the existence of an equilibrium in pure strategies in Bayesian spatial competition models with heterogenous firms.
    Keywords: Localized competition; market effciency, cost heterogeneity.
    JEL: L11 D61
    Date: 2009–07
  4. By: Francesco Turino (Universidad de Alicante)
    Abstract: In the last decade, the analytical progress achieved in the New Keynesian literature has been remarkable. Many of the early assumptions have been relaxed, leading to medium-scale macroeconomic models that are now able to capture many features of real-world data. Nevertheless, modern-day New Keynesian models still assume, as did their early counterparts, that firms compete in the market with no tools other than their relative prices. In particular, this literature has so far neglected the consequences of extending competition between firms to the non-price dimension. This paper tries to fill this gap by enriching the canonical New Keynesian framework to include both price and non-price competition. This has important consequences for the analysis of inflation dynamics, modifying in particular the inflation-marginal cost relationship. As a general result, we show that any activity by firms that boosts demand for their products, without directly affecting their prices, dampens the overall degree of real rigidities in price-setting.
    Keywords: Non-price competition, inflation dynamics, real rigidity
    JEL: E31 L11
    Date: 2009–07
  5. By: Bernardita Vial; (Instituto de Economía. Pontificia Universidad Católica de Chile.); Felipe Zurita.
    Abstract: This paper shows that more intense competition may improve, rather than hamper, the chances that a market for an experience good or service overcomes the problems caused by informational asymmetries. This, in spite of the fact that intensified competition diminishes the reputational rents that -allegedly- provide the incentives for the production of high quality. Our results show that instead, these incentives are created by price differentials not levels.
    Keywords: Reputation, rents, competition, adverse selection, experience good, public monitoring.
    JEL: L15 D82 D41
    Date: 2009
  6. By: Stefan Bauernschuster (University of Jena, Graduate College "The Economics of Innovative Change"; Max Planck Institute for Economics); Oliver Falck (Ifo Institute for Economic Research, Munich); Niels Daniel Grosse (University of Jena, Graduate College "The Economics of Innovative Change")
    Abstract: There is extensive literature, both theoretical and empirical, on the effects of social identity on a wide range of economic and non-economic outcomes. However, there is only scarce knowledge about how social identity is affected by policies or market structure. We address the question how competition among suppliers of finance interacts with trust and trustworthiness in a laboratory one-shot trust game. In order to disentangle pure effects of competition and effects of competition that concern social identity, we apply a 2 x 2 treatment design. We induce social identity by letting subjects play coordination games with clear focal points, which leads to higher investments and trustworthiness in the trust game. Our results show that competition has no significant effects on trust and trustworthiness of individuals in a strangers' framework. However, in a framework with competition of in-group and out-group investors we see that competition leads to crowding out of social identity by reducing trustworthiness. We suggest that once competition comes into play, trustees see in-group trustors' investments as the outcomes of a competitive bidding process rather than voluntary trust, which crowds out reciprocity.
    Keywords: Trust Game, Social Identity, Competition
    JEL: C92 G11 Z13 L14
    Date: 2009–07–08
  7. By: Alfons Palangkaraya (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Jongsay Yong (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper investigates the effects of competition on hospital quality. It proposes to extend the Elzinga-Hogarty quantity flow approach of defining markets by first determining the trading cluster to which each hospital belongs and then delineating markets using patient flow information. After defining hospital markets and computing measures of competition, this paper examines the effect of competition on hospital quality using hospital administration data from the state of Victoria, Australia. We approximate quality using two indicators, namely mortality within 30 days of discharge and unplanned readmission within 28 days of discharge. For each quality indicator, a random intercept logit model is estimated. Two main findings are reported. First, the boundaries of markets and hence the degree of competition depend on the nature of the medical services provided. Second, competition is found to have a mixed effect on quality of hospital care–increasing the number of private hospitals appears to lower quality, while increasing the number of public hospitals has the opposite effect. The intensity of competition, on the other hand, does not appear to have a statistically significant effect on quality.
    Keywords: Hospital markets; Elzinga-Hogarty; Hospital competition; Hospital Quality.
