nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒05‒29
thirteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Price competition with consumer confusion. By Chioveanu, I.; Zhou, J.
  2. Unemployment and Product Market Competition in a Cournot Model with Efficiency Wage By Zhiqi Chen; Bo Zhao
  3. Technology Choice and Incentives under Relative Performance Schemes By Matthias Kräkel; Anja Schöttner
  4. The Influence of Collusion on Price Changes: New Evidence from Major Cartel Cases By Korbinian von Blanckenburg; Alexander Geist; Konstantin A. Kholodilin
  5. Competitive Effects of Mass Customization By Oksana Loginova
  6. Coordination after gains and losses: Is prospect theoryâs value function predictive for games? By Schade, Christian; Schroeder, Andreas; Krause, Kai Oliver
  7. On the Effect of Technological Progress on Pollution: a New Distortion in an Endogenous Growth Model By Alexandra Ferreira Lopes; Tiago Sequeira e Catarina Roseta Palma
  8. The Economics of Smoking Bans By Charles A.M. de Bartolome; Ian J. Irvine
  9. Markets where buyers also are sellers. How realized home equity may work as an accelerator of house prices By Erling Røed Larsen
  10. Gender, Competition and the Efficiency of Policy Intervention By Balafoutas, Loukas; Sutter, Matthias
  11. The Environment and Directed Technical Change By Acemoglu, Daron; Aghion, Philippe; Bursztyn, Leonardo; Hemous, David
  12. Debt- Versus Equity-Financing in Auction Designs By Zheng, Charles Zhoucheng
  13. Myopia and the global financial crisis: short-termism, context-specific reasoning, and market structure.. By Clark, Gordon L.

  1. By: Chioveanu, I.; Zhou, J.
    Abstract: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.
    Date: 2009–08
  2. By: Zhiqi Chen (Department of Economics, Carleton University); Bo Zhao (School of International Trade and Economics, University of International Business and Economics)
    Abstract: This paper analyzes the impact of product market competition on unemployment, wage and welfare in a model where unemployment is caused by efficiency wage considerations and oligopolistic firms compete in quantity. It is shown that while more intensive competition in product market increases output and reduces price, it does not necessarily lead to a lower unemployment rate or a higher wage for workers. Consequently, the relationship between the intensity of competition and the level of employment (respectively, wage, welfare) is not monotonic, and, in some instances, has an inverted-U shape.
    Keywords: Cournot competition, unemployment, efficiency wage
    Date: 2010–05–17
  3. By: Matthias Kräkel; Anja Schöttner
    Abstract: We identify a new problem that may arise when heterogeneous workers are motivated by relative performance schemes: If workers’ abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker’s productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague, thereby reducing the motivation of both workers to exert effort under a relative incentive scheme. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise.
    Keywords: complementarities; heterogeneous workers; production technology; tournament.
    JEL: D82 D86 J33 M52
    Date: 2010–05
  4. By: Korbinian von Blanckenburg; Alexander Geist; Konstantin A. Kholodilin
    Abstract: In this paper, we compare the distribution of price changes between collusive and noncollusive periods for ten major cartels. The first moments focus on previous research. We extend the discussion to the third (skewness) and fourth (kurtosis) moments. However, none of the above descriptive statistics can be considered as a robust test allowing a differentiation between competition and cartel. Therefore, we implement the Kolmogorov-Smirnov test. According to our results, 8 out of 10 cartels were successful in controlling the market price for a number of years. The proposed methodology may be used for antitrust screening and regulatory purposes.
