nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒11‒14
twenty-one papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. R&D Productivity and Intellectual Property Rights Protection Regimes By Joanna Poyago-Theotoky; Khemarat Talerngsri Teerasuwannajak
  2. Platform competition, compatibility, and social efficiency By Casadesus-Masanell, Ramon; Ruiz-Aliseda, Francisco
  3. Foreclosing competition through access charges and price discrimination By Lopez, Angel L.; Rey, Patrick
  4. Asymmetric price effects of competition By Lach, Saul; Moraga, Jose L.
  5. Strategic Supply Function Competition with Private Information By Xavier Vives
  6. Strategies to fight ad-sponsored rivals By Casadesus-Masanell, Ramon; Zhu, Feng
  7. Beyond the Need to Boast: Cost Concealment Incentives and Exit in Cournot Duopoly By Jos Jansen
  8. Dynamics in Non-Binding Procurement Auctions with Boundedly Rational Bidders By Domenico Colucci; Nicola Doni; Vincenzo Valori
  9. Competition and Gender Prejudice: Are Discriminatory Employers Doomed to Fail? By Weber, Andrea; Zulehner, Christine
  10. Biased Social Learning By Helios Herrera; Johannes Horner
  11. The Welfare Effects of Ticket Resale By Phillip Leslie; Alan Sorensen
  12. Bubble or no Bubble - The Impact of Market Model on the Formation of Price Bubbles in Experimental Asset Markets By Michael Kirchler; Jürgen Huber; Thomas Stöckl
  13. Labour Market Status and Migration Dynamics By Bijwaard, Govert
  14. Credit Risk Transfer and Bank Competition By Hendrik Hakenes; Isabel Schnabel
  15. How do the social norms sustain? By Singh, Indervir
  16. Social and private learning with endogenous decision timing By Julian Jamison; David Owens; Glenn Woroch
  17. Tax competition and equalization: the impact of voluntary cooperation on the efficiency goal By Petra Ens
  18. Two Heads Are Less Bubbly than One: Team Decision-Making in an Experimental Asset Market By Cheung, Stephen L.; Palan, Stefan
  19. Dynamic Unawareness and Rationalizable Behavior By Heifetz, Aviad; Meier, Martin; Schipper, Burkhard C.
  20. “On the ‘Hot Potato Effect’ of Inflation: Intensive versus Extensive Margins” By Lucy Qian Liu; Liang Wang; Randall Wright
  21. Output Persistence from Monetary Shocks with Staggered Prices or Wages under a Taylor Rule By Sebastiano Daros; Neil Rankin

  1. By: Joanna Poyago-Theotoky (Rimini Centre for Economic Analysis (RCEA); University of Loughborough, Department of Economics); Khemarat Talerngsri Teerasuwannajak (Faculty of Economics, Chulalongkorn University)
    Abstract: We study fi…rms' preferences towards intellectual property rights (IPR) regimes in a North-South context, using a simple duopoly model where a 'North' and a 'South' firm compete in a third market. Unlike other contributions in this fi…eld, we explicitly introduce the South's capability to undertake cost-reducing R&D, but maintain the South's inferiority in utilizing and managing its R&D. In contrast to traditional results, we show that the North may encourage lax IPR protection provided that its South rival's R&D productivity is sufficiently high, while the South may fi…nd it in its best interest to strictly enforce IPR protection if its R&D productivity is low. In this sense, our results do not support the idea of universal or uniform IPR protection regime. In addition, we …find that if fi…rms are allowed to agree on any level of information exchange when IPR protection is strictly enforced, such an exchange can always be established as long as each fi…rm is ensured that what it gets to utilize in return is sufficiently more than what it gives to its rival.
