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on Microeconomics |
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Issue of 2007‒08‒18
eleven papers chosen by Joao Carlos Correia Leitao University of the Beira Interior |
| By: | Marco Alderighi (University of Valle d'Aosta, Italy.); Claudio A. Piga (Dept of Economics, Loughborough University) |
| Abstract: | We study when a monopolistically-competitive firm may optimally choose to limit the size of its market. This may be the case when the cost of serving the market with geographically dispersed customers is increasing in size. We also investigate the incentives faced by a firm to limit the reach of its market, when it adopts different pricing schemes. We show that under certain assumptions the derived equilibria are constrained socially optimal. |
| Keywords: | Monopolistic competition; Transport costs; Endogenous fixed costs; Overlapping market areas |
| JEL: | D21 D43 F12 L13 R12 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2007_21&r=mic |
| By: | Azar, Ofer H. |
| Abstract: | Consumers often have to decide whether to go to a remote store for a lower price. Only the absolute price difference between the stores should be relevant in this case, but several experiments showed that people exhibit "relative thinking": they are affected also by the relative savings (relative to the good's price). This article analyzes the effects of this bias on firm strategy and market outcomes using a two-period game-theoretic model of location differentiation. Relative thinking causes consumers to make less effort to save a constant amount when they buy more expensive goods. In the location differentiation context this behavior can be modeled by consumers who behave as if their transportation costs are an increasing function of the good's price. This gives firms an additional incentive to raise prices, in order to increase the perceived transportation costs of consumers, which consequently softens competition and allows higher profits. Therefore, the response of firms to relative thinking raises prices and profits and reduces consumer surplus, in both periods. Total welfare is unchanged in the first period, and in the second period it is either unchanged or reduced, depending on whether the objective or subjective transportation costs are used to compute welfare. The main results of the model (firms' response to relative thinking increases prices and reduces consumer surplus) are likely to hold also in the context of search. The article also explains why "relative thinking" is a more appropriate term than "mental accounting" (which was often used before) to describe this behavior, and discusses why people might exhibit relative thinking. |
| Keywords: | Competitive Strategy; Relative Thinking; Pricing; Mental Accounting; Consumer Psychology; Consumer Attitudes & Behavior; Cognitive Processes; Behavioral Decision Making; Industrial Organization; Product Differentiation. |
| JEL: | D10 M31 L10 L13 D43 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4455&r=mic |
| By: | Eugenio Miravete (University of Texas at Austin); ; |
| Abstract: | I study how firms actually compete in nonlinear tariffs by analyzing whether the incumbent and entrant’s decisions to offer a given number of tariff options are interrelated. The goal is to shed some light on those dynamic and strategic aspects of tariff menus that are currently ignored by theoretical models of nonlinear pricing competition in order to highlight some basic features of the market that future theoretical work should address. This paper also introduces a generalized multivariate count data model that allows to account for the possibility of correlation of any sign among the pricing decisions of competing firms in a manner that is robust to the existence of over and underdispersion of counts. Pricing strategies appear to be strategic complements that respond positively to the existing heterogeneity of consumers’ tastes. While this is a common source driving the number of tariff options offered, results also show that previous pricing decisions by the incumbent affect the entrant’s current offering of tariff options, thus free riding on information about the market revealed by the likely better informed firm of the industry. The strategic complementarity result disappears when we only consider non-dominated tariffs. |
| Keywords: | Nonlinear Pricing Competition; Tariff Menus; Strategic Complementarity; Bivariate Count Data Regression |
| JEL: | D43 L96 M21 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0702&r=mic |
| By: | Dalia Marin (University of Munich, Department of Economics, Ludwigstr. 28, 80539 Munich, Germany +49-89-2180-2446, dalia.marin@lrz.uni-muenchen.de); Thierry Verdier (Paris School of Economics, 48 Boulevard Jourdan 75014 Paris, France +331 43 13 63 08, verdier@pse.ens.fr) |
| Abstract: | This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition. |
| Keywords: | international trade with endogenous firm organizations and endogenous toughness of competition, firm heterogeneity, power struggle in the firm. |
| JEL: | F12 F14 L22 D23 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:207&r=mic |
| By: | Federico Etro (Department of Economics, University of Milan-Bicocca) |
| Abstract: | This article derives antitrust implications for markets where entry can be regarded as endogenous (contrary to most analysis within the post-Chicago tradition). Many applications concern issues of abuse of dominance. Endogenous entry requires a wide revision of our understanding of the role of incumbents in pricing, producing in the presence of network externalities and multi-sided markets, bundling products, price discriminating and delegating to retailers through vertical restraints: when entry is endogenous, leaders adopt aggressive strategies without exclusionary purposes and without affecting welfare negatively. Endogenous entry has also implications for the analysis of mergers (that take place only if create enough cost efficiencies and do not harm consumers), the evaluation of collusive cartels (that are unfeasible in markets where entry is endogenous) and state aids for exporting firms (which are always unilaterally optimal for international markets with free entry). The spirit of the policy recommendations of the Chicago school is broadly supported by our analysis in a solid game-theoretic framework. |
