nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒07‒17
sixteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Advertising Competition in Retail Markets By Kyle Bagwell; Gea M. Lee
  2. Testing Forbearance Experimentally - Duopolistic Competition of Conglomerate Firms By Werner Güth; Kirtsen Häger; Oliver Kirchkamp; Joachim Schwalbach
  3. Legal Institutions, Innovation and Growth By Luca Anderlini; Leonardo Felli; Giovanni Immordino; Alessandro Riboni
  4. Shocks and Crises in the Long Run By Frankel, David M.
  5. Small-scale changes in wealth and attitudes toward risk By Sergio Sousa
  6. Liquidity in Credit Networks: A Little Trust Goes a Long Way By Pranav Dandekar; Ashish Goel; Ramesh Govindan; Ian Post
  7. Positional spending and status seeking in rural China By Brown, Philip H.; Bulte, Erwin; Zhang, Xiaobo
  8. Cloud Computing Value Chains Understanding Businesses and Value Creation in the Cloud By Ashraf Bany Mohammed; Jorn Altmann; Junseok Hwang
  9. Nominal Uncertainty and Inflation: The Role of European Union Membership By Kyriakos C. Neanidis; Christos S. Savva
  10. Examining the dynamic relationship between spot and future prices of agricultural commodities By Hernandez, Manuel; Torero, Maximo
  11. Price dynamics in financial markets: a kinetic approach By Dario Maldarella; Lorenzo Pareschi
  12. Do Laws Affect Attitudes? - An assessment of the Norwegian prostitution law using longitudinal data By Jakobsson, Niklas; Kotsadam, Andreas
  13. What drives Endogenous Growth in the United States? By Dennis Wesselbaum
  14. A Simple Theory of Predation By Chiara Fumagalli; Massimo Motta
  15. A robust test for error cross-section correlation in panel models By L Godfrey; T Yamagata
  16. Von Neumann-Morgenstern Clutters By Stefano Vannucci

  1. By: Kyle Bagwell (Stanford University); Gea M. Lee (School of Economics, Singapore Management University)
    Abstract: We consider non-price advertising by retail firms that are privately informed as to their respective production costs. We construct an advertising equilibrium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising firm. Consumers are rational in using the advertising search rule, since the lowest-cost firm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive efficiency, we establish conditions under which firms enjoy higher expected profit when advertising is banned. Consumer welfare falls in this case, however. Under free entry, social surplus is higher when advertising is allowed. In addition, we consider a benchmark model of price competition; we provide comparative-statics results with respect to the number of informed consumers, the number of firms and the distribution of costs; and we consider the possibility of sequential search.
    Date: 2009–12
  2. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Kirtsen Häger (Universität Jena); Oliver Kirchkamp (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Joachim Schwalbach (Humboldt-Universität zu Berlin, Institute of Management)
    Abstract: Like Feinberg and Sherman (1985) and Phillips and Mason (1992) we test experimentally whether conglomerate firms, i.e., firms competing on multiple structurally unrelated markets, can effectively limit competition. Our more general analysis assumes differentiated rather than homogeneous products and distinguishes strategic substitutes as well as complements to test this forbearance hypothesis. Rather than only a partners design we also explore a random strangers design to disentangle effects of forbearance and repeated interaction. Surprisingly, conglomerate firms do not limit competition, they rather foster it. More in line with our expectations we find more cooperation in complement markets than in substitute markets and also more cooperation in a partners than in a strangers matching.
    Keywords: Experiment, Forbearance, Competition
    JEL: C91 D43 L41
    Date: 2010–07–01
  3. By: Luca Anderlini (Georgetown University); Leonardo Felli (London School of Economics); Giovanni Immordino (Università di Salerno and CSEF); Alessandro Riboni (Université de Montréal)
    Abstract: We build a stylized model of endogenous technological change and analyze the relationship between legal institutions, innovation and growth. Two legal systems are analyzed: a rigid system, where an uncontingent law is written ex ante (before knowing the current technology) and a flexible system where law-makers select the law ex post (after observing the current technology). We show that flexible legal systems dominate in terms of welfare, amount of innovation and output growth in economies at intermediate stages of technological development -- which are periods when legal change is more needed -- while rigid legal systems are preferable at early stages of technological development, when commitment problems are more severe. For mature technologies the two legal systems are shown to be equivalent. Surprisingly, we find that rigid legal systems may induce excessive (greater than first-best) R&D investment and output growth.