    Keywords: Cartel detection, collusion, competition policy
    JEL: L10 L60
    Date: 2010
  5. By: Oksana Loginova (Department of Economics, University of Missouri-Columbia)
    Abstract: Earlier theoretical literature on mass customization maintains that customization reduces product differentiation and intensifies price competition. In contrast, operations management studies argue that customization serves primarily to differentiate a company from its competitors. Interactive involvement of the customer in product design creates an affective relationship with the firm, relaxing price competition. This paper provides a model that incorporates consumer involvement to explain the phenomena described in the operations management literature. Two firms on the Hotelling line compete for a continuum of consumers with heterogeneous brand preferences. An exogenously given fraction of consumers is potentially interested in customization. Consumer benefits from customization are the rewards from a special shopping experience and the value of product customization (better fitting product); these benefits are higher for consumers located closer to the customizing brand. When a consumer purchases a customized product, he incurs the waiting cost. The firms decide whether to offer customization, then engage in price competition. I show that customization increases the ``stickiness" of a consumer to the customizing firm, leading to less intense price competition. As mass customization becomes more efficient (the lead time goes down and/or the sunk costs decrease), customization by one or both firms occurs in equilibrium. I perform comparative statics analysis with respect to the fraction of consumers potentially interested in customization.
    Keywords: horizontal differentiation, price competition, customization, brand familiarity, product knowledge
    JEL: D43 L13 C72
    Date: 2010–05–18
  6. By: Schade, Christian; Schroeder, Andreas; Krause, Kai Oliver
    Abstract: We analyze the effects of prior gain and loss experiences on individualsâ behavior in two coordination games: battle of the sexes and simultaneous market entry. We propose subjectively transformed games that integrate elements of prospect theory, aggregation of prior and subsequent payoffs, and social projection. Mathematical predictions of behavior are derived based on equilibrium selection concepts. Malesâ behavior in our experimental studies is largely consistent with our predictions. However, the behavior of many female respondents appears to be rather consistent with interpreting the initial random lottery outcomes used to manipulate prior experiences as a signal for the playersâ abilities to compete. This could be related to femalesâ known uneasiness of competing against counterparts that might be male and thus, a generally higher salience of rivalry in our incentivized experiments. Females also chose to play far more mixed strategies than males indicating some uncertainty about what type of behavior is appropriate.
    Keywords: Prospect Game Theory, Prior Outcomes, Coordination, Equilibrium Selection, Economic Experiment, Agribusiness, Agricultural and Food Policy, Financial Economics, Institutional and Behavioral Economics, Research Methods/ Statistical Methods, Risk and Uncertainty,
    Date: 2010–02
  7. By: Alexandra Ferreira Lopes (Departamento de Economia, ISCTE); Tiago Sequeira e Catarina Roseta Palma (Departamento de Gestão e Economia, Universidade da Beira Interior; Departamento de Economia, ISCTE.)
    Abstract: We derive a model of endogenous growth with physical capital, human capital and technological progress through quality-ladders. We introduce welfare-decreasing pollution in the model, which can be reduced through the development of cleaner technologies. From the quantitative analysis of the model we show clear evidence that the new externality from technological progress to pollution considered in this model is sufficiently strong to induce underinvestment in R&D as an outcome of the decentralized equilibrium. An important policy implication of the main result of this article is a justification to subsidize the research in cleaner technologies.
    Keywords: Environmental Pollution, R&D, Social Capital, Human Capital, Economic Growth
    JEL: O13 O15 O31 O41 Q50
    Date: 2010
  8. By: Charles A.M. de Bartolome (University of Colorado); Ian J. Irvine (Concordia University, Montreal)
    Abstract: While the empirical literature on smoking bans is extensive, little theory has been developed. This paper examines the welfare impact of smoking bans in an economy where smokers’ utility is reduced by a workplace/public place ban. The government has two instruments - increasing the price through taxation, or limiting when the product can be consumed through a ban. Its ability to reduce smoking through taxation is limited by a black market where cigarettes are not taxed. We show that the quantity instrument (ban) is always welfareenhancing. The model has application to other addictive activities.