    Keywords: intellectual property rights (IPR), cost-reducing R&D, R&D productivity, information exchange
    JEL: O34 F13 O32 O38 L13 D43
    Date: 2009–01
  2. By: Casadesus-Masanell, Ramon (Harvard Business Scholl); Ruiz-Aliseda, Francisco (Universitat Pompeu Fabra)
    Abstract: Katz and Shapiro (1985) study systems compatibility in settings with one-sided platforms and direct network externalities. We consider systems compatibility in settings with two-sided platforms and indirect network externalities to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. We find that incompatibility gives rise to asymmetric equilibria with a dominant platform that earns more than under compatibility. We also find that incompatibility generates larger total welfare than compatibility when horizontal differences between platforms are small.
    Keywords: network; industries; platforms; markets;
    Date: 2009–06–17
  3. By: Lopez, Angel L. (IESE Business School); Rey, Patrick (Toulouse School of Economics)
    Abstract: This article analyzes competition between two asymmetric networks, an incumbent and a new entrant. Networks compete in non-linear tariffs and may charge different prices for on-net and off-net calls. Departing from cost-based access pricing allows the incumbent to foreclose the market in a profitable way. If the incumbent benefits from customer inertia, then it has an incentive to insist on the highest possible access markup even if access charges are reciprocal and even in the absence of actual switching costs. If instead the entrant benefits from customer activism, then foreclosure is profitable only when switching costs are large enough.
    Keywords: Networks; benefits; costs; customer;
    Date: 2009–07–09
  4. By: Lach, Saul (The Hebrew University); Moraga, Jose L. (University of Groningen)
    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: Asymmetric; Price; Effects; Competition;
    Date: 2009–06–15
  5. By: Xavier Vives (IESE Business School and UPF)
    Abstract: A finite number of sellers (n) compete in schedules to supply an elastic demand. The costs of the sellers have uncertain common and private value components and there is no exogenous noise in the system. A Bayesian supply function equilibrium is characterized; the equilibrium is privately revealing and the incentives to acquire information are preserved. Price-cost margins and bid shading are affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Private information coupled with strategic behavior induces additional distortionary market power above full information levels and welfare losses which can be counteracted by subsidies. As the market grows large the equilibrium becomes price-taking, bid shading is of the order of 1/n, and the order of magnitude of welfare losses is I/n^2. The results extend to demand schedule competition and a range of applications in product and financial markets are presented.
    Keywords: Reverse auction, Demand schedule competition, Market power, Adverse selection, Competitiveness, Rational expectations, Collusion, Welfare
    JEL: L13 D44 D82 G14 L94 E58 F13
    Date: 2009–10
  6. By: Casadesus-Masanell, Ramon (Harvard Business School); Zhu, Feng (Marshall School of Business)
    Abstract: We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or advertising intensity, we allow the incumbent to consider changes in its business model. We consider four alternative business models, two pure models (subscription-based and ad-sponsored) and two mixed models that are hybrids of the two pure models. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations, a phenomenon that we dub "competing through business models." We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through a pure, rather than a mixed,business model because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy,business model, and tactics in the field of strategy.
    Keywords: Ad-sponsored; economy; products; services; business;
    Date: 2009–06–19
  7. By: Jos Jansen (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper studies the incentives for production cost disclosure in an asymmetric Cournot duopoly. Whereas the efficient firm (consumers) prefers information sharing (concealment) when the firms choose accommodating strategies in the product market, the firm (consumers) may prefer information concealment (sharing) when it can exclude its competitor from the market. Hence, the rankings of expected profit and consumer surplus can be reversed if exit of the inefficient firm is possible. Although the efficient firm has stronger incentives to share information when it shares strategically, there remain cases in which the firm conceals information in equilibrium to induce exit.
    Keywords: cost asymmetry, Cournot duopoly, exit, information disclosure, precommitment
    JEL: D82 L13
    Date: 2009–10
  8. By: Domenico Colucci (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Nicola Doni (Dipartimento di Scienze Economiche, Universita' degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)
    Abstract: We study a procurement auction recently analysed by Gal-Or et al. (2007). In this auction game the buyer ranks different bids on the basis of both the prices submitted and the quality of each bidder that is her private information. We emphasise the similarity between this model and existing models of competition in horizontally differentiated markets. Finally we illustrate conditions for the existence and the stability of such equilibrium. To this end we extend the model to a dynamic setting in which a sequence of independent auctions takes place. We assume bidders have bounded rationality in a twofold sense. On one hand, they use an underparametrized model of their competitors' behaviour, best responding to expectations on average bids rather than keeping track of the entire vector of competitors' bids. On the other they update expectations adaptively. In a general framework with more than two bidders the system may fail to converge to the steady state, i.e. to the symmetric Nash equilibrium of the original game.