    Keywords: Commitment, Flexibility, Innovation and Growth
    JEL: O3 O43 L51 E61
    Date: 2010–07–03
  4. By: Frankel, David M.
    Abstract: Many recent models of crises involve games with small, anonymous players and finite action sets, such as whether or not to attack a currency or withdraw funds from a bank.  We show that such models, when repeated, do not yield recurring crises in the presence of a flexible class of payoff shocks.  As an illustration, we apply this result to Diamond and Dybvig's model of bank runs.
    JEL: C73 E32
    Date: 2010–07–10
  5. By: Sergio Sousa (University of Nottingham)
    Abstract: This paper reports on an experiment designed to examine the effects of small-scale changes in wealth on risk attitudes. We find that the money given prior to risky choices does not induce a change of subjects' risk preferences. This result supports a key assumption in a recent literature over calibration critique of decision theories. Furthermore, as the money given to subjects in our experiment is administered in between risky tasks and framed as a reward rather than a windfall gain, our result suggests that experimental findings reporting that a prior monetary gain induces individuals to take more risks (house-money effect) may be more sensitive to prior experience with the risk-elicitation task or framing of the money than previously thought.
    Keywords: risk aversion, wealth effects, risk-elicitation, house-money effect, narrow framing
    JEL: C91 D01 D81
    Date: 2010–06
  6. By: Pranav Dandekar; Ashish Goel; Ramesh Govindan; Ian Post
    Abstract: Credit networks represent a way of modeling trust between entities in a network. Nodes in the network print their own currency and trust each other for a certain amount of each other's currency. This allows the network to serve as a decentralized payment infrastructure---arbitrary payments can be routed through the network by passing IOUs between trusting nodes in their respective currencies---and obviates the need for a common currency. Nodes can repeatedly transact with each other and pay for the transaction using trusted currency. A natural question to ask in this setting is: how long can the network sustain liquidity, i.e.\ how long can the network support the routing of payments before credit dries up? We answer this question in terms of the long term success probability of transactions for various network topologies and credit values. We show that a number of well-known graph families have the remarkable property that repeated transactions do not result in a loss of liquidity. Further, we show using simulations that the success probability of transactions in Erd\"{o}s-R\'{e}nyi and power-law networks depends only on average node degree and credit capacity, not on network size. Finally, we compare liquidity in credit networks to that in a centralized payment infrastructure and show that credit networks are not significantly less liquid; thus we do not lose much liquidity in return for their robustness and decentralized properties.
    Date: 2010–07
  7. By: Brown, Philip H.; Bulte, Erwin; Zhang, Xiaobo
    Abstract: Focusing on a remote area in rural China, we use a panel census of households in 26 villages to show that socially observable spending has risen sharply in recent years. We demonstrate that such spending by households is highly sensitive to social spending by other villagers. This suggests that social spending is either positional in nature (that is, motivated by status concerns) or subject to herding behavior. We also document systematic relations between social spending and changes in higher order terms of the income distribution. In particular, and consistent with theories of rank-based status seeking, we find the poor increase spending on gifts as the income distribution tightens so that local competition for status intensifies. In addition families of unmarried men (who face grim marriage prospects given China’s high sex ratios, especially in poor areas) intensify their competition for status by increasing their spending on weddings. The welfare implications of spending in order to “keep up with the Joneses” are potentially large, particularly for poor households.
    Keywords: Positional spending, Poverty, Rural-urban linkages, status,
    Date: 2010
  8. By: Ashraf Bany Mohammed; Jorn Altmann; Junseok Hwang (Technology Management, Economics, and Policy Program (TEMEP), Seoul National University)
    Abstract: Based on the promising developments in Cloud Computing technologies in recent years, commercial computing resource services (e.g. Amazon EC2) or software-as-a-service offerings (e.g. came into existence. However, the relatively weak business exploitation, participation, and adoption of other Cloud Computing services remain the main challenges. The vague value structures seem to be hindering business adoption and the creation of sustainable business models around its technology. Using an extensive analyze of existing Cloud business models, Cloud services, stakeholder relations, market configurations and value structures, this Chapter develops a reference model for value chains in the Cloud. Although this model is theoretically based on porter's value chain theory, the proposed Cloud value chain model is upgraded to fit the diversity of business service scenarios in the Cloud computing markets. Using this model, different service scenarios are explained. Our findings suggest new services, business opportunities, and policy practices for realizing more adoption and value creation paths in the Cloud.
    Keywords: Cloud computing, value chain, business models, Grid computing, service oriented computing, value networks, software-as-a-service, Grid economics, services, service sciences.
