nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒03‒28
thirteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Price Competition under Limited Comparability By Piccione, Michele; Spiegler, Ran
  2. Competition among the big and the small By SHIMOMURA, Ken-Ichi; THISSE, Jacques-Franois
  3. Intellectual Property Right Protection in the Software Market By Arai, Yasuhiro
  4. Endogenous Market Structures and Contract Theory By Federico Etro
  5. The Influence of University Research on Industrial Innovation By Jinyoung Kim; Sangjoon John Lee; Gerald Marschke
  6. The value of switching costs By Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
  7. Welfare-Enhancing Hard Core Cartels By Bos Iwan; Pot Erik
  8. Modeling share prices of banks and bankrupts By Kitov, Ivan
  9. Fairness and Desert in Tournaments By Gill, David; Stone, Rebecca
  10. Promoting clean technologies under imperfect competition By AZOMAHOU, ThŽophile; BOUCEKKINE, Raouf; NGUYEN-VAN, Phu
  11. On the Incidence of Commissions in Auction Markets By Victor Ginsburgh; Patrick Legros; Nicolas Sahuguet
  12. A reasoning approach to introspection and unawareness By Gossner Olivier; Tsakas Elias
  13. The Predictive Content of Commodity Futures By Menzie D. Chinn; Olivier Coibion

  1. By: Piccione, Michele; Spiegler, Ran
    Abstract: This paper studies market competition when firms can influence consumers' ability to compare market alternatives, through their choice of price "formats". We introduce random graphs as a tool for modelling limited comparability of formats. Our main results concern the interaction between firms' equilibrium price and format decisions and its implications for industry profits and consumer switching rates. We show that narrow regulatory interventions that aim to facilitate comparisons may have adverse consequences for consumer welfare. Finally, we argue that our limited-comparability approach provides a new perspective into the phenomenon of product differentiation.
    Keywords: price competition; industrial organization; limited comparability; bounded rationality; framing; consumer protection; product differentiation; complexity
    JEL: D18 C79 L13 D43
    Date: 2009–05–04
  2. By: SHIMOMURA, Ken-Ichi (RIEB, Kobe University, Japan); THISSE, Jacques-Franois (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Keywords: oligopoly, monopolistic competition, product differentiation, welfare
    JEL: L13 L40
    Date: 2009–08–01
  3. By: Arai, Yasuhiro
    Abstract: We discuss the software patent should be granted or not. There exist two types of coping in the software market; reverse engineering and software duplication. Software patent can prevent both types of copies since a patent protects an idea. If the software is not protected by a patent, software producer cannot prevent reverse engineering. However, the producer can prevent the software duplication by a copyright. It is not clear the software patent is socially desirable when we consider these two types of coping. We obtain the following results. First, the number of copy users under the patent protection is greater than that under the copyright protection. Second, the government can increase social welfare by applying copyright protection when the new technology is sufficiently innovative.
    Keywords: Copyright Protection, Intellectual Property Right, Software
    JEL: D42 K39 L86
    Date: 2010–01
  4. By: Federico Etro
    Abstract: I study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry. Traditional results change substantially when the market structure is endogenous rather than exogenous. They concern 1) contracts of managerial delegation to non-profit maximizers, 2) incentive contracts in the presence of moral hazard on cost reducing activities, 3) screening contracts in case of asymmetric information on the productivity of the managers, 4) vertical contracts of franchising in case of hold-up problems and 5) tying contracts by monopolists competing also in secondary markets. Firms use always these contracts to strengthen price competition and manage to obtain positive pro?ts in spite of free entry.
    Keywords: Strategic delegation, Incentive contracts, Screening contracts, Franchising, Tying, Endogenous market structures
    JEL: L11 L13 L22 L43
    Date: 2010–03
  5. By: Jinyoung Kim (Korea University); Sangjoon John Lee (Alfred University); Gerald Marschke (University at Albany-SUNY, NBER and IZA)
    Abstract: We use U.S. patent records to examine the role of research personnel as a pathway for the diffusion of ideas from university to industry. Appearing on a patent assigned to a university is evidence that an ineventor has been exposed to university research, either directly as a university researcher or through some form of collaboration with university researchers. Having an advanced degree is another indicator of an inventor's exposure to university research. We find a steady increase in industry's use of inventors with university research experience over the period 1985-97, economy wide and in the pharmaceutical and semiconductor industries in particular. We interpret this as evidence of growth in the influence of university research on industrial innovation. Moreover, during this period we find that firms with large research operations in both industries, and young and highly capitalized firms in the pharmaceutical industry, are disproportionately active in the diffusion of ideas from the university sector. Finally, we find that the patents of firms that employ inventors with university research experience are more likely to cite university patents as prior art, suggesting that this experience better enables firms to tap academic research.
    Keywords: Patents; Innovation; Technology spillovers; University research
    JEL: J62 O31 O33
    Date: 2010
  6. By: Biglaiser, Gary; Crémer, Jacques; Dobos, Gergely
    Abstract: We study the consequences of heterogeneity of switching costs in a dynamic model with free entry and an incumbent monopolist. We identify the equilibrium strategies of the incumbent and of the entrants and show that the strategic interactions are more complex and more interesting than either in static models or in models where all consumers have the same switching costs. In particular, we prove that even low switching cost customers have value for the incumbent: when there are more of them its prots increase. Indeed, their presence hinders entrants who nd it more costly to attract high switching cost customers. This leads to dierent comparative statics: for instance, an increase in the switching costs of all consumers can lead to a decrease in the prots of the incumbent.