| Keywords: | Antitrust, Endogenous entry, Leadership, Chicago school |
| JEL: | L1 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:122&r=mic |
| By: | Ravi Mantena (Simon Graduate School of Business Administration, University of Rochester); Ramesh Sankaranarayanan (School of Business, University of Connecticut); Siva Viswanathan (Smith School of Business, University of Maryland) |
| Abstract: | This paper develops and analyzes a model of competition between platforms in an industry with indirect network effects, with a specific focus on complementary product exclusivity. The objective is to understand the determinants of exclusivity and explore its effects on competition. We find that the stage of platform market maturity and the asymmetry between the installed bases of platforms are critical determinants of exclusivity. Exclusivity is the dominant outcome in the nascent stage of the platform market and is sometimes the outcome in mature stages as well, while non-exclusivity is the usual outcome in the intermediate stages. In the nascent stages, the bigger platform secures exclusivity, while in the mature stages it is the smaller platform. |
| Keywords: | Licensing; exclusive; networks; complementarity |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0704&r=mic |
| By: | Stefano Comino (Università di Trento,); Fabio Manenti (Università di Padova,); Antonio Nicolò (Università di Padova,) |
| Abstract: | We consider a cumulative innovation process in which a follow-on innovator invests in R&D activities that influence both the expected commercial value as well as the novelty of its innovation. When the second innovator investments are not servable,licensing of the first innovation never occurs efficiently, and, at the equilibrium, the follow-on innovator either underinvests or overinvests. We show that a large patent breadth may be harmful for the first innovator too, and therefore Pareto-dominated;as long as the undervinvestment problem becomes more pronounced, the value generated by the follow-on innovator reduces, and so do the licensing revenues of the first inventor. |
| Keywords: | sequential innovation, patents, licensing, intellectual property |
| JEL: | K3 L5 O3 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0041&r=mic |
| By: | Lars Nerdrum (Norwegian Institute for Studies in Research and Education - Centre for Innovation Research); Magnus Gulbrandsen (Norwegian Institute for Studies in Research and Education - Centre for Innovation Research) |
| Abstract: | This paper analyses the role of technical-industrial research institutes for industrial innovation in Norway. Using statistical data and a survey among firms, the paper shows that there are many different types of interaction between institutes and firms. In addition to R&D and technical services, the institutes are a significant source of skilled manpower for firms. We highlight three central roles for the institutes: they are a learning partner for industry, they help increase absorptive capacity, and they constitute a flexible repository in the innovation system by helping firms in peak periods and by reducing the pressure on universities through assisting in teaching and supervision. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:tik:inowpp:20070614&r=mic |
| By: | Ralf Dewenter; Justus Haucap |
| Abstract: | This paper analyses price elasticities in the Austrian market for mobile telecommunications services using data on firm specific tariffs in the period between January 1998 and March 2002. Dynamic panel data regressions are used to estimate short-run and long-run demand elasticities for business customers and for private consumers with both postpaid contracts and prepaid cards.We find that business customers have a higher elasticity of demand than private consumers, where postpaid customers tend to have a higher demand elasticity than prepaid customers. Also demand is generally more elastic in the long run. In addition, the paper also provides estimates for firm-specific demand elasticities which range from –0.47 to –1.1. |
| Keywords: | Mobile telephony, price elasticities, unbalanced panel data, dynamic panel data analysis |
| JEL: | C23 L13 L96 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0017&r=mic |
| By: | Justus Haucap; Uwe Pauly; Christian Wey |
| Abstract: | This paper offers a cartel explanation for the stability of German collective bargaining institutions.We show that a dense net of legal safeguards has been yarned around the wage setting cartel. These measures make deviation by cartel insiders less attractive and simultaneously erect entry barriers for alternative unions. As we argue many recent labor policy measures, which make wages more flexible, serve to further stabilize the labor cartel, while truly pro-competitive proposals have not been implemented exactly because of their destabilizing effects.We propose policy measures that remove entry barriers and facilitate outside competition by alternative collective bargaining organizations. |
| Keywords: | Labor market cartel, labor market institutions, collective bargaining |
| JEL: | J52 K31 L12 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0009&r=mic |
| By: | Seung-Hyun Hong (University of Illinois); Leonardo Rezende (University of Illinois); |
| Abstract: | This paper attempts to distinguish state dependence (or lock-in) from unobserved preferences in the decision to adopt Linux or Windows as the operating system for computer servers. To this end, we use detailed survey data of over 100,000 establishments in the United States. Without accounting for unobserved heterogeneity in establishment-specific preferences for operating systems, we find a strong positive correlation between the current choice and the previous choice, suggesting potentially high switching costs and lock-in. To account for unobserved preferences for either operating system, we impose weak identifying assumptions and employ recently developed dynamic discrete choice panel data methods (Arellano and Carrasco 2003). The results show little or no evidence of state dependence, implying that unobserved preferences, rather than switching costs and lock-in, are more important factors in the adoption decision. Once taste heterogeneity is taken into account, we additionally find little evidence of network effects between server operating systems and non-server operating systems. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0705&r=mic |