nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒11‒27
seventeen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Third-Degree Price Discrimination and Consumer Surplus By Simon Cowan
  2. On Polarized Prices and Costly Sequential Search By Ruth G. Gilgenbach
  3. Competition Among the Big and the Small By Shimomura, Ken-Ichi; Thisse, Jacques-François
  4. Internal Rationality and Asset Prices By Adam, Klaus; Marcet, Albert
  5. Cash-out or flame-out! Opportunity cost and entrepreneurial strategy: Theory, and evidence from the information security industry By Ashish Arora; Anand Nandkumar
  6. Competing on Good Politicians By Galasso, Vincenzo; Nannicini, Tommaso
  7. Digital Technology and the Allocation of Ownership in the Music Industry By Maija Halonen-Akatwijuka; Tobias Regner
  8. Going on the Long Race? - Employment Duration and (De)Regulation of Experimental Stochastic Labor Markets By Siegfried Berninghaus; Sabrina Bleich; Werner Güth
  9. How Rigid Are Producer Prices? By Pinelopi Goldberg; Rebecca Hellerstein
  10. Money is an Experience Good: Competition and Trust in the Private Provision of Money By Marimon, Ramon; Nicolini, Juan Pablo; Teles, Pedro
  11. Consideration Sets and Competitive Marketing By Eliaz, Kfir; Spiegler, Ran
  12. Does Information Change Behavior? By Huffman, Wallace
  13. Buy-it-Now Prices in eBay Auctions-The Field in the Lab By Tim Grebe; Radosveta Ivanova-Stenzel; Sabine Kröger
  14. Health Savings Accounts for Small Businesses and Entrepreneurs: Shopping, Take-Up and Implementation Challenges By Susan M. Gates; Pinar Karaca-Mandic; James R. Burgdorf; Kanika Kapur
  15. The Integration of Western Hemisphere Grain Markets in the Eighteenth Century: Early Progress and Decline of Globalization By Rafael Dobado; David Guerrero
  16. Trade finance in a liquidity crisis By Ellingsen, Tore; Vlachos, Jonas
  17. How Did Financial-Crisis-Based Criticisms of Market Efficiency Get It So Wrong? By Ariane Szafarz

  1. By: Simon Cowan
    Abstract: his paper presents simple conditions for monopoly third-degree price discrimination to have negative or positive effects on aggregate consumer surplus. Consumer surplus is often reduced by discrimination, for example when total welfare (consumer surplus and profits) falls. Surplus increases with discrimination, however, in two cases: first, when the marginal revenues without discrimination are close together and inverse demand in the market where the price will fall with discrimination is more convex; second, when inverse demand functions are highly convex and the discriminatory prices are close together.
    Keywords: Third-degree price discrimination, Monopoly, Consumer surplus
    JEL: D42 L12 L13
    Date: 2009
  2. By: Ruth G. Gilgenbach (Southern Methodist University)
    Abstract: This paper presents a homogenous goods duopoly model of costly sequential consumer search with three classes of consumers: costless searchers; moderately costly searchers; and consumers for whom search costs are extremely high--higher than the value they attach to the good. Under certain conditions, the mixed-strategy Nash equilibrium price distribution is one where low and high, but never moderate, prices are charged. In equilibrium, free searchers will always search for both prices, very costly searchers never will, and moderately costly searchers will engage in actual search with positive probability. Interestingly, the existence of consumers who do not themselves search for prices allows for the introduction of an equilibrium where costly search does occur.
    Keywords: Some, Sequential search, pricing, duopoly.
    JEL: D83 D43 L13 L11
    Date: 2009–11
  3. By: Shimomura, Ken-Ichi; Thisse, Jacques-François
    Abstract: Armchair evidence shows that many industries are made of a few big commercial or manufacturing firms, which are able to affect the market outcome, and of a myriad of small family-run businesses with very few employees, each of which has a negligible impact on the market. Examples can be found in apparel, catering, publishers and bookstores, retailing, finance and insurances, and IT industries. We provide a new general equilibrium framework that encapsulates both market structures. Due to the higher toughness of the market, the entry of big firms leads them to sell more through a market expansion effect, which is generated by the exit of small firms. Furthermore, the level of social welfare increases with the number of oligopolistic firms because the procompetitive effect associated with the entry of a big firm dominates the resulting decrease in product variety.
