nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒02‒26
28 papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. License Auctions with Royalty Contracts for Losers By Thomas Giebe; Elmar Wolfstetter
  2. Endogenous Integration and Welfare in Complementary Goods Markets By Ricardo Flores-Fillol; Rafael Moner-Colonques
  3. Anti-Limit Pricing By Byoung Heon Jun; In-Uck Park
  4. Evolutionary stability and Nash equilibrium in finite populations, with an application to price competition By Ana B. Ania
  5. On Information and Competition in Private Value Auctions By Juan José Ganuza; José S. Penalva
  6. Bertrand colludes more than Cournot By Suetens S.; Potters J.
  7. Posted - Offer Markets In Near Continuous Time: an Experimental Investigation By Douglas D. Davis; Oleg Korenok
  8. University competition: Symmetric or asymmetric quality choices? By Vanhaecht E.; Pauwels W.
  9. Portfolio Choice when Managers Control Returns By Egil Matsen
  10. A Practical Short-run Approach to Market Equilibrium By Anthony Horsley; Andrew J Wrobel
  11. Organization of R&D With Two Agents and Principal By Ekaterina Goldfayn
  12. Rebates, Matches, and Consumer Behavior By Douglas D. Davis; Edward L. Millner
  13. Durable Goods and Conformity By Christopher L. House; Emre Ozdenoren
  14. The Wong-Viner Envelope Theorem for subdifferentiable functions By Anthony Horsley; Andrew J Wrobel
  15. Welfare in the Nash Equilibrium in Export Taxes under Bertrand Duopoly By Clarke, Roger; Collie, David R.
  16. The golden rule in transfer pricing regulation By Pauwels W.; Weverbergh M.
  17. Optimal Tariffs: The Evidence By Christian Broda; Nuno Limao; David Weinstein
  18. Strategic Buyers, Horizontal Mergers and Synergies: An Experimental Investigation* By Douglas D. Davis; Bart J. Wilson
  19. Export Taxes under Bertrand Duopoly By Clarke, Roger; Collie, David R.
  20. Characterizations of long-run producer optima and the short-runapproach to long-run market equilibrium: a general theory withapplications to peak-load pricing By Anthony Horsley; Andrew J Wrobel
  21. Integrated versus Separated Regulation: An Application to the Water Industry By David Bartolini
  22. Bidding for Incomplete Contracts: An Empirical Analysis By Patrick Bajari; Stephanie Houghton; Steve Tadelis
  23. A Macro and Microeconomic Integrated Approach to Assessing the Effects of Public Policies By José M. Labeaga; Miguel Rodríguez; Xavier Labandeira
  24. Market Power, Brand Characteristics and Demand for Retail Grocery Products By Paul H. Jensen; Elizabeth Webster
  25. R&D in the Pharmaceutical Industry: A World of Small Innovations By Beatriz Domínguez; Juan José Ganuza; Gerard Llobet
  26. Equilibrium Exhaustible Resource Price Dynamics By Murray Carlson; Zeigham Khoker; Sheridan Titman
  27. Responses of Consumers to the Mandatory Disclosure of Information: Evidence from Natural Experiments in Japanese Inter-brand Cigarette Demands By Junmin Wan
  28. The Value of Broadband and the Deadweight Loss of Taxing New Technology By Austan Goolsbee

  1. By: Thomas Giebe (Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10099 Berlin, Germany.; Elmar Wolfstetter (Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10099 Berlin, Germany.–
    Abstract: This paper revisits the standard analysis of licensing a cost reducing innovation by an outside innovator to a Cournot oligopoly. We propose a new mechanism that combines elements of a license auction with royalty licensing by granting the losers of the auction the option to sign a royalty contract. The optimal new mechanism eliminates the losses from exclusionary licensing without reducing bidders’ surplus; therefore, it is more profitable than both standard license auctions and pure royalty licensing. We also take into account that the number of licenses must be an integer, which is typically ignored in the literature.