    Keywords: smoking, workplace ban, public place ban, government control, taxation
    Date: 2010–05–01
  9. By: Erling Røed Larsen (Statistics Norway)
    Abstract: The house price level is a function of buyers’ realized home equity, and buyers’ realized home equity is a function of the house price level. This interdependence follows from the fact that buyers are sellers in the same market. This article examines under what conditions this leads to a possible upward-sloping demand curve with a potentially unstable equilibrium. I employ a parsimonious model with two kinds of buyers, and utilize an augmented Slusky-equation that decomposes Walrasian demand into a substitution, an income, and an endowment income effect. The model demonstrates that instability may occur if first-time buyers’ demand is sufficiently inelastic, leverage is stretched, debt-financing is common, and nth-time buyers are relatively more frequent than first-time buyers. Regulation on leverage and a capital gains tax reduce the likelihood of upward-sloping demand. The article utilizes new data from Norway to examine an empirical indicator of an equity accelerator of house prices and finds that over the period 2000-2008 the value of all housing transactions exceeded the aggregate net growth of mortgages by 50%, indicating substantial equity financing. In one year, 2008, the value of aggregate housing transactions was double the growth in net mortgages.
    Keywords: capital gains; consumer behavior; endowment income; feedback system; financial acceleration; home equity; housing; instability; interdependence
    JEL: D10 D53 E21 E44 G12 R21 R31
    Date: 2010–05
  10. By: Balafoutas, Loukas (University of Innsbruck); Sutter, Matthias (University of Innsbruck, University of Gothenburg and IZA Bonn)
    Abstract: Recent research has shown that women shy away from competition more often than men. We evaluate experimentally three alternative policy interventions to promote women in competitions: Quotas, Preferential Treatment, and Repetition of the Competition unless a critical number of female winners is reached. We find that Quotas and Preferential Treatment encourage women to compete significantly more often than in a control treatment, while efficiency in selecting the best candidates as winners is not worse. The level of cooperation in a post-competition teamwork task is even higher with successful policy interventions. Hence, policy measures promoting women can have a double dividend.<p>
    Keywords: Competition; gender gap; experiment; affirmative action; teamwork; coordination
    JEL: C91
    Date: 2010–05–18
  11. By: Acemoglu, Daron (Harvard); Aghion, Philippe (Institute for International Economic Studies, Stockholm University); Bursztyn, Leonardo (Harvard); Hemous, David (Harvard)
    Abstract: This paper introduces endogenous and directed technical change in a growth model with environmental constraints. A unique final good is produced by combining inputs from two sectors. One of these sectors uses “dirty” machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both “carbon taxes” and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth.
    Keywords: environment; exhaustible resources; directed technological change; innovation
    JEL: C65 O30 O31 O33
    Date: 2010–04–25
  12. By: Zheng, Charles Zhoucheng
    Abstract:  A social planner wishes to launch a project but the contenders capable of running the project are cash-constrained and may default.  To signal their capabilities, the contenders may finance their bids through debt or equity, depending on the mechanism chosen by the social planner.  When moral hazard is absent, it is established as theorems that the ex post efficient social choice function cannot be achieved by any mechanism using only debt financing and can be achieved by a mechanism using equity financing.  When moral hazard is present, however, it is illustrated heuristically that equity share discourages effort and exacerbates default more than risky debt does.
    Keywords: auction; finance; debt; equity; default; financial constraint; budget constraint
    JEL: D44 D92
    Date: 2010–05–18
  13. By: Clark, Gordon L.
    Abstract: Many people are unable or unwilling to spend the resources necessary to look beyond the short-term and integrate the local with the global. As illustrated by the global financial crisis, the costs of myopia for individual and collective welfare can be far-reaching. In the context of the global financial crisis, I survey the costs of myopia and move on to the experimental evidence on the nature and scope of time/space myopia referencing early work by Kahneman and Tversky. Having put the case for the importance of myopia against those who assume perfection and those who believe human beings are Bayesian by impulse or by training, I consider the interaction between human predilections and the market environment in which decisions must be made. Different levels of behavioural sophistication combined with being embedded in so-called "reinforcing" or "regulatory" environments can give rise to quite different expressions of myopia with implications for the governance of institutions and government policy. Looking forward, it is suggested that whether or not myopia can be in some sense managed will have enormous implications for how we cope with the prospect of increasing global financial market volatility over the coming decades.
    JEL: G14 G24
    Date: 2010

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