    Keywords: Non-binding auctions, Product differentiation, Hotelling Duopoly, Expectations, Stability of steady states
    JEL: D43 D44 C62 D83
    Date: 2009–06
  9. By: Weber, Andrea (RWI Essen); Zulehner, Christine (University of Vienna)
    Abstract: According to Becker's (1957) famous theory on discrimination, entrepreneurs with a strong prejudice against female workers forgo profits by submitting to their tastes. In a competitive market their firms lack efficiency and are therefore forced to leave. We present new empirical evidence for this prediction by studying the survival of startup firms in a large longitudinal matched employer-employee data set from Austria. Our results show that firms with strong preferences for discrimination, i.e. a low share of female employees relatively to the industry average, have significantly shorter survival rates. This is especially relevant for firms starting out with female shares in the lower tail of the distribution. They exit about 18 months earlier than firms with a median share of females. We see no differences in survival between firms at the top of the female share distribution and at the median, though. We further document that highly discriminatory firms that manage to survive submit to market powers and increase their female workforce over time.
    Keywords: firm survival, profitability, female employment, discrimination, market test, matched employer-employee data
    JEL: J16 J71 L25
    Date: 2009–10
  10. By: Helios Herrera (SIPA, Columbia University); Johannes Horner (Cowles Foundation, Yale University)
    Abstract: This paper examines social learning when only one of the two types of decisions is observable. Because agents arrive randomly over time, and only those who invest are observed, later agents face a more complicated inference problem than in the standard model, as the absence of investment might reflect either a choice not to invest, or a lack of arrivals. We show that, as in the standard model, learning is complete if and only if signals are unbounded. If signals are bounded, cascades may occur, and whether they are more or less likely than in the standard model depends on a property of the signal distribution. If the hazard ratio of the distributions increases in the signal, it is more likely that no one invests in the standard model than in this one, and welfare is higher. Conclusions are reversed if the hazard ratio is decreasing. The monotonicity of the hazard ratio is the condition that guarantees the presence or absence of informational cascades in the standard herding model.
    Keywords: Informational herds, Cascades, Selection bias
    JEL: D82 D83
    Date: 2009–10
  11. By: Phillip Leslie; Alan Sorensen
    Abstract: We develop an equilibrium model of ticket resale in which buyers' decisions in the primary market, including costly efforts to "arrive early" to buy underpriced tickets, are based on rational expectations of resale market outcomes. We estimate the parameters of the model using a novel dataset that combines transaction data from both the primary and secondary markets for a sample of major rock concerts. Our estimates indicate that while resale improves allocative efficiency, half of the welfare gain from reallocation is offset by increases in costly effort in the arrival game and transaction costs in the resale market.
    JEL: D4 L0
    Date: 2009–11
  12. By: Michael Kirchler; Jürgen Huber; Thomas Stöckl
    Abstract: For the past two decades a market model introduced by Smith, Suchanek, and Williams (1988, henceforth SSW) has dominated experimental research on financial markets. In SSW the fundamental value of the traded asset is determined by the expected value of a finite stream of dividend payments. This setup implies a deterministically falling fundamental value with a predetermined end of the life-span of the asset and extremely high dividend-payouts. We present a new market model in which we implement the fundamental value by adopting a random walk process. Compared to SSW-markets, prices in the new markets (SAVE) are more efficient and end-of-experiment imbalances common in SSW-markets are not observed. Our results demonstrate, that implicit features of the SSW market model contribute to bubble formation.