    Keywords: Patents, Licensing, Auctions, Royalty, Innovation, R&D, Mechanism Design
    JEL: D21 D43 D44 D45
    Date: 2006–01
  2. By: Ricardo Flores-Fillol; Rafael Moner-Colonques
    Abstract: This paper analyzes the strategic decision to integrate by firms that produce complementary products. Integration entails bundling pricing. We find out that integration is privately profitable for a high enough degree of product differentiation, that profits of the non-integrated firms decrease, and that consumer surplus need not necessarily increase when firms integrate despite the fact that prices diminish. Thus, integration of a system is welfare-improving for a high enough degree of product differentiation combined with a minimum demand advantage relative to the competing system. Overall, and from a number of extensions undertaken, we conclude that bundling need not be anti-competitive and that integration should be permitted only under some circumstances.
    Keywords: complementary products; integration; bundling
    JEL: L13 L41 D43
    Date: 2006–02–01
  3. By: Byoung Heon Jun; In-Uck Park
    Abstract: Extending Milgrom and Roberts (1982) we present an infinite horizon entry model, where the incumbent(s) may use the current price to signal its strength to deter entry. We show that, due to the importance of entrants' types on the post-entry duopoly/oligopoly pro?ts, the incumbent(s) may want to signal its weakness to invite entry of weaker firms. (JEL D42, D43, D82, L11)
  4. By: Ana B. Ania
    Abstract: Schaffer (1988) proposed a concept of evolutionary stability for finite-population models that has interesting implications in economic models of evolutionary learning, since it is related to perfectly competitive equilibrium. The present paper explores the relation of this concept to Nash equilibrium in particular classes of games, including constant-sum games, games with weak payoff externalities, and games where imitative decision rules are individually improving. An illustration of the latter is provided in the context of Bertrand oligopoly with homogeneous product which allows for a characterization of the set of evolutionarily stable prices.
    JEL: B52 C72 D43 D83 L13
    Date: 2005–11
  5. By: Juan José Ganuza; José S. Penalva
    Abstract: This paper studies the relationship between the auctioneer’s provision of information and the level of competition in private value auctions. We use a general notion of informativeness which allows us to compare the efficient with the (privately) optimal amount of information provided by the auctioneer. We show that in the private value setting more information increases the efficiency of the allocation while it also increases informational rents so that it is not optimal for the auctioneer to provide the efficient level of information. We also show that as the number of participants in the auction increases both the efficient and the optimal level of information increase and both converge when the number of bidders goes to infinity.
    Keywords: Auctions, Competition, Private Values, Optimal and Efficient Provision of Information
    JEL: D44 D82 D83
    Date: 2006–01
  6. By: Suetens S.; Potters J.
    Abstract: On the basis of evidence of past oligopoly experiments, we argue that there is often significantly more tacit collusion in Bertrand price-choice than in Cournot quantity-choice markets.
    Date: 2005–12
  7. By: Douglas D. Davis (Department of Economics, VCU School of Business); Oleg Korenok (Department of Economics, Virginia Commonwealth University)
    Abstract: This paper reports an experiment conducted to evaluate a “near continuous” variant of the posted-offer trading institution, where the number of periods in a market session is increased by reducing sharply each period’s maximum length. Experimental results suggest that extensive rapid repetition improves considerably the drawing power of equilibrium predictions in some environments that have been problematic for markets organized under posted-offer trading rules. Nevertheless, the drawing power of static market predictions remains imperfect. We also observe that the extra data collected in the near continuous framework allows new insights into price convergence and signaling.
    Keywords: experiment, Monopoly, Pricing, Price Signaling
    JEL: C92 L12 L11
    Date: 2005–11
  8. By: Vanhaecht E.; Pauwels W.
    Abstract: In this paper we model competition between two publicly financed and identical universities deciding on quality and on admission standards. The education offered by the two universities is differentiated horizontally and vertically. If horizontal differentiation dominates, the Nash equilibrium is symmetric, and the two universities offer the same quality levels. If vertical differentiation dominates, the Nash equilibrium is asymmetric, and the high quality university attracts the better students. Symmetric and asymmetric equilibria may also coexist. We highlight the importance of three driving forces behind these results: a single crossing condition, the peer group effect, and the students' mobility costs. We also compare the monopoly and the duopoly case. The model we use is an extension of Del Rey's [8] model.
