Eugenio J. Miravete

Choosing the Wrong Calling Plan? Ignorance and Learning

When a firm offers several tariff options to its customers, the possibility arises that they will make an ex post mistake in tariff choice. This occurs since consumers cannot commit to a certain purchase level at the time they subscribe to the service option and, thus, they might find out later that a different choice of tariff could have resulted in a lower payment for their actual level of consumption. This is a common feature of increasingly important subscriptions markets, in which buyers and sellers maintain long-term, nonanonymous relations and where learning induces interesting dynamics. On the one hand, buyers may learn their taste over time, thus making the right choice as times goes by; on the other hand, the seller may design options to identify the “type” of each buyer and, if possible, to extract a higher proportion of their consumer surplus by offering tariff options that are better tailored to the profile of the consumer. This paper focuses on the first type of learning. In turn I document buyer behavior in a subscriptions market using data from a tariff experiment run by South Central Bell (SCB) in Kentucky during the second half of 1986. The most frequently studied case of subscriptions markets is the choice among Optional Calling Plans (OCPs) in the telephone industry. This paper shows that, contrary to the conven-

Innovation Complementarity and Scale of Production

This Paper is an empirical study on the existence of complementarity between product and process innovation. We present an econometrically feasible model that uses the information contained in the innovation profile of each firm to test for the existence of complementarity among production and innovation strategies. We apply the model to analyse the Spanish ceramic tiles industry where the adoption of the single firing furnace in the 1980s facilitated the introduction of new product designs as well as to opening new ways of organizing production. Our econometric results show that there is significant complementarity between product and process innovation. We are able to separate the nature of complementarity relationships and thus, our results show that both intrinsic – technologically driven – and induced complementarity – due to firms unobserved heterogeneity – are significant. Small firms tend to be more innovative overall.

Aggregation in Input–Output Tables: How to Select the Best Cluster Linkage

In this paper we try to give a solution to the aggregation problem on working with Input–Output tables. First of all we verify the degree of similarity among the production functions of the industries which aggregate in each sector. Secondly, once we have established the aggregation by using different cluster analysis, we set a number of conditions required to choose the proper linkage method that allows us to characterize the process of aggregation (weighted or unweighted) of the input–output table.

Consumer Inertia, Choice Dependence, and Learning from Experience in a Repeated Decision Problem

Understanding when and how individuals think about real-life problems is a central question in economics. This paper studies the role of inertia (inattention), state dependence, and learning. The empirical setting is a tariff experiment, when optional measured tariffs for local telephone calls were introduced unanticipatedly. We find that consumers tend to align their choices of tariff and telephone use levels correctly. Despite low potential savings, mistakes are not permanent, as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service. Ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results.

Estimating Price—Cost Markups Under Nonlinear Pricing Competition

This paper provides a structural interpretation to the estimates of the shape and position of nonlinear tariffs. We focus on the evaluation of price-cost margins, and thus we need to identify marginal cost from an equilibrium model of nonlinear pricing competition. We estimate these price-cost margins using quarterly data from the early U.S. cellular telephone industry between 1984 and 1988. Our results indicate that the margins are increased under duopoly, due to a significant reduction in marginal costs. Moreover, we find that the price-cost margins vary over the consumption levels and that low end users are subject to higher price-cost margins than high-end users. The impact of competition further increases the margins in the low-end user segment, relative to high-end users. In that sense the benefits of competition, which are largely due to increased efficiencies, are passed on relatively more to high-end users. We also show that these findings are robust even if one includes a number of observable market demand and cost variables. (JEL: D43, D82, L96) Copyright (c) 2004 The European Economic Association.

The Doubtful Profitability of Foggy Pricing

This paper studies whether competition may induce firms abandoning deceptive pricing strategies aimed to profit from mistaken choices of consumers. The empirical analysis focuses on the pricing practices of early U.S. cellular firms, both under monopoly and duopoly. Foggy tariff options are those that are dominated by another option or a combination of other tariff options offered by the firm. I also define a measure of fogginess of non-dominated tariffs based on the range of airtime usage for which they are the least expensive option among those available. Results indicate that firms offer more dominated tariff options in a competitive market than under monopoly. While markets are profitable, perhaps because they grow or because firms collude, the use of foggy tactics is not frequent. However, if the market is more mature, or if firms do not cooperate, thus reducing the return to their investment, then they commonly turn to foggy pricing.

Preserving Log-Concavity Under Convolution: Comment

In arguing that their results are broadly applicable BMR claim that log–concavity of the convolution is not a very restrictive condition, since it is implied by the log–concavity of either the density of θ1 or that of θ2. They formally state this as Proposition 16 in the appendix to their paper and provide a ‘proof’. Unfortunately, this result is false. Assume that f1(θ1) is the density function of a uniform random variable on the unit interval, and f2(θ2) is the density of a beta distribution with parameters p = 0.4 and q = 0.5, also defined on the unit interval. Both distributions are defined on bounded supports and the uniform density is log–concave as required by BMR. However, this beta density is not log–concave and thus, there are regions in the support of θ0 where the uniform–beta convolution distribution F0(θ0) and the corresponding survival function S0(θ) = 1−F0(θ0) are not log–concave.

Innovation, Emissions Policy, and Competitive Advantage in the Diffusion of European Diesel Automobiles

Spurred by Volkswagens introduction of the TDI diesel engine in 1989, market penetration of diesel cars in Europe increased from 10% in 1990 to over 50% in 2000. Using Spanish automobile registration data, we estimate an equilibrium discrete choice, oligopoly model of horizontally differentiated products. We find that changing product characteristics and the increasing popularity of diesels leads to correlation between observed and unobserved (to the researcher) product characteristics, an aspect we allow for in the estimation. Despite widespread imitation by its rivals, Volkswagen was able to capture 32% of the potential innovation rents and diesels accounted for approximately 60% of the firms profits. Moreover, diesels amounted to an important competitive advantage for European auto makers over foreign imports. We provide evidence that the greenhouse emissions policy enacted by European regulators, and not preferential fuel taxes, enabled the adoption of diesels. In so doing, this non-tariff policy was equivalent to a 20% import tariff; effectively cutting imports in half.

One Markup to Rule Them All: Taxation by Liquor Pricing Regulation

Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies.

Learning Temporal Preferences

We analyse households’ responses to an unanticipated change in consumption opportunities and evaluate their implications for the nature and formation of preferences. We study the tariff experiment conducted by South Central Bell where local telephone measured tariffs were introduced for the first time in Louisville, KY. Households were given the choice to remain in a flat rate scheme or switch to the new measured tariff scheme. The results of the analysis support models where consumers react to a change in the environment in the direction predicted by theories of rational investment in information. Households learn rapidly to undertake optimal decisions, and react to potential savings of seemingly small magnitude, typically about