nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒11‒07
fourteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Goldilocks and the Licensing Firm: Choosing a Partner when Rivals are Heterogeneous By Anthony Creane; Hideo Konishi
  2. A Dynamic Game of Airline Network Competition: Hub-and-Spoke Networks and Entry Deterrence By Victor Aguirregabiria; Chun-Yu Ho
  3. Conformity based behavior and the dynamics of price competition: a new rational for fashion shifts By Filomena Garcia; Joana Resende
  4. Piracy on the internet: Accommodate it or fight it? A dynamic approach By Herings P. Jean-Jacques; Peeters Ronald; Yang Michael S.
  5. Learning to Play Nash from the Best By Robert S. Gazzale
  6. Korea and the BICs (Brazil, India and China) : catching up experiences By V. Chandra; Osorio-Rodarte , I.; Braga, C. A. Primo
  7. Intergenerational justice when future worlds are uncertain By Humberto Llavador; John E. Roemer; Joaquim Silvestre
  8. On the Use of Information in Repeated Insurance Markets By Iris Kesternich; Heiner Schumacher
  9. Transfer Pricing Policy and the Intensity of Tax Rate Competition By Johannes Becker; Clemens Fuest
  10. Does Education Shield Against Common Mental Disorders? By Edvard Johansson; Petri Böckerman; Tuija Martelin; Sami Pirkola; Karí Poikolainen
  11. Microfinance tradeoffs : regulation, competition, and financing By Cull, Robert; Demirguc-Kunt, Asli; Morduch, Jonathan
  12. Health Investment over the Life-Cycle By Halliday, Timothy; He, Hui; Zhang, Hao
  13. Impacts of policy instruments to reduce congestion and emissions from urban transportation : the case of Sao Paulo, Brazil By Anas, Alex; Timilsina, Govinda R.
  14. Informed Trading in Parallel Bond Markets By Paola Paiardini

  1. By: Anthony Creane (Michigan State University); Hideo Konishi (Boston College)
    Abstract: Markets are often characterized with firms of differing capabilities with more efficient firms licensing their technology to lesser firms.  We  examine the effects that the amount of the technology transferred, and the characteristics of the partner have on this licensing.  We find that a partial technology transfer can be the joint-profit minimizing transfer; no such transfer then is superior. However, under weakly concave demand, a complete transfer always increases joint profits so long as there are at least three firms in the industry.  We also establish a "Goldilocks" condition in partner selection: it is neither too efficient nor too inefficient.  Unfortunately, profitable transfers between sufficiently inefficient firms reduce welfare, while transfers from relatively efficient firms increase welfare.  However, an efficient firm might not select the least efficient partner, though it is the social-welfare-maximizing partner.
    Keywords: licensing, technology transfers
    JEL: D4 L24 L4
    Date: 2009–11–01
  2. By: Victor Aguirregabiria; Chun-Yu Ho
    Abstract: In a hub-and-spoke network, the total profit function of an airline is supermodular with respect to its entry decisions at different city-pairs. This source of complementarity implies that a hub-and-spoke network can be an effective strategy to deter entry of competitors. This paper presents a dynamic game of airlines network competition that incorporates this entry deterrence motive for using hub-and-spoke networks. We summarize the results of the estimation of the model, with particular attention to empirical evidence on the entry deterrence motive.
    Keywords: Airline networks; Hub-and-spoke; Entry deterrence; Dynamic games; Supermodularity
    JEL: C73 L13 L41 L93
    Date: 2009–10–28
  3. By: Filomena Garcia (ISEG - Technical University of Lisbon and UECE); Joana Resende (CEF.UP and Faculdade de Economia, Universidade do Porto and CORE, Université catholique de Louvain)
    Abstract: This paper deals with dynamic price competition in markets in which the perception of consumers regarding the value of goods depends on the choices of other consumers in the market. In particular, we consider the case in which consumers tend to imitate their peers, generating a conformity effect. In the context of a finite horizon model, we show that conformity based behavior creates new channels of dynamic interaction between firms, changing the nature of price competition. As time evolves, both price strategic complementarity and substitutability may arise along the equilibrium trajectory. This leads to V-shaped equilibrium price paths and oscillating trajectories of market shares. We provide also a new rational for the inversion of fashion trends.
    Keywords: dynamic price competition, consumer behavior, conformity, fashion shift
    JEL: D11 L13 C61
    Date: 2009–10
  4. By: Herings P. Jean-Jacques; Peeters Ronald; Yang Michael S. (METEOR)
    Abstract: This paper uses a dynamic stochastic model to solve for the optimal pricing policy of themusic recording companies in the presence of P2P file-sharing networks eroding their CDsales. We employ a policy iteration algorithm on a discretized state space to numericallycompute the optimal price policy. The realistically calibrated model reflects the real-worldfigures we observe and provides estimates of figures we can not observe, such as changesin total welfare. The results suggest that, thanks to the existence of P2P networks, totalwelfare in 2008 in the U.S. is about $25.6 billion more per annum than in 1999 before P2Pwas introduced. Moreover, the results predict that the current trend of decreasing CDsales will continue until around the year 2020 when it will stabilize at around 231.2 millioncopies per year, comparing to the industry all-time high of 938.9 million in 1999. Thecomparative static analysis shows that full enforcement of intellectual property rights,although helpful for the industrial profit, may have adverse effect on total welfare.
