nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒04‒04
twenty-one papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Dynamic Price Competition with Fixed Capacities By Kalyan Talluri; Víctor Martínez de Albéniz
  2. Assesing Advertising Efficiency: Does the Internet Play a Role? By Albena Pergelova; Diego Prior; Josep.Rialp
  3. Optimal research and development expenditure: a general equilibrium approach By Galo Nuño
  4. Targeting in Advertising Markets: Implications for Offline vs. Online Media By Dirk Bergemann; Alessandro Bonatti
  5. On consensus through communication without a commonly known protocol By Tsakas Elias; Voorneveld Mark
  6. Wage subsidies and international trade: When does policy coordination pay? By Sabastian Braun; Christian Spielmann
  7. Fiscal Centralization and the Political Process By Facundo Albornoz; Antonio Cabrales
  8. An Egalitarian Regime Breeds Generosity: The Effect of Endowment Allocation Procedures on Social Preferences By Riyanto, Yohanes Eko; Zhang, Jianlin
  9. Windows of technological opportunity: do technological booms influence the relationship between firm size and innovativeness? By Degner, Harald
  10. The Costs of Favoritism: Is Politically-Driven Aid Less Effective? By Dreher, Axel; Klasen, Stephan; Vreeland, James Raymond; Werker, Eric
  11. Identifying Social Entrepreneurs Serving the Poor at the BoP By Abraham George
  12. Do Islamic banks have greater market power? By Weill, Laurent
  13. Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger) By Harbord, David; Hoernig, Steffen
  14. Proving the Performance of a New Revenue Management System By Kalyan Talluri; Fernando Castejon; Begoña Codina; Juan Magaz
  15. Short- and long-term allocation of power in liberalized electricity markets By Torgeir Ericson and Bente Halvorsen
  16. The periphery paradox in innovation policy: Latin America and Eastern Europe Compared By Rainer Kattel; Annalisa Primi
  17. Wage and Employment Eff ects of Workplace Representation – A ”Right To Co-Manage” Model By Yiquan Gu
  18. Revealed Unawareness By Schipper, Burkhard C
  19. Predictive Ability of Business Cycle Indicators under Test: A Case Study for the Euro Area Industrial Production By Carstensen, Kai; Wohlrabe, Klaus; Ziegler, Christina
  20. The European Security Industry: A Research Agenda By Carlos Martí Sempere
  21. On the fixed-effects vector decomposition By Breusch, Trevor; Ward, Michael B; Nguyen, Hoa; Kompas, Tom

  1. By: Kalyan Talluri; Víctor Martínez de Albéniz
    Abstract: Many revenue management (RM) industries are characterized by (a) fixed capacities in the short term (e.g., hotel rooms, seats on an airline flight), (b) homogeneous products (e.g., two airline flights between the same cities at similar times), and (c) customer purchasing decisions largely influenced by price. Competition in these industries is also very high even with just two or three direct competitors in a market. However, RM competition is not well understood and practically all known implementations of RM software and most published models of RM do not explicitly model competition. For this reason, there has been considerable recent interest and research activity to understand RM competition. In this paper we study price competition for an oligopoly in a dynamic setting, where each of the sellers has a fixed number of units available for sale over a fixed number of periods. Demand is stochastic, and depending on how it evolves, sellers may change their prices at any time. This reflects the fact that firms constantly, and almost costlessly, change their prices (alternately, allocations at a price in quantity-based RM), reacting either to updates in their estimates of market demand, competitor prices, or inventory levels. We first prove existence of a unique subgame-perfect equilibrium for a duopoly. In equilibrium, in each state sellers engage in Bertrand competition, so that the seller with the lowest reservation value ends up selling a unit at a price that is equal to the equilibrium reservation value of the competitor. This structure hence extends the marginal-value concept of bid-price control, used in many RM implementations, to a competitive model. In addition, we show that the seller with the lowest capacity sells all its units first. Furthermore, we extend the results transparently to n firms and perform a number of numerical comparative statics exploiting the uniqueness of the subgame-perfect equilibrium.
    Keywords: revenue management, bid-prices, subgame-perfect equilibrium.
    JEL: C73 D43 M11
    Date: 2010–02
  2. By: Albena Pergelova (Departament d'Economia de l'Empresa, Universitat Autònoma de Barcelona); Diego Prior (Departament d'Economia de l'Empresa, Universitat Autònoma de Barcelona); Josep.Rialp (Departament d'Economia de l'Empresa, Universitat Autònoma de Barcelona)
    Abstract: This research focuses on a major concern for marketers addressing the claims of inefficiency of the spending on advertising. We examine whether the Internet can help increase overall advertising efficiency. Using a sample from the Spanish automobile industry, we combine a nonparametric method - Data Envelopment Analysis - with recent important insights from statistics and econometrics studies, and we find that online advertising improves the efficiency levels and this effect is more pronounced in the long-term temporal framework.