    Keywords: monopolistic competition; oligopoly; product differentiation; welfare
    JEL: L13 L40
    Date: 2009–08
  4. By: Adam, Klaus; Marcet, Albert
    Abstract: We present a decision theoretic framework with agents that are learning about the behavior of market determined variables. Agents are 'internally rational', i.e., maximize discounted expected utility under uncertainty given consistent beliefs about the future, but may not be 'externally rational', i.e., may not know the true stochastic process for market determined variables (asset prices) and fundamentals (dividends). We apply this approach to a simple asset pricing model with heterogeneity and incomplete markets. We show how knowledge about dividends and optimal behavior alone fail to fully inform agents about equilibrium prices, so that learning about price behavior, as in Adam, Marcet and Nicolini (2008), is fully consistent with internal rationality. We also show that equilibrium prices depend on expectations of the discounted price and dividend in the next period only, rather than on the expected discounted sum of future dividends. Discounted sums emerge only after making very strong assumptions about agents' knowledge and prove extremely sensitive to the details about agents' prior beliefs about the dividend process.
    Keywords: learning; rationality
    JEL: D83 D84 G12 G14
    Date: 2009–10
  5. By: Ashish Arora; Anand Nandkumar
    Abstract: We analyze how entrepreneurial opportunity cost conditions performance. We depart from the literature on entrepreneurship which identifies survival with performance. Instead, many entrepreneurs aim for a cash-out (IPO or acquisition), especially in innovation based industries. Striving for a cash-out makes mistakes more likely and increases the probability of failure. High opportunity cost entrepreneurs will attempt to cash-out (IPO or friendly acquisition) quickly, even if it implies a higher risk of failure. Entrepreneurs with fewer outside alternatives may tend to linger on longer. We formalize this intuition with a simple model. Using a novel dataset of information security startups we find that entrepreneurs with high opportunity costs are not only more likely to cash-out but they are also more likely to fail. As well, our results confirm the predicted role of venture quality in conditioning the relationship between entrepreneurial opportunity cost and entrepreneurial performance.
    JEL: J4 L26 O3
    Date: 2009–11
  6. By: Galasso, Vincenzo; Nannicini, Tommaso
    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
  7. By: Maija Halonen-Akatwijuka (University of Bristol); Tobias Regner (Max Planck Institute of Economics, Jena)
    Abstract: We apply the property rights theory of Grossman-Hart-Moore in the music industry and study the optimal allocation of copyright between the artists who create music and the labels who promote and distribute it. Digital technology opens up a role for new intermediaries. We find that entry of online platforms occurs only if they are sufficiently more productive in distribution than the incumbent label. Furthermore, entry leads to a change in bargaining positions and it can become optimal for the copyright to be shifted from the label to the artist.
    Keywords: property rights theory, copyright, internet, music industry
    JEL: D23 L22 L23 L82 L86
    Date: 2009–11–17
  8. By: Siegfried Berninghaus (Institut für Wirtschaftstheorie und Operations Research, University of Karlsruhe); Sabrina Bleich (Institut für Wirtschaftstheorie und Operations Research, University of Karlsruhe); Werner Güth (Max Planck Institute of Economics, Jena)
    Abstract: If the future market wage is uncertain, engaging in long-term employment is risky, with the risk depending on how regulated the labor market is. In our experiment long-term employment can result either from offering long-term contracts or from repeatedly and mutually opting for rematching. Treatments differ in how regulations restrict the employer's flexibility in adapting the employment contract to changes of the market (wage). All treatments allow for longer contract duration as well as for mutually opting to be rematched. Effort is chosen by employees after a contract is concluded. Treatments vary from no flexibility to no restriction at all. Will more (downward) flexibility be used in ongoing employment but reduce efficiency? If so, deregulation may weaken rather than promote labor market efficiency. And will regulation crowd out long-term employment, either in the form of long-term contracts or voluntary rematching?