    Keywords: microeconomics ;
    Date: 2009
  5. By: Robert S. Gazzale (Williams College)
    Abstract: I experimentally investigate the effects of the ability to imitate successful others on convergence to the one-shot Nash equilibrium. I study a two-player game (Potters and Suetens Forthcoming) in which a single parameter determines the existence of strategic complementarities. I generally confirm previous findings when learning from others is not possible: games with strategic complementarities converge more robustly to the Nash equilibrium than those without. However, I find the reverse with the ability to learn from successful others as this information significantly improves convergence in games without strategic complementarities but has no effect and possibly a negative effect on games with complementarities.
    JEL: C90 D70
    Date: 2009–06
  6. By: V. Chandra; Osorio-Rodarte , I.; Braga, C. A. Primo
    Abstract: This paper tests a neo-Schumpeterian model with industry-level data to analyze how Brazil, India, and China are catching up with South Korea’s technological frontier in a globalized world. The paper validates Aghion et al.’s inverted-U hypothesis that industries that are closer to the technological frontier innovate to escape competition while longer distances discourage innovating. It suggests that for effective catching up, distance-shortening (or innovation-enhancing) policies may be a necessary complement to liberalization. South Korea and China combined a variety of distance-shortening policies with financial subsidies to promote high tech industries and an export-led growth strategy. Post-liberalization, they leveraged swift competition to spur catch-up. In comparison, Brazil, which was as rich as South Korea, and India, which was as rich as China in 1980, are catching up more slowly. Import-substitution industrialization strategies saddled Brazil and India with a large anti-export bias, and unfocused attention to innovation-enhancing policies dampened global competitiveness. Post liberalization, many of their industries were too far behind the technological frontier to effectively benefit from competition. The catch-up experiences of Brazil, India, and China with South Korea illustrate that distance from the technological frontier matters and that the design of country-specific distance- shortening policies can be an important complement to trade liberalization in promoting catching up with richer countries.
    Keywords: Labor Policies,Economic Theory&Research,Water and Industry,E-Business,Knowledge for Development
    Date: 2009–10–01
  7. By: Humberto Llavador; John E. Roemer; Joaquim Silvestre
    Abstract: We study the problem of intergenerational welfare maximization when the existence of future worlds is uncertain. One of the major examples of this problem today concerns global warming, and how to structure resource use intertemporally in its presence. The theoretical issues raised by uncertainty are quite complex, and in the interest of clarity, we will study only two simple models in this article – and neither of them explicitly models the effect of production on the biosphere and global temperature. In a companion paper (Llavador, Roemer, and Silvestre, 2009), we study a more complex version of the second model of this article, which does take into account the biosphere as a renewable resource: but that paper studies only the case with no uncertainty concerning the existence of future generations. The conclusions of the present paper suggest some inferences for the more complex problem. We study several (intergenerational) social welfare functions: utilitarian, Rawlsian, ‘extended Rawlsian,’ and ‘Rawlsian with growth.’ The Rawlsian function is identified with the view of sustainability, in a model with production.1 Sustainability, in our parlance, means sustaining human welfare over time at the highest possible level. This is often called ‘weak sustainability,’ to be contrasted with ‘strong sustainability’, which advocates sustaining the physical stock of bio-resources – species variety, forests, and so on. (See, for instance, Neumayer, 2003, and the articles in Asheim, 2007.) In another dimension, it is to be contrasted with the discountedutilitarian approach, which does not advocate sustaining human welfare over time, but rather the maximization of a weighted sum of generational welfare levels.
    Keywords: Discounted utilitarianism, Rawlsian, sustainability, maximin, uncertainty, expected utility, von Neumann-Morgenstern, dynamic welfare maximization
    JEL: D63 D81 O40 Q54 Q56
    Date: 2009–10
  8. By: Iris Kesternich (Ludwig Maximilian Universität München); Heiner Schumacher (Goethe Universität Frankfurt)
    Abstract: We analyze the use of information in a repeated oligopolistic insurance market. To sustain collusion, insurance companies might refrain from changing their pricing schedules even if new information about risks becomes available. We therefore provide an explanation for the existence of "unused observables" that is information which a) insurance companies collect or could collect, b) is correlated with the risk experience, but c) is not used by companies to set prices. Furthermore, the existence of bulk discounts becomes rationalizable. These results also obtain if we include communication among companies and market entry to our framework.
