nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒07‒28
eighteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. First mover advantage in a dynamic duopoly with spillover By Gianluca Femminis; Gianmaria Martini
  2. On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model By Colombo, Stefano
  3. Pay What You Like By Fernandez, Jose; Nahata, Babu
  4. Defense R&D: Effects on Economic Growth and Social Welfare By Chu, Angus C.; Lai, Ching-Chong
  5. Equilibrium Price Distribution with Directed Technical Change By Pedro Mazeda Gil; Fernanda Figueiredo; Oscar Afonso
  6. Peer Effect and Competition in Higher Education By Andrade, Eduardo de C.; Moita, Rodrigo M.
  7. The Effect of Learning Varies According to Locality: Micro Data Analysis of the Lawyer Market in Japan By Yamamura, Eiji
  8. Optimal Irrational Behavior By James Feigenbaum; Frank N. Caliendo; Emin Gahramanov
  9. Auctioning with Aspirations: Keep Them Low (Enough) By Shunda, Nicholas
  10. Modern Industrial Economics and Competition Policy: Open Problems and Possible Limits By Oliver Budzinski
  11. The Power of Apology By Johannes Abeler; Juljana Calaki; Kai Andree; Christoph Basek
  12. The Moral Costs of Nastiness By Klaus Abbink; Benedikt Herrmann
  13. Bayesian semiparametric stochastic volatility modeling By Mark J. Jensen; John M. Maheu
  14. Climate change mitigation options and directed technical change: A decentralized equilibrium analysis By GRIMAUD Andre; LAFFORGUE Gilles; MAGNE Bertrand
  15. Endogenous Network Dynamics By Frank H. Page; Myrna H. Wooders
  16. Tit-for-tat Strategies in Repeated Prisoner's Dilemma Games: Evidence from NCAA Football By Humphreys, Brad; Ruseski, Jane
  17. Was There Ever a Ruling Class? A Proposal for the study of 800 Years of Social Mobility By Gregory Clark
  18. Gender Pay Differences in the European Union: Do Higher Wages Make Up For Discrimination? By Canton, E.J.F.; Verheul, I.

  1. By: Gianluca Femminis (DISCE, Università Cattolica); Gianmaria Martini (Università di Bergamo)
    Abstract: We present a dynamic duopoly model of technical innovation where R&D costs decrease exogenously with time, and inter-firm knowledge spillover lowers the second comer's R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters, and raises several interesting implications. First, in our new equilibrium the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second mover, this benefit is not enough to rule out a first mover advantage. Indeed, the first mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation our equilibrium implies under--investment, which requires a substantial public intervention in favour of the investment activity.
    Keywords: R&D, knowledge spillover, dynamic oligopoly
    JEL: L13 L41 O33
    Date: 2009–07
  2. By: Colombo, Stefano
    Abstract: We analyse the effects of predation in a vertical differentiation model, where the highquality incumbent is able to price discriminate while the low-quality entrant sets a uniform price. The incumbent may act as a predator, that is, it may price below its marginal costs on a subset of consumers to induce the rival’s exit. We show that the entrant may adopt an aggressive attitude to make predation unprofitable for the incumbent. In this case predation does not occur and the equilibrium prices are lower than the equilibrium prices which would emerge in a contest of explicitly forbidden predation. Moreover, we show that when the incumbent may choose whether to price discriminate or not before the game starts, if the quality cost function is sufficiently convex, there always exists a parameter space on which the incumbent prefers to commit not to price discriminate.
    Keywords: Vertical differentiation, selective below-cost pricing, predation, price discrimination
    JEL: D43 L12 L41
    Date: 2009
  3. By: Fernandez, Jose; Nahata, Babu
    Abstract: We show that when a seller of a di¤erentiated good o¤ers the product allowing consumers an option to pay what they like, then all consumers will never free ride in equilibrium when their valuations of the good are positive, and, under certain conditions, all will consumers would pay. Further, for the seller this pricing could be more pro…table than uniform pricing. If consumers consider the social cost of free riding, or not paying a "fair" price, then our results show that consumers, rather than free riding, may not opt for this option. Instead, they prefer to purchase the good at the market price from a price-setting firm.
    Keywords: pay-what-you-like pricing; self-selection; multidimensional screening; buffet pricing.