    Date: 2009–12
  3. By: Galo Nuño (Banco de España)
    Abstract: How much should be spent in research and development (R&D)? How should R&D vary over the business cycle? In this paper we answer both questions in the context of a calibrated dynamic general equilibrium model with Schumpeterian endogenous growth. Firstly, we demonstrate that, although the existence of distortions in a decentralized economy produces underinvestment in R&D, a simple proportional subsidy to R&D spending alone cannot restore the first best allocation. The optimal proportional R&D subsidy attains a second best allocation in which R&D spending exceeds its first best level. Secondly, we show how the observed procyclicality of R&D is socially inefficient. However, the welfare loss due to this dynamic inefficiency is much smaller than the loss due to underinvestment in R&D.
    Keywords: Schumpeterian growth, technology adoption, optimal subsidy
    JEL: E32 O38 O40
    Date: 2010–03
  4. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti (MIT Sloan School of Management)
    Abstract: We develop a model with many heterogeneous advertisers (products) and advertising markets (media). Each advertiser has a different consumer segment for its product, and each medium has a different ability to target advertisement messages. We characterize the competitive equilibrium in the media markets and investigate the role of targeting for the price and allocation of advertisements across media markets. An increase in the targeting ability leads to an increase in the total number of purchases (matches), and hence in the social value of advertisements. Yet, an improved targeting ability also increases the concentration of advertising firms in each market. Surprisingly, we find that the equilibrium price for advertisements is decreasing in the targeting ability over a large range of parameter values. We trace out the implications of targeting for competing media markets. We distinguish offline and online media by their targeting ability: low versus high. We show that competition by an online medium lowers the revenue of the offline medium more than competition by another offline medium of the same size.
    Keywords: Targeting, Advertising, Online advertising, Sponsored search, Media markets
    JEL: D44 D82 D83
    Date: 2010–03
  5. By: Tsakas Elias; Voorneveld Mark (METEOR)
    Abstract: The present paper extends the standard model of pairwise communication among Bayesianagents to cases where the structure of the communication protocol is not commonly known.We show that, even under strict conditions on the structure of the protocols and the nature of the transmitted signals, a consensus may never be reached if very little asymmetric information about the protocol is introduced.
    Keywords: Economics (Jel: A)
    Date: 2010
  6. By: Sabastian Braun (Kiel Institute for the World Economy); Christian Spielmann (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: National labour market institutions interact across national boundaries when product markets are global. Labour market policies can thus entail spill-overs, a fact widely ignored in the academic literature. This paper studies the effects of wage subsidies in an international duopoly model with unionised labour markets. We document both positive and negative spill-over effects and discuss the benefits and costs from international policy coordination both for the case of symmetric and asymmetric labour market institutions. Our results suggest that institutional differences could sign responsible for the slow speed at which labour market policy coordination has progressed so far.
    Date: 2010–03
  7. By: Facundo Albornoz; Antonio Cabrales
    Abstract: We study the dynamic support for fiscal decentralisation in a political agency model from the perspective of a region. We show that corruption opportunities are lower under centralization at each period of time. However, centralization makes more difficult for citizens to detect corrupt incumbents. Thus, corruption is easier under centralization for low levels of political competition. We show that the relative advantage of centralization depends negatively on the quality of the local political class, but it is greater if the center and the region are subject to similar government productivity shocks. When we endogenize the quality of local politicians, we establish a positive link between the development of the private sector and the support for decentralization. Since political support to centralization evolves over time, driven either by economic/political development or by exogenous changes in preferences over public good consumption, it is possible that voters are (rationally) discontent about it. Also, preferences of voters and the politicians about centralization can diverge when political competition competition is weak.
    Keywords: decentralization, centralization, political agency, quality of politicians, corruption
    JEL: H11 D72 D73 P16
    Date: 2010–03
  8. By: Riyanto, Yohanes Eko; Zhang, Jianlin
    Abstract: We experimentally investigate the effect of endowment allocation procedures on social preferences using a two-stage dictator game. In the first stage, participants who were randomly selected as allocators had to perform a task in order to earn money. Better performance on the task resulted in higher earnings. In our baseline meritocratic treatment, the allocators' initial endowment was set equal to their individual earnings. We compared this with an egalitarian treatment whereby the allocators' initial endowment was set equal to the average earnings of all allocators. Essentially, high performers were taxed and under performers were subsidized by the high performers. In the second stage, the allocators had to divide their endowment with the recipients. We show that the allocators were more generous in the egalitarian treatment than in the meritocratic treatment. Interestingly, being taxed did not reduce the high performers' generosity but being subsidized did significantly increase the under performers' generosity. Thus, being treated kindly induced the under performers to reciprocate forward to other people.