    Keywords: repeated games, insurance markets, oligopoly, unused observables
    JEL: C72 G22 L13
    Date: 2009–09
  9. By: Johannes Becker (Max Planck Institute for Intellectual Property, Competition and Tax Law); Clemens Fuest (Oxford University Centre for Business Taxation)
    Abstract: This note provides a novel argument why countries may have incentives to allow for some profit shifting to low-tax jurisdictions. The reason is that a tightening of transfer pricing policies by high tax countries leads to more agressive tax rate competition by low tax countries.
    Keywords: Corporate Taxation, Profit Shifting, Tax Competition
    JEL: H25 F23
    Date: 2009
  10. By: Edvard Johansson; Petri Böckerman; Tuija Martelin; Sami Pirkola; Karí Poikolainen
    Abstract: ABSTRACT : The paper examines the causal effect of education on common individual mental disorders in adulthood. We use a representative population health survey and instrumental variable methods. The estimates point to mostly insignificant effects of education on common mental disorders. We find that the length of education reduces the BDI (Beck Depression Inventory) measure at the 10% significance level, but has no effect when using the GHQ-12 (12-item General Health Questionnaire) or the probability of severe depression as a measure of mental health. These results cast doubt on the view that the length of formal education would be a particularly important determinant of common mental disorders later in life.
    JEL: I12 I21
    Date: 2009–10–20
  11. By: Cull, Robert; Demirguc-Kunt, Asli; Morduch, Jonathan
    Abstract: This paper describes important trade-offs that microfinance practitioners, donors, and regulators navigate. Drawing evidence from large, global surveys of microfinance institutions, the authors find a basic tension between meeting social goals and maximizing financial performance. For example, non-profit microfinance institutions make far smaller loans on average and serve more women as a fraction of customers than do commercialized microfinance banks, but their costs per dollar lent are also much higher. Potential trade-offs therefore arise when selecting contracting mechanisms, level of commercialization, rigor of regulation, and the extent of competition. Meaningful interventions in microfinance will require making deliberate choices - and thus embracing and weighing tradeoffs carefully.
    Keywords: Access to Finance,Debt Markets,Banks&Banking Reform,Emerging Markets,Rural Finance
    Date: 2009–10–01
  12. By: Halliday, Timothy (University of Hawaii at Manoa); He, Hui (University of Hawaii at Manoa); Zhang, Hao (University of Hawaii at Manoa)
    Abstract: We study the evolution of health investment over the life-cycle by calibrating a model of endogenous health accumulation. The model is able to produce the decline in labor supply with age as well as the hump-shaped consumption profile. In both cases, health and health investment play a crucial role as the former encroaches upon healthy time and the latter crowds out non-medical expenditures as people age. Finally, we quantify the value of health as both an investment and a consumption good. We show that the investment motive is about three times higher than the consumption motive during the early 20s, but decreases over the life-cycle until it disappears at retirement. In contrast, the consumption motive increases with age and surpasses the investment motive during the mid 40s.
    Keywords: health investment, structural model, medical expenditures
    JEL: I12
    Date: 2009–10
  13. By: Anas, Alex; Timilsina, Govinda R.
    Abstract: This study examines impacts on net social benefits or economic welfare of alternative policy instruments for reducing traffic congestion and atmospheric emissions in São Paulo, Brazil. The study shows that expanding road networks, subsidizing public transit, and improving automobile fuel economy may not be as effective as suggested by economic theories because these policies could cause significant rebound effects. Although pricing instruments such as congestion tolls and fuel taxes would certainly reduce congestion and emissions, the optimal level of these instruments would steeply increase the monetary cost of travel per trip and are therefore politically difficult to implement. However, a noticeable finding is that even smaller tolls, which are more likely to be politically acceptable, have substantial benefits in terms of reducing congestion and emissions. Among the various policy instruments examined in the study, the most socially preferable policy option for São Paulo would be to introduce a mix of congestion toll and fuel taxes on automobiles and use the revenues to improve public transit systems.
    Keywords: Transport Economics Policy&Planning,Climate Change Economics,Roads&Highways,Climate Change Mitigation and Green House Gases,Transport and Environment
    Date: 2009–10–01
  14. By: Paola Paiardini (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: In this paper we investigate the presence of asymmetric information in the parallel trading of ten-year government fixed rate bonds (BTP) on two secondary electronic platforms: the business-to-business (B2B) MTS platform and the business-to-customer (B2C) BondVision one. The two platforms are typified by a different degree of transparency. We investigate whether the probability to encounter an informed trader on the less transparent market is higher than the corresponding probability on the more transparent one. Our results show that on BondVision, that is the less transparent platform, the probability of encountering an informed trader is higher. Finally we perform a series of tests to check the robustness of our estimates. Two tests do not meet the hypothesis of independence. Nevertheless, these findings do not controvert the hypothesis of our model, but call for further analysis.
    Date: 2009–10

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