    JEL: D21 D11 D4 C72
    Date: 2009–04
  4. By: Chu, Angus C.; Lai, Ching-Chong
    Abstract: In the US, defense R&D share of GDP has decreased significantly since 1960. To analyze the implications on economic growth and welfare, we develop an R&D-based growth model that features the commonly discussed crowding-out and spillover effects of defense R&D on civilian R&D. The model also captures the important effects of defense technology on (a) national security and (b) aggregate productivity via the spin-off effect resembling consumption public goods and productive public goods respectively. In this framework, economic growth is driven by market-based civilian R&D as in standard R&D growth models and government-financed public goods (i.e. defense R&D) as in Barro (1990). We find that defense R&D has an inverted-U-shape effect on growth, and the growth-maximizing level of defense R&D is increasing in the spillover effect and in the spin-off effect. Also, there is a welfare-maximizing level of defense R&D that is increasing in the security effect of national defense, and there exists a critical degree of this security effect below (above) which the welfare-maximizing level of defense R&D is below (above) the growth-maximizing level.
    Keywords: defense R&D; economic growth; public goods; social welfare
    JEL: O41 O38 H56
    Date: 2009–07
  5. By: Pedro Mazeda Gil (CEF.UP and Faculdade de Economia, Universidade do Porto, Portugal); Fernanda Figueiredo (CEAUL and Faculdade de Economia, Universidade do Porto, Portugal); Oscar Afonso (CEF.UP, OBEGEF and Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: This paper studies a non-degenerate price distribution for the homogeneous good within a model of endogenous directed technical change. A probability density function is analytically derived and shown to be related to the technology and innovation parameters of the model.
    Keywords: price distribution, directed technical change, scale effects, labour endowment
    JEL: D41 D43 O41
    Date: 2009–07
  6. By: Andrade, Eduardo de C.; Moita, Rodrigo M.
    Date: 2009–10
  7. By: Yamamura, Eiji
    Abstract: By using individual level data, this paper attempts to examine how and to what extent behavior and perception of those bringing lawsuit’s differ between large district courts (competitive lawyer market) and medium or small district ones (less competitive lawyer market). The major findings are; (1) in medium or small but not in large districts, trial experience discourages persons from employing a lawyer. (2) A natural person is less likely to employ a lawyer than a legal person in medium or small districts, but not in large ones. (3) The self-rated cost of searching for a lawyer is lower in large districts than small ones. It follows from these results that the lower competitive pressure in the lawyer markets in medium and small districts results in higher costs of employing a lawyer than is found in large districts.
    Keywords: Learning; Lawyer market
    JEL: K49 L13 L88
    Date: 2009–07–16
  8. By: James Feigenbaum; Frank N. Caliendo; Emin Gahramanov
    Abstract: Contrary to the usual presumption that welfare is maximized if consumers behave rationally, we show in a two-period overlapping generations model that there always exists a rule of thumb that can weakly improve upon the lifecycle/permanent-income rule in general equilibrium with irrational households. The market-clearing mechanism introduces a pecuniary externality that individual rational households do not consider when making decisions, but a publically shared rule of thumb can exploit this effect. For typical calibrations, the improvement of the welfare of irrational households is robust to the introduction of rational agents. Generalizing to a more realistic lifecycle model, we find in particular that the Save More Tomorrow Plan can confer higher lifetime utility than the permanent-income rule in general equilibrium.
    Keywords: consumption, saving, coordination, lifecycle/permanent income hypothesis, SMarT Plan, general equilibrium, rules of thumb, pecuniary externality
    JEL: C61 D11 E21
    Date: 2009–02–10
  9. By: Shunda, Nicholas
    Abstract: In an auction with a buy price, a seller offers bidders the opportunity to forgo competing in an auction by transacting immediately at a pre-specified fixed price. If a seller has aspirations in the form of a reference price that depends upon the auction's reserve price and buy price, she does best to keep her aspirations sufficiently low by designing a no-reserve auction with a buy price low enough that some bidder types would exercise it with positive probability in equilibrium. The seller is indifferent between the auction component of her mechanism being a first- or second-price auction.
