Ramon Caminal

Endogenous switching costs in a duopoly model

We analyze the effect of alternative pricing policies on the competitive outcome in a two-period, differentiated product duopoly model. If firms can precommit to a second period price for their loyal customers equilibrium profits fall, but if they precommit to a discount, then the equilibrium profits increase. In either case, switching costs are endogenized: in period two firms discriminate against newcomers.

Market power and banking failures

Abstract We investigate whether more competition in the banking industry necessarily results in a higher probability of banking failures, as it is often suggested. In our model borrowers face a moral hazard problem, which induces banks to choose between costly monitoring and credit rationing. We show that investment decreases with the lending rate and increases with monitoring effort. Since incentives to monitor are enhanced by market power, the relationship between market structure and investment is ambiguous. In the presence of non-diversifiable risk and decreasing returns to scale, more investment implies higher failure rates. As a result, the relationship between market power and banking failures is ambiguous.

Why market shares matter: an information-based theory

Consider a duopoly market in which consumers have heterogeneous information about the quality differential q of the two goods. When firms are ignorant about q, consumers rationally believe that a firm with high market shares is likely to produce a high-quality good. As a result, firms try to signal-jam the inferences of consumers and compete for market shares beyond the level explained by short-run profit maximization. When firms know q, multiple equilibria may exist, but there is always one equilibrium in which market shares signal quality, and then the market tends to be more competitive.

Do Capital Market Imperfections Exacerbate Output Fluctuations

We develop a dynamic general equilibrium macroeconomic model where a proportion of firms are credit constrained due to asymmetric information. In general, a macroeconomic shock has additional effects created by a reallocation of funds between credit-constrained and unconstrained firms. We show that the output response to shocks is not necessarily amplified, however, and can be dampened by the presence of asymmetric information. This depends on the impact of the shock on the composition of external and internal funds for credit-constrained firms. Furthermore, we show that it is important to distinguish between firms’ collateral and firms’ cash flow in determining the dampening or amplifying effect of agency costs.

Optimal seigniorage and financial liberalization

Abstract This paper analyzes the effect of financial integration for countries relying on the taxation of their domestic financial system. A two-country model with overlapping generations and explicit financial intermediation is used. Goverments derive revenues from seigniorage and set optimally, but non-cooperatively, the rate of inflation and the level of required reserves on bank deposits. A financial liberalizations leads to lower reserve ratios, higher inflation rates, and larger stocks of government debt. When the liberalization is anticipated, governments may temporarily increase the reserve ratios before the liberalization occurs. (JEL F30, E60)

In Google we trust

We examine the incentives of a monopolistic search engine, funded by advertising, to provide reliable search results. We distinguish two types of search results: sponsored and organic (not-paid-for). Organic results are most important in searches for online content, while sponsored results are more important in product searches. By modeling the underlying markets for online content and offline products, we can identify the sources of distortions for each type of result, and their interaction. This explicit treatment proves crucial for understanding, not only spillovers across markets, but also fundamental policy issues, such as the welfare effects of integration. In particular, integration of the engine with a small fraction of content providers is welfare-enhancing when incentives to distort are stronger for sponsored than organic search, but welfare-reducing in the opposite case.

Personal Redistribution and the Regional Allocation of Public Investment

Should the geographic allocation of public investment aim at reducing regional inequalities or should it exclusively be concerned with the maximization of aggregate output? In this Paper I study the potential role of public investment in reducing personal welfare inequality, in combination with distortionary taxation. The case for public investment as a significant redistribution device seems weak. If the tax code is constrained to be uniform across regions then it is optimal to distort the allocation of public investment in favour of the poor regions, but only to a limited extent. The reason is that poor individuals are relatively more sensitive to public transfers, which are maximized by allocating public investment efficiently. If the tax code can vary across regions then the result is ambiguous and it might even be the case that the optimal policy involves an allocation of public investment distorted in favour of the rich regions.

Price Advertising and Coupons in a Monopoly Model

The paper studies the pricing and advertising policies of a monopolist in a situation where consumers discover prices by costly search. The monopolist is shown to choose between no advertising and large scale advertising. This is shown to be optimal behavior even with decreasing returns to scale to advertising expenditures which would a priori argue for small advertising expenditures. The optimal advertising policy is undertaken in conjunction with a pricing policy that is characterized by downwardly rigid prices. Flexibility with regard to realizations of a cost parameter is achieved via couponing, which, even though it is untargeted, allows for discrimination between ex ante identical consumers. Copyright 1996 by Blackwell Publishing Ltd.

Multi‐Product Firms and Product Variety

The goal of this paper is to study the role of multi-product firms in the market provision of product variety. The analysis is conducted using the spokes model of non-localized competition proposed by Chen and Riordan (2007). Firstly, we show that multi-product firms are at a competitive disadvantage vis-a-vis single-product firms and can only emerge if economies of scope are sufficiently strong. Secondly, under duopoly product variety may be higher or lower with respect to both the first best and the monopolistically competitive equilibrium. However, within a relevant range of parameter values duopolists drastically restrict their product range in order to relax price competition, and as a result product variety is far below the efficient level.

The Design and Efficiency of Loyalty Rewards

The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards in markets for final consumption goods. While the literature has emphasized the role of loyalty rewards as endogenous switching costs (which distort the efficient allocation of consumers), in this paper I analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their specific design. A commitment to the price of repeat purchases can involve substantial efficiency gains by reducing price-cost margins. However, discount policies imply higher future prices and are likely to reduce total surplus. Second, firms may prefer to set up inefficient rewards (discounts), especially in those circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.