    Date: 2005–08
  9. By: Egil Matsen (Department of Economics, Norwegian University of Science and Technology)
    Abstract: This paper investigates the allocation decision of an investor with two projects. Separate managers control the mean return from each project, and the investor may or may not observe the managers’ actions. We show that the investor’s risk-return trade-off may be radically different from a standard portfolio choice setting, even if managers’ actions are observable and enforceable. In particular, feedback effects working through optimal contracts and effort levels imply that expected terminal wealth is nonlinear in initial wealth allocation. The optimal portfolio may involve very little diversification, despite projects that are highly symmetric in the underlying model. We also show that moral hazard in one of the projects need not imply lower allocation to that project. Expected returns are generally lower than under the first-best, but the optimal contract shifts more of the idiosyncratic risk in the hidden action project to the manager in charge of it. The minimum-variance position of the investor’s (net) terminal wealth would in most cases involve a portfolio shift towards the hidden action project, and there are plausible cases where this would dominate the overall effect on the second-best optimal portfolio when comparing with the first-best.
    Keywords: Portfolio choice; diversification; optimal contracts
    JEL: D81 D82 G11
    Date: 2006–02–05
  10. By: Anthony Horsley; Andrew J Wrobel
    Abstract: The "short-run approach" calculates long-run producer optima and general equilibria bybuilding on short-run solutions to the producer's profit maximization problem and onprofit-based valuation of the fixed inputs. We outline this method and illustrate it on anexample of peak-load pricing.
    Keywords: general equilibrium, fixed-input valuation, nondifferentiable joint costs, Wong-Viner Envelope Theorem, peak-load pricing
    JEL: D24 D41 D58
    Date: 2005–04
  11. By: Ekaterina Goldfayn
    Abstract: In order to deliver an innovation principals employ competing agents in some circumstances, while employing research team in other circumstances. This paper compares various structures of R&D to provide a rational behind this observation. It is assumed, that the principal can employ either one agent, two competing agents or two agents, cooperating in a team. Which of the available structures will be chosen by principal, depends on value of prize in stake, technological benefits of team production and team structure. Due to the positive effect on incentives, competing agents always generate larger profit to the principal, than a single agent. Further, they often perform better than the team, even when the latter has significant technological benefits. However, the performance of the team may be improved, if it is organized as a hierarchy with the team leader (who is responsible for allocation of resources) and his subordinate. The paper provides conditions on parameters, which determine whether the principal should employ a team or competing agents for performing R&D.
    Keywords: moral hazard, hierarchy, team production, competition, organization of R&D
    JEL: O31 L23 C72
    Date: 2006–02
  12. By: Douglas D. Davis (Department of Economics, VCU School of Business); Edward L. Millner (Department of Economics, VCU School of Business)
    Abstract: An experiment conducted to examine the effects of different discount formats on consumer purchases is reported. Participants made a series of purchase decisions for chocolate bars given (a) “rebates” from the listed price, (b) “matching” quantities of chocolates for each bar purchased, and (c) simple price reductions. Contrary to standard theoretical predictions, and consistent results in the context of charitable contributions by Eckel and Grossman (2003), we find that participants purchase significantly more chocolate bars under a “matching” sales format than under a comparable “rebate” format. Inattention to the net consequences of decisions, as well as some “rebate aversion”, explain the preference for matching discounts.
    Keywords: Consumer Behavior, Experiment, Discount Formats
    JEL: C91 D11 D46
    Date: 2004–09
  13. By: Christopher L. House; Emre Ozdenoren
    Abstract: Is the variety of products supplied in markets a reflection of the diversity of consumers' preferences? In this paper, we argue that the distribution of durable goods offered in markets tends to be compressed relative to the distribution of consumers' underlying preferences. In particular, there are strong incentives for conformity in markets for durable goods. The reason for conformity is natural: durables (for example houses) are traded and as a result, demand for these goods is influenced by their resale value. Agents may like one product, but purchase another because of resale concerns. We show that (1) there is a tendency to conform to the average preference; (2) conformity depends primarily on the number of people with extreme preferences; (3) conformity increases with increases in durability, patience, and the likelihood of trade; and (4) equilibrium conformity is not necessarily optimal. Surprisingly, there tends to be too little conformity in equilibrium. Conformity also creates a demand for rental markets. Renting does not necessarily decrease conformity however. Instead, renting tends to exaggerate conformity in the owner-occupied market.