    JEL: D02 D21 D23 D46 D85 L14 L23 L86 M21
    Date: 2010–06
  9. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: Using a GARCH model we provide evidence that higher inflation uncertainty leads to higher inflation in the new European Union (EU) member states and candidate countries only prior to EU accession. During EU accession and entry inflation uncertainty has no effect on mean inflation. This result supports the consideration of policy regime shifts in assessing the nominal uncertainty-average inflation relationship.
    Date: 2010
  10. By: Hernandez, Manuel; Torero, Maximo
    Abstract: This study examines the dynamic relationship between spot and futures prices of agricultural commodities. We first briefly discuss what the non-arbitrage and asset pricing theory has to say about the relationship between spot and futures markets. Next, using recent price data for corn, wheat, and soybeans, we perform Granger causality tests to empirically uncover the direction of information flows between spot and futures prices. Linear as well as nonlinear (nonparametric) causality tests are conducted on both spot and futures returns and their volatility. The results indicate that spot prices are generally discovered in futures markets. In particular, we find that changes in futures prices lead changes in spot prices more often than the reverse. These findings also contribute to the debate on alternative instruments to address excessive volatility in grain markets. Our results support, for example, the viability of implementing a global virtual reserve, recently proposed by von Braun and Torero (2008, 2009), to prevent disproportionate spikes in grain spot prices through signals and, if necessary, market assessment in the exchange of futures.
    Keywords: agricultural commodity markets, futures prices, granger causality, spot prices,
    Date: 2010
  11. By: Dario Maldarella; Lorenzo Pareschi
    Abstract: The use of kinetic modelling based on partial differential equations for the dynamics of stock price formation in financial markets is briefly reviewed. The importance of behavioral aspects in market booms and crashes and the role of agents' heterogeneity in emerging power laws for price distributions is emphasized and discussed.
    Date: 2010–07
  12. By: Jakobsson, Niklas (Department of Economics, School of Business, Economics and Law, Göteborg University); Kotsadam, Andreas (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The question of whether laws affect attitudes has inspired scholars across many disciplines, but empirical knowledge is sparse. Using longitudinal survey data from Norway and Sweden, collected before and after the implementation of a Norwegian law criminalizing the purchase of sexual services, we assess the short-run effects on attitudes using a difference-in-differences approach. In the general population, the law did not affect moral attitudes toward prostitution. However, in the Norwegian capital, where prostitution was more visible before the reform, the law made people more negative toward buying sex. This supports the claim that proximity and visibility are important factors for the internalization of legal norms.<p>
    Keywords: attitudes; norms; law; prostitution
    JEL: K14 K40
    Date: 2010–07–07
  13. By: Dennis Wesselbaum
    Abstract: This paper estimates whether learning-by-doing effects or cleansing effects of recessions drive the endogenous component of productivity in the United States. Using Bayesian estimation techniques we find that external and internal learning-by-doing effects dominate. We find no evidence for cleansing effects of recessions. Furthermore, the exogenous component of productivity growth is close to the two percent pace
    Keywords: Business Cycles, Cleansing Effects of Recessions, Endogenous Growth, Learning-by-Doing
    JEL: C11 E32 O40
    Date: 2010–07
  14. By: Chiara Fumagalli (Università Luigi Bocconi, CSEF and CEPR); Massimo Motta (ICREA-Universitat Pompeu Fabra and BarcelonaGSE)
    Abstract: We propose a simple theory of predatory pricing, based on incumbency advantages, scale economies and sequential buyers (or markets). The prey needs to reach a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers so as to deprive the prey of the scale the latter needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterized by common costs. Conditions under which predation may take place in actual cases are also discussed.
    Date: 2010–07–03
  15. By: L Godfrey; T Yamagata
    Abstract: A wild bootstrap test of the null hypothesis that the errors of a panel data model are not correlated over cross-section units is proposed. The new test is more generally applicable than others that use the restrictive assumptions of normality and homoskedasticity. Monte Carlo results indicate that the new test is reliable.
    Keywords: Cross-section correlation; Wild bootstrap; Robust test
    JEL: C12 C52
    Date: 2010–07
  16. By: Stefano Vannucci
    Abstract: A clutter on a set X is a simple hypergraph with pairwise not-comparable hyperedges, hence in particular any set of Von Neumann-Morgenstern (VNM) -stable sets of an irreflexive simple digraph is a clutter. A clutter (X,E) is representable by VNM-stable sets or VNM if there exists an irreflexive simple digraph (X, ?) such that E is a set of VNM-stable sets of (X, ?). The class of VNM clutters on a set X is characterized
    Keywords: VNM-stable sets, kernels, clutters, Sperner systems
    JEL: C70 C71
    Date: 2010–04

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