    Keywords: deregulation, employment contracts, wage flexibility, principal-agent theory, experimental economics, repeated interaction
    JEL: C72 C90 F16 J21 J24 L10
    Date: 2009–11–12
  9. By: Pinelopi Goldberg (Princeton University); Rebecca Hellerstein (Federal Reserve Bank of New York)
    Abstract: How rigid are producer prices? Conventional wisdom is that producer prices are more rigid than and so play less of an allocative role than do consumer prices. In the 1987-2008 micro data collected by the U.S. Bureau of Labor Statistics for the PPI, we find that producer prices for finished goods and services in fact exhibit roughly the same rigidity as do consumer prices that include sales, and substantially less rigidity than do consumer prices that exclude sales. Large firms change prices two to three times more frequently than do small firms, and by smaller amounts, particularly for price decreases. Longer price durations are associated with larger price changes, though there is considerable heterogeneity in this relationship. Long-term contracts are associated with somewhat greater price rigidity for goods and services, though the differences are not dramatic. The size of price decreases plays a key role in inflation dynamics, while the size of price increases does not. The frequencies of price increases and decreases tend to move together, and so cancel one another out.
    Keywords: Producer prices, consmer prices, contracts
    JEL: D24 D40 E30 E37 H31
    Date: 2009–11
  10. By: Marimon, Ramon; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: We study the interplay between competition and trust as efficiency-enhancing mechanims in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a lower bound on efficiency. Stationary inflation must be positive and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. We show that the two problems, the time-inconsistency in the private provision of money and moral-hazard in the provision of experience goods, are isomorphic, and therefore the same results are attained in both settings.
    Keywords: Currency competition; Experience goods; Inflation; Trust
    JEL: E40 E50 E58 E60
    Date: 2009–08
  11. By: Eliaz, Kfir; Spiegler, Ran
    Abstract: We study a market model in which competing firms use costly marketing devices to influence the set of alternatives which consumers perceive as relevant. Consumers in our model are boundedly rational in the sense that they have an imperfect perception of what is relevant to their decision problem. They apply well-defined preferences to a “consideration set”, which is a function of the marketing devices employed by the firms. We examine the implications of this behavioral model in the context of a competitive market model, particularly on industry profits, vertical product differentiation, the use of marketing devices and consumers’ conversion rates.
    Keywords: Advertising; Bounded rationality; Consideration sets; Irrelevant alternatives; Limited attention; Marketing; Persuasion
    JEL: C72 D11 D21 D43
    Date: 2009–09
  12. By: Huffman, Wallace
    Abstract: This paper reviews and synthesizes the theory of information economics and empirical evidence on how information changes the behavior of consumers, households and firms. I show that consumers respond to new information in food experiments but perhaps not in retirement account management. Some seeming perverse consumer/investor decision making may be a result of a complex decision with a low expected payoff.
    Keywords: information economics, consumer behavior, behavioral economics, moral hazard, adverse selection.
    JEL: A0
    Date: 2009–11–19
  13. By: Tim Grebe; Radosveta Ivanova-Stenzel; Sabine Kröger
    Abstract: This article is an experimental investigation on decision making in online auction markets. We focus on a widely used format, the Buy-It-Now auction on eBay, where sellers post prices at which buyers can purchase a good prior to an auction. Even though, buyer behavior is well studied in Buy-It-Now auctions, up to date little is known about the behavior of sellers. In this article, we study how sellers set Buy-It-Now prices by combining the use of a real online auction market (the eBay platform and eBay traders) with the techniques of lab experiments. We find a striking relation between information about agents provided by eBay and their behavior. Information about buyers is correlated with their deviation from true value bidding. Sellers respond strategically to this information when deciding on their Buy-It-Now prices. Our results highlight consequences of information publicly available in (online) markets and underline the crucial role of institutional details.