    JEL: L0
    Date: 2006–02
  14. By: Anthony Horsley; Andrew J Wrobel
    Abstract: The Wong-Viner Envelope Theorem on the equality of long-run and short-run marginalcosts (LRMC and SRMC) is reformulated for convex but generally nondifferentiable costfunctions. The marginal cost can be formalized as the multi-valued subdifferential a.k.a.the subgradient set but, in itself, this is insufficient to extend the result effectively, i.e., toidentify suitable SRMCs as LRMCs. This goal is achieved by equating the profit-imputedvalues of the fixed inputs to their prices. Thus reformulated, the theorem is proved froma lemma on the sections of the joint subdifferential of a bivariate convex function. Thenew technique is linked to the Partial Inversion Rule of convex calculus.
    Keywords: Wong-Viner Envelope Theorem, nondifferentiable joint costs, profit-imputedvaluation of fixed inputs, general equilibrium, public utility pricing.
    JEL: C61 D21 D41
    Date: 2005–04
  15. By: Clarke, Roger (Cardiff Business School); Collie, David R. (Cardiff Business School)
    Abstract: In the Eaton and Grossman (1986) model of export taxes under Bertrand duopoly, it is shown that welfare in the Nash equilibrium in export taxes is always higher than welfare under free trade for both countries.
    Keywords: Trade Policy; Imperfect Competition; Oligopoly
    JEL: F12 F13 L13
    Date: 2006–02
  16. By: Pauwels W.; Weverbergh M.
    Abstract: In this paper we analyze the optimal regulation of an internationally integrated monopolist, producing in one country and selling in another country. The monopolist’s pricing policy is constrained by transfer pricing regulations, and is subject to different tax rates on profits in the two countries. The governments of the two countries can use their tax rates as regulatory instruments, and they also determine an arm’s length interval of acceptable transfer prices. The two governments can cooperate in order to maximize world welfare, or they can each try to maximize their own country welfare. It is shown that in several of the solutions governments apply a golden rule. This rule requires that the firm realizes all profits in the manufacturing country, while no profits are made in the retailing country. This can be obtained by choosing a sufficiently high (low) tax rate in the retailing (manufacturing) country, or by appropriately fixing the transfer price.
    Date: 2005–12
  17. By: Christian Broda; Nuno Limao; David Weinstein
    Abstract: The theoretical debate over whether countries can and should set tariffs in response to export elasticities goes back over a century to the writings of Edgeworth (1894) and Bickerdike (1907). Despite the optimal tariff argument's centrality in debates over trade policy, there exists no evidence about whether countries actually apply it when setting tariffs. We estimate disaggregate export elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The result is robust to the inclusion of political economy variables and a variety of model specifications. Moreover, we find that countries with higher aggregate market power have on average higher tariffs. In short, we find strong evidence in favor of the optimal tariff argument.
    JEL: F13 H21 F14
    Date: 2006–02
  18. By: Douglas D. Davis (Department of Economics, VCU School of Business); Bart J. Wilson (Interdisciplinary Center for Economic Science, George Mason University)
    Abstract: This paper reports an experiment designed to evaluate interrelationships between strategic buyers, market power and merger-induced synergies. The experiment consists of 40 posted-offer quadropolies. Treatments include the use of simulated or human buyers, seller consolidations and merger-induced fixed cost and unit cost synergies. In the simulated-buyer markets we observe behavior generally consistent with comparative static predictions: prices rise post-merger, and unit (but not fixed) cost synergies may exert some price-moderating effect. The addition of powerful buyers changes results markedly. Although prices are lower in the human buyer markets, outcomes are more variable and predicted comparative static effects are no longer observed.
    Date: 2006–01
  19. By: Clarke, Roger (Cardiff Business School); Collie, David R. (Cardiff Business School)
    Abstract: This article analyses export taxes in a Bertrand duopoly with product differentiation, where a home and a foreign firm both export to a third-country market. It is shown that the maximum-revenue export tax always exceeds the optimum-welfare export tax. In a Nash equilibrium in export taxes, the country with the low cost firm imposes the largest export tax. The results under Bertrand duopoly are compared with those under Cournot duopoly. It is shown that the absolute value of the export subsidy or tax under Cournot duopoly exceeds the export tax under Bertrand duopoly.