    JEL: I11 D24
    Date: 2009–06
  8. By: Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Employee overwork and fatigue are a concern of managers in many organizations, as they may increase health and safety risks and decrease productivity. The problem is especially severe in competitive environments where compensation and promotions are awarded, explicitly or implicitly, on the basis of relative performance. In this paper, we propose a theory for, and study experimentally, the phenomenon of fatigue in dynamic contests aimed to mimic such settings. Theoretically, we find that if managers wish to avoid overwork, for example due to its negative impact on productivity, they should let their employees compete for promotion longer, with multiple intermediate performance evaluation stages. Experimentally, we find that subjects react strongly to changes in the environment related to fatigue and follow the comparative statics of equilibrium predictions. At the same time, within a given environment subjects behave as if they are unaware of the deteriorating effect of fatigue on their competitiveness. The results suggest that nonspecific information on consequences of fatigue is more effective than targeted information on how fatigue affects an employee’s chances of winning the competition.
    Keywords: overwork, fatigue, dynamic contest, experiment
    JEL: C73 C90 D21 I10
    Date: 2009–06
  9. By: Juan Pablo Montero (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: As with other commodity markets, markets for trading pollution permits have not been immune to market power concerns. In this paper, I survey the existing literature on market power in permit trading but also contribute with some new results and ideas. <br><br>I start the survey with Hahn’s (1984) dominant-firm (static) model that I then extend to the case in which there are two or more strategic firms that may also strategically interact in the output market, to the case in which current permits can be stored for future use (as in most existing and proposed market designs), to the possibility of collusive behavior, and to the case in which permits are auctioned off instead of allocated for free to firms. <br><br>I finish the paper with a review of empirical evidence on market power, if any, with particular attention to the U.S. sulfur market and the Southern California NOx market.
    Keywords: Market power, emissions trading, pollution permits, storable permits.
    JEL: D40 L13 Q58
    Date: 2009
  10. By: Radosveta Ivanova-Stenzel (Department of Economics, Humboldt-University of Berlin); Timothy Salmon (Department of Economics, Florida State University)
    Abstract: Most prior theoretical and experimental work involving auction choice has assumed bidders only find out their value after making a choice of which auction to enter. In this paper we examine whether or not subjects knowing their value prior to making an auction choice impacts their choice decision and/or the outcome of the auctions. The results show a strong impact. Subjects with low values choose the first price sealed bid auction more often while subjects with high values choose the ascending auction more often. The average number of bidders in both formats ended up being on average the same, but due to the self-selection bias the ascending auction raised as much revenue on average as the first price sealed bid auction. The two formats also generate efficiency levels that are roughly equivalent though the earnings of bidders are higher in the ascending auction.
    Keywords: bidder preferences, private values, sealed bid auctions, ascending auctions, endogenous entry
    JEL: C91 D44
    Date: 2009–06
  11. By: Erzo G.J. Luttmer
    Abstract: Suppose firms are subject to decreasing returns and permanent idiosyncratic productivity shocks. Suppose also firms can only stay in business by continuously paying a fixed cost. New firms can enter. Firms with a history of relatively good productivity shocks tend to survive and others are forced to exit. This paper identifies assumptions about entry that guarantee a stationary firm size distribution and lead to balanced growth. The range of technology diffusion mechanisms that can be considered is greatly expanded relative to previous work. High entry costs slow down the selection process and imply slow aggregate growth. They also push the firm size distribution in the direction of Zipf's law.
    Keywords: Technology ; Productivity
    Date: 2009
  12. By: Corseuil, Carlos H. L.
    Abstract: The present paper provides empirical evidence compatible with a proposed theoretical framework to explain the joint determination of two components of worker flows: worker replacement and job creation. We show that a negative correlation between job creation and replacement across firms emerges from such a framework. An empirical model is specified and its parameters are estimated taking into account two serious problems: measurement error and endogenous regressor. We take advantage of a matched employer-employee longitudinal database with detailed information on job and worker characteristics to tackle both issues. Our estimates confirm the negative correlation predicted by the theory.