    Date: 2010–02–03
  7. By: Bos Iwan; Pot Erik (METEOR)
    Abstract: The conventional wisdom is that cartels are bad. In particular, cartels that merely lead to lower production levels and higher prices are thought to be exclusively detrimental to social welfare. This is reflected in the fact that most capitalist societies have declared such so-called hard core cartel arrangements illegal per se. In this paper, we question this rather rigid approach to hard core cartels. In a simple but fairly general setting, we provide necessary and sufficient conditions for the existence of a hard core cartel that is beneficial for firms and society at large. We consider both strong (with side payments) and weak (without side payments) hard core cartel contracts and find that (i) both strong and weak welfare-enhancing cartels exist when at least one firm makes a loss on part of its sales in competition, (ii) a welfare-enhancing strong cartel exists whenever there is a difference in unit costs at competitive production levels, and (iii ) a welfare-enhancing weak cartel exists when this difference is sufficiently large.
    Keywords: mathematical economics;
    Date: 2010
  8. By: Kitov, Ivan
    Abstract: Share prices of financial companies from the S&P 500 list have been modeled by a linear function of consumer price indices in the USA. The Johansen and Engle-Granger tests for cointegration both demonstrated the presence of an equilibrium long-term relation between observed and predicted time series. Econometrically, the pricing concept is valid. For several companies, share prices are defined only by CPI readings in the past. Therefore, our empirical pricing model is a deterministic one. For a few companies, including Lehman Brothers, AIG, Freddie Mac and Fannie Mae, negative share prices could be foreseen in May-September 2008. One might interpret the negative share prices as a sign of approaching bankruptcies.
    Keywords: share price; modeling; CPI; prediction; the USA; bankruptcy
    JEL: G1 G2 G3 E4
    Date: 2010–03–13
  9. By: Gill, David; Stone, Rebecca
    Abstract: We model the behavior of agents who care about receiving what they feel they deserve in a two-player rank-order tournament. Perceived entitlements are sensitive to how hard an agent has worked relative to her rival, and agents are loss averse around their meritocratically determined endogenous reference points. In a fair tournament sufficiently large desert concerns drive identical agents to push their effort levels apart in order to end up closer to their reference points on average. In an unfair tournament, where one agent is advantaged, the equilibrium is symmetric in the absence of desert, but asymmetric in the presence of desert. We find that desert concerns can undermine the standard conclusion that competition for a fixed supply of status is socially wasteful and explain why, when the distribution of output noise is fat-tailed, an employer might use a rank-order incentive scheme.
    Keywords: Desert; Equity; Tournament; Loss Aversion; Reference-Dependent Preferences; Reference Point; Psychological Game Theory; Status; Relative Performance Evaluation
    JEL: D63 J33
    Date: 2010–01–12
  10. By: AZOMAHOU, ThŽophile; BOUCEKKINE, Raouf (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); NGUYEN-VAN, Phu
    Keywords: energy-saving technological progress, vintage capital, market imperfections, natural monopoly, investment subsidies
    JEL: O40 E22 Q40
    Date: 2009–03–01
  11. By: Victor Ginsburgh; Patrick Legros; Nicolas Sahuguet
    Abstract: We analyze the welfare consequences of an increase in the commissions charged by intermediaries in auction markets. Commissions are similar to taxes imposed on buyers and sellers, and standard economics suggests that both sellers and buyers are made worse off by the tax. However, we show that when the buyers' participation constraint binds and when sellers set optimal reservation prices, the level of commissions correlates participation and reservation prices in such a way that participating buyers strictly gain from higher commissions.
    Keywords: Auction, intermediation, commissions, welfare.
    JEL: L12 L40 D44
    Date: 2010
  12. By: Gossner Olivier; Tsakas Elias (METEOR)
    Abstract: We introduce and study a unified reasoning process which allows to represent the beliefs of both a fully rational agent and of an unaware one. This reasoning process provides natural properties to introspection and unawareness. The corresponding model for the rational or boundedly rational agents is both easy to describe and to work with, and the agent’s full system of beliefs has natural descriptions using a reduced number of parameters.
    Keywords: Economics (Jel: A)
    Date: 2010
  13. By: Menzie D. Chinn (Department of Economics, University of Wisconsin); Olivier Coibion (Department of Economics, College of William and Mary)
    Abstract: This paper examines the relationship between spot and futures prices for a broad range of commodities, including energy, precious and base metals, and agricultural commodities. In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. While energy futures prices are generally unbiased predictors of future spot prices, there is much stronger evidence against the null for other commodity markets. This difference appears to be driven in part by the depth of each market. We find that over the last five years, it is much harder to reject the null of futures prices being unbiased predictors of future spot prices than in earlier periods for almost all commodities. In addition, futures prices do approximately as well as a random walk in forecasting future spot prices, and vastly outperform a reduced form empirical model.
    Keywords: futures, energy, petroleum, natural gas, heating oil, gasoline, precious metals, base metals, agricultural commodities, forecasting, efficient markets hypothesis.
    JEL: G13 Q43
    Date: 2010–03–15

This nep-mic issue is ©2010 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.