    Keywords: Other-regarding Behavior; Dictator Game; Endowment Allocation Procedures; Meritocratic; Egalitarian; Forward Reciprocity
    JEL: D63 D64 C91
    Date: 2010–01
  9. By: Degner, Harald
    Abstract: Many papers have been written about the effect of firm size on innovativeness, revealing a positive, a negative or a mixed impact. To this day, the so-called Schumpeterian hypothesis of the above-average innovativeness of large firms has been neither confirmed nor rejected, often because of insufficient data or a too-short observation period. Many studies concentrate only on a specific region or a specific sector, or they analyze a very short time period. Windows of technological opportunities, providing technological booms for both firms and sectors, have not yet been investigated. An analysis of Germany’s chemical, metal and electronic-engineering sectors between 1877 and 1932 reveals that the sector-specific long-term relationship between firm size and innovativeness is negative, except during times of specific technological booms. In combination with firm-specific characteristics, this new aspect can contribute to a better understanding of the long-term relationship between firm size and innovativeness. --
    Keywords: Effect of firm size on innovativeness,technological boom,Schumpeterian hypothesis
    Date: 2010
  10. By: Dreher, Axel (University of Göttingen); Klasen, Stephan (University of Göttingen); Vreeland, James Raymond (Georgetown University); Werker, Eric (Harvard Business School)
    Abstract: As is now well documented, aid is given for both political as well as economic reasons. The conventional wisdom is that politically-motivated aid is less effective in promoting developmental objectives. We examine the ex-post performance ratings of World Bank projects and generally find that projects that are potentially politically motivated – such as those granted to governments holding a non-permanent seat on the United Nations Security Council or an Executive Directorship at the World Bank – are no more likely, on average, to get a negative quality rating than other projects. When aid is given to Security Council members with higher short-term debt, however, a negative quality rating is more likely. So we find evidence that World Bank project quality suffers as a consequence of political influence only when the recipient country is economically vulnerable in the first place.
    Keywords: World Bank, aid effectiveness, political influence, United Nations Security Council
    JEL: O19 O11 F35
    Date: 2010–03
  11. By: Abraham George
    Abstract: The concept of social entrepreneurship as a characterization of social responsibility for business organizations has gained considerable popularity. There is growing belief in international development and donor communities that this form of for-profit activity might be the long-sought panacea for solving poverty at the so-called Base of the Pyramid (BoP) -- the poorest segment of the society. Yet, there is no consensus within these communities as to what constitutes social entrepreneurship, and how the BoP is defined. Confusion arises from the absence of generally accepted definitions for both terms, leaving much scope for some conventional for-profit activities to assert a higher social service status. This paper attempts to clarify what constitutes social entrepreneurship serving the BOP segment of the population, and how the BoP may be defined to better represent the poor.
    Keywords: social entrepreneurship, bottom of the pyramid, poverty alleviation
    JEL: O10
    Date: 2009–12–15
  12. By: Weill, Laurent (BOFIT)
    Abstract: The aim of this paper is to investigate whether Islamic banks have greater market power than con-ventional banks. An Islamic bank, for example, might enjoy enhanced market power if a captive clientele adhering to religious principles permits it to charge higher prices. To measure market power, we compute Lerner indices for a sample of banks from 17 countries where Islamic and conventional banks coexist. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks over the period 2000-2007. When including control variables, regression of Lerner indices even suggests that Islamic banks have less market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are no less competitive than conventional banks. Thus, any reduced market power of Islamic banks can be attributed to differences in norms and incentives.
    Keywords: Islamic banks; Lerner index; bank competition
    JEL: D43 D82 G21
    Date: 2010–02–26
  13. By: Harbord, David; Hoernig, Steffen
    Abstract: This paper presents results from a calibrated welfare model of the UK mobile telephony market which includes many mobile networks; calls to and from the fixed network; networkbased price discrimination; and call externalities. The analysis focuses on the short-run effects of adopting lower mobile termination rates (MTRs) on total welfare, consumer surplus and profits. Our simulations show that reducing MTRs broadly in line with the recent European Commission Recommendation to either “long-run incremental cost”; reciprocal termination charges with fixed networks; or “bill-and-keep” (i.e. zero termination rates), increases social welfare, consumer surplus and networks’ profits. Depending on the strength of call externalities, social welfare may increase by as much as £360 million to £2.5 billion per year. The analysis thus lends support to a move away from fully-allocated cost pricing and towards much lower MTRs, with bill-and-keep frequently leading to the highest increase in welfare when call externalities matter. We also apply the model to estimate the welfare effects of the recently-approved merger between Orange and T-Mobile under two different scenarios concerning MTRs.