    Keywords: job flows; replacement; employment dynamics
    JEL: J63 J23
    Date: 2009–07
  13. By: Aldashev, Gani; Kirchsteiger, Georg; Sebald, Alexander
    Abstract: It is a persistent finding in psychology and experimental economics that people's behavior is not only shaped by outcomes but also by decision-making procedures. In this paper we develop a general framework capable of modelling these procedural concerns. Within the context of psychological games we define procedures as mechanisms that influence the probabilities of reaching different endnodes. We show that for such procedural games a sequential psychological equilibrium always exists. Applying this approach within a principal-agent context we show that the way less attractive jobs are allocated is crucial for the effort exerted by agents. This prediction is tested in a field experiment, where some subjects had to type in data, whereas others had to verify the data inserted by the typists. The controllers' wage was 50% higher than that of the typists. In one treatment the less attractive typists' jobs were allocated directly, whereas in the other treatment the allocation was done randomly. As predicted, random allocation led to higher effort levels of the typists than direct appointment.
    Keywords: Appointment Procedures; Procedural Concerns; Psychological Game Theory
    JEL: A13 C70 C93 D63
    Date: 2009–07
  14. By: Francesco Parisi (University of Minnesota and University of BolognaDepartment of Economics); Ram Singh (Department of Economics, Delhi School of Economics, Delhi, India)
    Abstract: Comparative causation is the only tort regime that allows parties to share an accident loss in equilibrium. The sharing of an accident loss between a nonnegligent injurer and his nonnegligent victim spreads activity level and R&D incentives between prospective tortfeasors and their victims. This is an effect that is never observed under the other negligence and strict liability based regimes. In spite of these interesting attributes, the existing literature left open the question as to whether loss sharing was able to maintain optimal care incentives for both parties. In this paper, we address this unresolved issue in the literature, considering the eciency of loss-sharing under comparative causation.
    Date: 2009–06
  15. By: Domenico Colucci (Dipartimento di Matematica per le Decisioni, Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni, Università degli Studi di Firenze)
    Abstract: We study a cobweb-type commodity market where n firms operate and characterised by a strictly monotone demand and supply. The firms are assumed to differ in a key parameter governing price expectations which we suppose to be adaptive. We characterise the unique steady state of the resulting economic dynamics in terms of stability and we study the impact of the number and diversity of firms: to this end we introduce the notions of structural and behavioural degree of instability which prove to be crucial in determining whether stability or instability prevail. We also consider the case of market merging and establish conditions to have stability (or instability) in the aggregated market in terms of the original (structural and behavioural) degrees of instability. We take up the issue of transitional dynamics and speed of convergence when the system is stable and characterise parametric configurations that maximise the speed of convergence. Motivated by the difficulty to actually observe expectations, whereas it is easier to measure some structural features of a given market, such as the relevant demand and supply price elasticities, we take the perspective of an observer (e.g. a policy maker) whose information set includes the structural but not the behavioural degree of instability. We therefore assume the firms - via the parameter which defines their expectations - are sampled independently from a population described by a given probability distribution. In this case the structural degree of instability determines how the number of potentially different firms affects the probability of ending up with a stable outcome. Analytical results are provided alongside numerical evidence.
    Keywords: heterogeneous agents, expectations, stability of steady states, market merging, speed of convergence
    JEL: D83 D84 E17
    Date: 2009–03
  16. By: Galasso, Vincenzo (Bocconi University); Nannicini, Tommaso (Bocconi University)
    Abstract: Is electoral competition good for political selection? To address this issue, we introduce a theoretical model in which ideological parties select candidates between party loyalists and experts, and allocate them into the electoral districts. Non-ideological voters, who care about national and local policies, strongly prefer experts. We show that parties compete on good politicians by allocating them to the most contestable districts. Empirical evidence on Italian members of parliament confirms this prediction. We find that politicians with higher ex-ante quality − as measured by years of schooling, previous market income, and local government experience − are more likely to run in a contestable district. Indeed, despite being different on average, the characteristics of politicians belonging to opposite parties converge to high-quality levels in close races. Furthermore, politicians elected in contestable districts make fewer absences in parliament; this is shown to be driven more by a selection effect than by reelection incentives.
    Keywords: political competition, political selection, probabilistic voting
    JEL: D72 H00
    Date: 2009–07

This nep-mic issue is ©2009 by Vaishnavi Srivathsan. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.