    Keywords: Electronic markets, experience, online auctions, BIN price, buyout price, risk, single item auction, private value, experiment
    JEL: C72 C91 D44 D82
    Date: 2009
  14. By: Susan M. Gates (RAND Corporation); Pinar Karaca-Mandic (University of Minnesota and RAND Corporation); James R. Burgdorf (RAND Corporation); Kanika Kapur (School of Economics and Geary Institute, University College Dublin and RAND Corporation)
    Abstract: A combination of high deductible health plans (HDHPs) and health savings accounts (HSAs) holds promise for expanding health insurance for small firms. We provide information on HSA take-up and shopping behavior from a 2008 survey of female small business owners, revealing that the HSA marketplace can be confusing for small firms. HSAs may have expanded access to health insurance for the smallest firms (under three employees), but not for small firms more generally. A sizable number of firms offering HSA-eligible insurance did not offer attached HSAs. Firms offering HSAs were satisfied with their experiences, but faced challenges in implementing them.
    Keywords: Health Savings Accounts, Health Insurance Costs, Small Business
    Date: 2009–11–17
  15. By: Rafael Dobado (Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales); David Guerrero (Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales)
    Abstract: In this work it is shown evidence supporting the idea that, if globalization is defined as the convergence of commodity prices between distant markets, the process started and advanced gradually in the eighteenth century instead of suddenly appearing after 1820, as claimed by the canonical version developed in a series of important works by O’Rourke and Williamson (1999, 2002, 2004). We use long time-series of grain prices for several markets in Western Europe and the Americas to explore the extent and dynamics of market integration across the Western Hemisphere throughout the eighteenth century. An innovative methodology, consisting in studying the standard deviations of the innovations in the ARMA model of pairwise relative prices between markets, is used. A general decrease in price dispersion is observed when the early eighteenth century is compared with the three decades preceding 1793. Neither Argentina nor Mexico participated in this general trend towards closer market integration across the Western Hemisphere. From 1793 to 1828 we observe a substantial increase in dispersion between markets. After this first backlash, globalization resumed at an unprecedented pace since it was favored by the transport revolution and other factors.
    Keywords: market integration, globalization.
    Date: 2009
  16. By: Ellingsen, Tore; Vlachos, Jonas
    Abstract: The paper discusses the reasons for supporting international trade finance during a liquidity crisis. Targeted interventions are justified when prices are rigid and sellers insist on immediate payment due to fears of strategic default. In this case, buyers who reject the seller's offer fail to internalize the seller's benefit from additional liquidity. A general infusion of credit will not facilitate the beneficial transaction, but an infusion targeted at the buyer's bank's trade finance supply will do so. Since there is a need for interventions in one country to benefit actors in another, international coordination is called for.
    Keywords: Debt Markets,Emerging Markets,Economic Theory&Research,Access to Finance,Trade Law
    Date: 2009–11–01
  17. By: Ariane Szafarz (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.)
    Abstract: In the aftermath of the financial crisis, market efficiency is being heavily criticized. However, the volatility-based criticisms rely on false grounds as efficiency and speculative bubbles are compatible. Indeed, the efficient market model is about rationality and information, not about stability. This model admits multiple solutions, as do most rational expectations models. One solution is the so-called fundamental one while the others are referred to as rational bubbles. Still, many practitioners, and even some financial academics, keep denying that speculative bubbles are compatible with efficient markets. This paper argues that not only would the recognition of efficient market multiplicity thwart irrationality-based theories, but it would also allow for further empirical developments taking full advantage of the power of diversity. The multiple price dynamics compatible with market efficiency represent a valuable asset largely underestimated by the profession.
    Keywords: Efficient Markets, Multiple Solutions, Rational Expectations, Speculative Bubbles, Volatility.
    JEL: G14 G12 B41
    Date: 2009–11

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