    Keywords: telecommunications; regulation; mobile termination rates; network effects; welfare; simulations welfare; simulations
    JEL: L96 L51 L13 D43
    Date: 2010–03–03
  14. By: Kalyan Talluri; Fernando Castejon; Begoña Codina; Juan Magaz
    Abstract: Revenue management (RM) is a complicated business process that can best be described as control of sales (using prices, restrictions, or capacity), usually using software as a tool to aid decisions. RM software can play a mere informative role, supplying analysts with formatted and summarized data who use it to make control decisions (setting a price or allocating capacity for a price point), or, play a deeper role, automating the decisions process completely, at the other extreme. The RM models and algorithms in the academic literature by and large concentrate on the latter, completely automated, level of functionality. A firm considering using a new RM model or RM system needs to evaluate its performance. Academic papers justify the performance of their models using simulations, where customer booking requests are simulated according to some process and model, and the revenue perfor- mance of the algorithm compared to an alternate set of algorithms. Such simulations, while an accepted part of the academic literature, and indeed providing research insight, often lack credibility with management. Even methodologically, they are usually awed, as the simula- tions only test \within-model" performance, and say nothing as to the appropriateness of the model in the first place. Even simulations that test against alternate models or competition are limited by their inherent necessity on fixing some model as the universe for their testing. These problems are exacerbated with RM models that attempt to model customer purchase behav- ior or competition, as the right models for competitive actions or customer purchases remain somewhat of a mystery, or at least with no consensus on their validity. How then to validate a model? Putting it another way, we want to show that a particular model or algorithm is the cause of a certain improvement to the RM process compared to the existing process. We take care to emphasize that we want to prove the said model as the cause of performance, and to compare against a (incumbent) process rather than against an alternate model. In this paper we describe a \live" testing experiment that we conducted at Iberia Airlines on a set of flights. A set of competing algorithms control a set of flights during adjacent weeks, and their behavior and results are observed over a relatively long period of time (9 months). In parallel, a group of control flights were managed using the traditional mix of manual and algorithmic control (incumbent system). Such \sandbox" testing, while common at many large internet search and e-commerce companies is relatively rare in the revenue management area. Sandbox testing has an undisputable model of customer behavior but the experimental design and analysis of results is less clear. In this paper we describe the philosophy behind the experiment, the organizational challenges, the design and setup of the experiment, and outline the analysis of the results. This paper is a complement to a (more technical) related paper that describes the econometrics and statistical analysis of the results.
    Keywords: Revenue management, airlines, sandbox testing,econometric analysis.
    JEL: M11 M31 L93
    Date: 2009–11
  15. By: Torgeir Ericson and Bente Halvorsen (Statistics Norway)
    Abstract: The experience of liberalized electricity markets’ ability to allocate scarce energy resources has been mixed. In this paper, we analyze how liberalized markets allocate power in the short and long run through the interaction between the spot and end-user markets. We show that totally inelastic demand in the spot market does not necessarily result in market failure in a shortage situation, as long as price incentives are transferred to the end-user markets. We argue that the market does not have to run optimally to handle a shortage situation, and that problems with short- or long-run allocation of power arise when price restrictions in end-user markets results in a higher demand than that which may sustain the energy situation over time.
    Keywords: Liberalized electricity market; allocation of power; demand response
    JEL: D4 Q4
    Date: 2010–03
  16. By: Rainer Kattel; Annalisa Primi
    Abstract: In this paper we are interested in analyzing the dynamics of the innovation policy in non-frontier countries, and their relationship with structural change and development.
    Date: 2010–03
  17. By: Yiquan Gu
    Abstract: Government agencies and other national and international institutions are asked to perform foThis paper introduces a two-stage union-oligopoly-council model of wage and employment determination wherein at the fi rst stage wage is negotiated through collective bargaining and at the second stage employment in each fi rm is co-determined by the employer and its works council. We provide a full characterization of the model outcome for all parameter values of bargaining power and co-determination power. In particular, works councils always increase employment while their impact on wage can be non-monotonic. Overall, individual works councils’ pursuit of own workers’ interests may well harm the workers as a union.