    Keywords: Auction; Aspiration; Buy price; Internet; Reference-dependence
    JEL: D44 L86 C72
    Date: 2009–07–13
  10. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark)
    Abstract: Naturally, competition policy is based on competition economics made applicable in terms of law and its enforcement. Within the different branches of competition economics, modern industrial economics, or more precisely game-theoretic oligopoly theory, has become the dominating paradigm both in the U.S. (since the 1990s Post-Chicago movement) and in the EU (so-called more economic approach in the 2000s). This contribution reviews the state of the art in antitrust-oriented modern industrial economics and, in particular, critically discusses open questions and possible limits of basing antitrust on modern industrial economics. In doing so, it provides some hints how to escape current enforcement problems in industrial economics-based competition policy on both sides of the Atlantic. In particular, the paper advocates a change of the way modern industrial economics is used in competition policy: instead of more and more case-by-cases analyses, the insights from modern industrial economics should be used to design better competition rules. I like to thank the co-panelists Laurence Idot, Michele Polo and Daniel Rubin-feld as well as all the participants of the conference “Foundations and Limita-tions of an Economic Approach to Competition Law” (Max-Planck-Institute for Intellectual Property, Competition and Tax Law; Munich 12th / 13th March 2009), Arndt Christiansen and Nadine Lindstädt for very valuable and helpful comments.
    Keywords: competition policy, antitrust, modern industrial economics, more economic approach, merger control
    JEL: L40 K21 L00 M21 B52
    Date: 2009–06
  11. By: Johannes Abeler (University of Nottingham); Juljana Calaki (University of Bonn); Kai Andree (University of Potsdam); Christoph Basek (University of Bonn)
    Abstract: After an unsatisfactory purchase, many firms are quick to apologize to customers. It is, however, not clear why they should do that. As the apology is costless, it should be regarded as cheap talk and thus ignored by the customer. In this paper, we test in a controlled field experiment whether apologizing inuences customers' subsequent behavior. We find that apologizing yields much better outcomes for the firm than offering a monetary compensation.
    Keywords: Apology, Credulity, Natural Field Experiment
    JEL: C93 D82 L81
    Date: 2009–06
  12. By: Klaus Abbink (CREED, University of Amsterdam); Benedikt Herrmann (School of Economics, The University of Nottingham)
    Abstract: We introduce two variants of the one-shot joy-of-destruction minigame (mini-JOD). Two players are endowed with the same amount of money. They simultaneously decide whether or not to reduce the payoff of the other player at an own cost. In one treatment there was a probability that Nature would destroy the opponent’s money anyway. We test whether this feature reduces the moral costs of being nasty, and find that destruction rates rise significantly, despite the absence of strategic reasons.
    Date: 2009–06
  13. By: Mark J. Jensen (Federal Reserve Bank of Atlanta); John M. Maheu (University of Toronto and RCEA)
    Abstract: This paper extends the existing fully parametric Bayesian literature on stochastic volatility to allow for more general return distributions. Instead of specifying a particular distribution for the return innovation, nonparametric Bayesian methods are used to flexibly model the skewness and kurtosis of the distribution while the dynamics of volatility continue to be modeled with a parametric structure. Our semiparametric Bayesian approach provides a full characterization of parametric and distributional uncertainty. A Markov chain Monte Carlo sampling approach to estimation is presented with theoretical and computational issues for simulation from the posterior predictive distributions. An empirical example compares the new model to standard parametric stochastic volatility modelsClassification-JEL:
    Date: 2009–01
  14. By: GRIMAUD Andre; LAFFORGUE Gilles; MAGNE Bertrand
    Date: 2009–07
  15. By: Frank H. Page (Indiana University); Myrna H. Wooders
    Abstract: In all social and economic interactions, individuals or coalitions choose not only with whom to interact but how to interact, and over time both the structure (the “with whom”) and the strategy (“the how”) of interactions change. Our objectives here are to model the structure and strategy of interactions prevailing at any point in time as a directed network and to address the following open question in the theory of social and economic network formation: given the rules of network and coalition formation, the preferences of individuals over networks, the strategic behavior of coalitions in forming networks, and the trembles of nature, what network and coalitional dynamics are likely to emerge and persist. Our main contributions are (i) to formulate the problem of network and coalition formation as a dynamic, stochastic game, (ii) to show that this game possesses a stationary correlated equilibrium (in network and coalition formation strategies), (iii) to show that, together with the trembles of nature, this stationary correlated equilibrium determines an equilibrium Markov process of network and coalition formation, and (iv) to show that this endogenous process possesses a finite, nonempty set of ergodic measures, and generates a finite, disjoint collection of nonempty subsets of networks and coalitions, each constituting a basin of attraction. We also extend to the setting of endogenous Markov dynamics the notions of pairwise stability (Jackson-Wolinsky, 1996), strong stability (Jacksonvan den Nouweland, 2005), and Nash stability (Bala-Goyal, 2000), and we show that in order for any network-coalition pair to persist and be stable (pairwise, strong, or Nash) it is necessary and sufficient that the pair reside in one of finitely many basins of attraction. The results we obtain here for endogenous network dynamics and stochastic basins of attraction are the dynamic analogs of our earlier results on endogenous network formation and strategic basins of attraction in static, abstract games of network formation (Page and Wooders, 2008), and build on the seminal contributions of Jackson and Watts (2002), Konishi and Ray (2003), and Dutta, Ghosal, and Ray (2005).