    Keywords: Experimental economics, asset market, bubble, market efficiency
    JEL: C92 D83 D84 G12
    Date: 2009–06
  13. By: Bijwaard, Govert (NIDI - Netherlands Interdisciplinary Demographic Institute)
    Abstract: In this empirical paper we assess how labour market transitions and out- and repeated migration of immigrants are interrelated. We estimate a multi-state multiple spell competing risks model with four states: employed, unemployed receiving benefits, out-of-the-labour market (no benefits) and abroad. For the analysis we use data on recent labour immigrants to The Netherlands, which implies that all migrants are (self)-employed at the time of arrival. We find that many migrants leave the country after a period of no-income. Employment characteristics and the country of origin play an important role in explaining the dynamics. Microsimulations of synthetic cohorts reveal that many migrants experience unemployment spells, but ten years after arrival only a few are unemployed. Scenarios based on microsimulation indicate that the Credit Crunch will not only increase the unemployment among migrants but also departure from the country. Scenarios also indicate that an increase in the number of migrants from the EU accession countries will lead to higher labour market and migration dynamics. Finally, based on microsimulation we do not expect that the recent simplification of the entry of high income migrants will have a lasting effect, as many of those migrants leave fast.
    Keywords: migration dynamics, labour market transitions, competing risks, immigrant assimilation
    JEL: F22 J61 C41
    Date: 2009–10
  14. By: Hendrik Hakenes (Institute of Financial Economics, Leibniz University of Hannover); Isabel Schnabel (Department of Law and Economics, Johannes Gutenberg University Mainz)
    Abstract: We present a banking model with imperfect competition in which borrowers’ access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans in order to transfer them to other parties, leading to an increase in aggregate risk. Nevertheless, the introduction of CRT generally increases welfare in our setup. However, under private information, higher competition induces an expansion of loans to unprofitable firms, which in the limit offsets the welfare gains from CRT completely.
    Keywords: access to credit, bank competition, credit derivatives, Credit risk transfer, public and private information
    JEL: G13 G21 L11
    Date: 2009–10
  15. By: Singh, Indervir
    Abstract: The present study attempts to provide reasons for sustainability of social norms. Here, the people are considered as competitors, where everyone tries to improve his position in the society by proving himself better than others. In this situation, a person has an incentive to punish the rule breaker as well as people related to him, if the breaking of rule gives him opportunity to improve his position by punishing them. Further, the people related to the rule breaker have incentive to punish him if they can reduce the extent their punishment by doing so. A person may also use the punishment activity for gains if people who have internalized the norm pay him for his services in different ways due to their conscience. In addition, the conditions for the taking up the punishment activity are also worked out.
    Keywords: Social norms; sustainability; emotions and competition.
    JEL: D02 Z13
    Date: 2009–08–20
  16. By: Julian Jamison; David Owens; Glenn Woroch
    Abstract: Firms often face choices about when to upgrade and what to upgrade to. We discuss this in the context of upgrading to a new technology (for example, a new computer system), but it applies equally to the upgrading of processes (for example, a new organizational structure) or to individual choices (for example, buying a new car). This paper uses an experimental approach to determine how people address such problems, with a particular focus on the impact of information flows. Specifically, subjects face a multi-round decision, choosing when (if ever) to upgrade from the status quo to either a safe or a risky new technology. The safe technology yields more than the status quo, and the risky technology may yield either less than the status quo or more than the safe technology. Every round, subjects who have not yet upgraded receive noisy information about the true quality of the risky technology. Our focus on the timing of endogenous choice is novel and differentiates the results from previous experimental papers on herding and cascades. We find that, in the single-person decision problem, subjects tend to wait too long before choosing (relative to optimal behavior). In the second treatment, they observe payoff-irrelevant choices of other subjects. This turns out to induce slightly faster decisions, so the "irrationality" of fads actually improves profits in our framework. In the third and final treatment, subjects observe payoff-relevant choices of other subjects (that is, others who have the same value for the risky technology but independent private signals). Behavior here is very similar to the second treatment, so having "real" information does not seem to have a strong marginal effect. Overall we find that social learning, whether or not the behavior of others is truly informative, plays a large role in upgrade decisions and hence in technology diffusion.