    Keywords: Workplace representation; union-oligopoly bargaining; fi rm-council codetermination
    JEL: J50 J54 L13
    Date: 2010–03
  18. By: Schipper, Burkhard C
    Abstract: I develop awareness-dependent subjective expected utility by taking unawareness structures introduced in Heifetz, Meier, and Schipper (2006, 2008, 2009) as primitives in the Anscombe-Aumann approach to subjective expected utility. I observe that a decision maker is unaware of an event if and only if her choices reveal that the event is "null" and the negation of the event is "null". Moreover, I characterize "impersonal" expected utility that is behaviorally indistinguishable from awareness-dependent subject expected utility and assigns probability zero to some subsets of states that are not necessarily events. I discuss in what sense impersonal expected utility can not represent unawareness.
    Keywords: Unawareness; awareness; unforeseen contingencies; null; zero probability; subjective expected utility; Anscombe-Aumann; small worlds; extensionality of acts; event exchangeability
    JEL: D81 C70 D80 C72
    Date: 2010–03–18
  19. By: Carstensen, Kai; Wohlrabe, Klaus; Ziegler, Christina
    Abstract: In this paper we assess the information content of seven widely cited early indicators for the euro area with respect to forecasting area-wide industrial production. To this end, we use various tests that are designed to compare competing forecast models. In addition to the standard Diebold-Mariano test, we employ tests that account for specific problems typically encountered in forecast exercises. Specifically, we pay attention to nested model structures, we alleviate the problem of data snooping arising from multiple pairwise testing, and we analyze the structural stability in the relative forecast performance of one indicator compared to a benchmark model. Moreover, we consider loss functions that overweight forecast errors in booms and recessions to check whether a specific indicator that appears to be a good choice on average is also preferable in times of economic stress. We find that on average three indicators have superior forecast ability, namely the EuroCoin indicator, the OECD composite leading indicator, and the FAZ-Euro indicator published by the Frankfurter Allgemeine Zeitung. If one is interested in one-month forecasts only, the business climate indicator of the European Commission yields the smallest errors. However, the results are not completely invariant against the choice of the loss function. Moreover, rolling local tests reveal that the indicators are particularly useful in times of unusual changes in industrial production while the simple autoregressive benchmark is difficult to beat during time of average production growth.
    Keywords: weighted loss; leading indicators; euro area; forecasting
    JEL: C32 C53 E32
    Date: 2010–03
  20. By: Carlos Martí Sempere
    Abstract: The security industry can be defined, in the first instance, as the industry that produces the goods and services required to protect citizens from insecurity. Yet, this industry, as opposed to defence, has not been an area of intense research. Their boundaries are unclear and the industry is not well characterised. This paper analyses this knowledge gap and presents some ideas for a research agenda for this industry that could assist in unveiling the main features, the potential weaknesses and strengths, and the capability to solve the security needs of society in an efficient and effective way. The paper discusses a definition of this economic sector useful in setting its boundaries, and it briefly describes the main types of industries operating within the sector. It analyses methods for gathering information regarding the industry, customers, and other market agents. Finally, it outlines ways for assessing market performance in terms of the structure-conduct-performance paradigm.
    Keywords: security industry, security market, terrorism and organised crime countermeasures, competition, market performance
    Date: 2010
  21. By: Breusch, Trevor; Ward, Michael B; Nguyen, Hoa; Kompas, Tom
    Abstract: This paper analyses the properties of the fixed-effects vector decomposition estimator, an emerging and popular technique for estimating time-invariant variables in panel data models with unit effects. This estimator was initially motivated on heuristic grounds, and advocated on the strength of favorable Monte Carlo results, but with no formal analysis. We show that the three-stage procedure of this decomposition is equivalent to a standard instrumental variables approach, for a specific set of instruments. The instrumental variables representation facilitates the present formal analysis which finds: (1) The estimator reproduces exactly classical fixed-effects estimates for time-varying variables. (2) The standard errors recommended for this estimator are too small for both time-varying and time-invariant variables. (3) The estimator is inconsistent when the time-invariant variables are endogenous. (4) The reported sampling properties in the original Monte Carlo evidence are incorrect. (5) We recommend an alternative shrinkage estimator that has superior risk properties to the decomposition estimator, unless the endogeneity problem is known to be small or no relevant instruments exist.
    Keywords: panel data models; fixed-effects vector decomposition; instrumental variables; inconsistent estimator; incorrect standard errors; improved shrinkage estimator
    JEL: C23 C33
    Date: 2010–03

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