    Keywords: Endogenous Network Dynamics, Dynamic Stochastic Games of Network Formation, Equilibrium Markov Process of Network Formation, Basins of Attraction, Harris Decomposition, Ergodic Probability Measures, Dynamic Path Dominance Core, Dynamic Pairwise Stability
    JEL: A14 C71 C72
    Date: 2009–05
  16. By: Humphreys, Brad (University of Alberta, Department of Economics); Ruseski, Jane (University of Alberta, Department of Economics)
    Abstract: Defection in every period is the dominant strategy Nash equilibrium in finitely repeated prisoner's dilemma games with complete information. However, in the presence of incomplete information, players may have an incentive to cooperate in some periods, leading to tit-for-tat strategies. We describe the decision to comply with recruiting regulations or cheat made by NCAA Division IA football programs as a finitely repeated prisoner's dilemma game. The game includes incomplete information about the resources devoted to football programs, the recruiting effort made by rival programs, and the behavior of rival programs. We test for evidence that NCAA Division IA football programs follow tit-for-tat strategies in terms of complying with or defecting from NCAA recruiting rules using panel data from NCAA Division IA football over the period 1976-2005. We find anecdotal and empirical evidence that is consistent with tit-for-tat strategies in this setting. The presence of in-conference rivals under NCAA sanctions increases the probability of a team being placed under sanctions.
    Keywords: noncooperative behavior; cartels; NCAA football; tit-for-tat strategies
    JEL: C72 L13 L83
    Date: 2009–07–01
  17. By: Gregory Clark (Department of Economics, University of California, Davies)
    Abstract: This reports on a preliminary investigation of surnames distributions as a measure long run social mobility. In England this suggests two surprising claims. First, England, all the way from the heart of the Middle Ages in 1250 to at least 1860, was a society without persistent social classes. It was a world of social mobility, with no permanent over-class and under-class, a world of complete equal opportunity. There was, however, a gain from being in the upper class in any generation in the form of leaving more copies of your DNA permanently in later populations. Second, signs of persistent social classes have only emerged in societies like England and the United States in recent years. Instead of moving from a world of immobility and class rigidity to a world of equal opportunity, we have moved in the opposite direction.
    Keywords: Social Mobility, Economic Mobility, History of Social Class, History of Economic Opportunity
    JEL: D31 J62 N30
    Date: 2009–07
  18. By: Canton, E.J.F.; Verheul, I. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper explores the role of social interactions at the work floor for understanding gender pay differences in the EU. Using data from the Fourth European Working Conditions Survey, we find that sex similarity of subordinate and supervisor decreases the pay disadvantage for women in non-managerial occupations, though working for a female boss is associated with a lower wage than working for a man. This may point at a ‘discrimination-for-pay’ effect. Female workers can avoid part of the discrimination against them by working for a woman and accepting lower pay. And when they face stronger discrimination in the situation of a male supervisor, they are ‘bribed’ by being offered a higher salary. Different results are obtained for managerial workers where sex similarity of worker and superior actually puts women at a further disadvantage. In addition to effects of vertical gender segregation, we examine whether wage formation is influenced by the proportion of women per sector (i.e., horizontal segregation), but find only weak support for the so-called social bias theory. Our main message is that while the traditional human capital model tends to study the wage formation process in isolation, gender pay differentials can also be seen as a social phenomenon, stemming from social interactions in labor markets.
    Keywords: gender pay differences;wages;European Union
    Date: 2009–07–01

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