    Keywords: Human behavior
    Date: 2009
  17. By: Petra Ens (Georg-August-Universität Göttingen)
    Abstract: Literature has long learned about the welfare improving effect of equalization in tax competition environments. By setting incentives to local authorities, public spending becomes efficient in spite of relying on a mobile resource as the tax base. This paper proves that this result cannot hold when local players have influence on the shape of the transfer system. A bargaining concerning equalization may change the incentives arising from equalization.
    Keywords: tax competition, fiscal equalization, nash bargaining, cooperation
    JEL: H10 H71 H77
    Date: 2009
  18. By: Cheung, Stephen L. (University of Sydney); Palan, Stefan (University of Graz)
    Abstract: We study the effect of team decision-making on bubbles and crashes in experimental asset markets of the kind introduced by Smith, Suchanek and Williams (1988). We find that populating such markets with teams of size two instead of individuals significantly reduces the severity of mispricing. In particular we observe that under our teams treatment, deviations in prices away from intrinsic value are significantly smaller in magnitude, shorter in duration and associated with lower volume and price volatility. We also find an unexpected gender effect in team composition, manifesting itself in more extreme – though not consistently more profitable – behaviour by all-male teams. Since these effects are not observed among male participants generally, we conjecture that they may be due to factors specific to the psychology of decision-making in male-dominated environments.
    Keywords: asset market experiments, price bubbles, group decision-making, gender composition of teams
    JEL: C92 D70 G12
    Date: 2009–10
  19. By: Heifetz, Aviad (Open University of Israel); Meier, Martin (Instituto de Analisis Economico, CSIC, Barcelona and Institut fur Hohere Studien, Vienna); Schipper, Burkhard C. (University of California, Davis)
    Abstract: We define generalized extensive-form games which allow for mutual unawareness of actions. We extend Pearce's (1984) notion of extensive-form (correlated) rationalizability to this setting, explore its properties and prove existence. We define also a new variant of this solution concept, prudent rationalizability, which refines the set of outcomes induced by extensive-form rationalizable strategies. Finally, we define the normal form of a generalized extensive-form game, and characterize in it extensive-form rationalizability by iterative conditional dominance.
    JEL: C70 C72 D80 D82
    Date: 2009–05
  20. By: Lucy Qian Liu (International Monetary Fund, Wash D.C.); Liang Wang (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Wisconsin-Madison)
    Abstract: Conventional wisdom is that inflation makes people spend money faster, trying to get rid of it like a “hot potato,” and this is a channel through which inflation affects velocity and welfare. Monetary theory with endoge- nous search intensity seems ideal for studying this. However, in standard models, inflation is a tax that lowers the surplus from monetary exchange and hence reduces search effort. We replace search intensity with a free entry (participation) decision for buyers - i.e., we focus on the extensive rather than intensive margin - and prove buyers always spend their money faster when inflation increases. We also discuss welfare.
    Keywords: Search, Money, Inflation, Velocity, Free Entry
    JEL: E40 E50 E31
    Date: 2009–11–04
  21. By: Sebastiano Daros; Neil Rankin
    Abstract: We analytically examine output persistence from monetary shocks in a DSGE model with staggered prices or wages under a Taylor Rule for monetary policy. The best known such model assumes Calvo-style staggering of prices and flexible wages and is known to yield no persistence under a Taylor Rule. Switching to Taylor-style staggering introduces lagged output into the model’s ‘New Keynesian Phillips Curve’ equation. Despite this, we show it generates no persistence, whether staggering is in wages or prices. Surprisingly, however, Calvo-style staggering of wages does generate persistence, if there are decreasing returns to labour.
    Keywords: Output Persistence, Staggered Prices/Wages, Taylor Rule.
    JEL: E32 E52
    Date: 2009–05

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