    Keywords: Trade Policy; Imperfect Competition; Oligopoly
    JEL: F12 F13 L13
    Date: 2006–02
  20. By: Anthony Horsley; Andrew J Wrobel
    Abstract: This is a new formal framework for the theory of competitive equilibrium and its applications.Our "short-run approach" means the calculation of long-run producer optimaand general equilibria from the short-run solutions to the producer's profit maximizationprogramme and its dual. The marginal interpretation of the dual solution means that itcan be used to value the capital and other fixed inputs, whose levels are then adjustedaccordingly (where possible). But short-run profit can be a nondifferentiable function ofthe fixed quantities, and the short-run cost is nondifferentiable whenever there is a rigidcapacity constraint. Nondifferentiability of the optimal value requires the introductionof nonsmooth calculus into equilibrium analysis, and subdifferential generalizations ofsmooth-calculus results of microeconomics are given, including the key Wong-Viner EnvelopeTheorem. This resolves long-standing discrepancies between "textbook theory"and industrial experience. The other tool employed to characterise long-run produceroptima is a primal-dual pair of programmes. Both marginalist and programming characterizationsof producer optima are given in a taxonomy of seventeen equivalent systemsof conditions. When the technology is described by production sets, the most usefulsystem for the short-run approach is that using the short-run profit programme andits dual. This programme pair is employed to set up a formal framework for long-rungeneral-equilibrium pricing of a range of commodities with joint costs of production.This gives a practical method that finds the short-run general equilibrium en route tothe long-run equilibrium, exploiting the operating policies and plant valuations that mustbe determined anyway. These critical short-run solutions have relatively simple formsthat can greatly ease the fixed-point problem of solving for equilibrium, as is shownon an electricity pricing example. Applicable criteria are given for the existence of theshort-run solutions and for the absence of a duality gap. The general analysis is speltout for technologies with conditionally fixed coefficients, a concept extending that of thefixed-coefficients production function to the case of multiple outputs. The short-run approachis applied to the peak-load pricing of electricity generated by thermal, hydro andpumped-storage plants. This gives, for the first time, a sound method of valuing thefixed assets-in this case, river flows and the sites suitable for reservoirs.
    Keywords: general equilibrium, fixed-input valuation, nondifferentiable joint costs,Wong-Viner Envelope Theorem, public utility pricing
    JEL: C61 D24 D46 D58 L94
    Date: 2005–05
  21. By: David Bartolini
    Abstract: The regulation of monopolistic firms has been widely investigated in the economic literature. Particular emphasis has been placed on the relationship between the regulated monopolist and the regulator. The present work deals with problems that may arise from the presence of several regulators. If regulators have different objective functions, inefficiency is likely to arise. A theoretical model with two regulators, one monopolistic firm and a renewable natural resource is presented. In this set up the level of demand relative to the sustainable use of the water resource plays a major role. The main result is the characterization of the cases in which the outcome of the regulation actually differs between the integrated-regulator and the separate-regulator scenarios. We find that the main determinants of the equilibrium are the level of demand and the marginal environmental damage. The equilibria obtained are analyzed in terms of price, environmental tax levels, and in terms of welfare distribution among the components of the regulator(s)' objective function.
    Date: 2006–02–22
  22. By: Patrick Bajari; Stephanie Houghton; Steve Tadelis
    Abstract: Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.
    JEL: D23 D82 H57 L14 L22
    Date: 2006–02
  23. By: José M. Labeaga; Miguel Rodríguez; Xavier Labandeira
    Abstract: Most public policies have not only efficiency but also distributional effects. However, there is a kind of trade-off between modeling approaches suitable for calculating each one of these impacts on the economy. For the former, most of the studies have been conducted with general equilibrium models, whereas partial equilibrium models represent the main approach for distributional analysis. This paper proposes a methodology which enables us to carry out an analysis of the distributional and efficiency consequences of public policies. In order to do so, we have integrated a microeconomic household demand model and a computable general equilibrium model for the Spanish economy. We illustrate the advantages of this approach by simulating a revenue-neutral reform in Spanish indirect taxation, with a reduction of VAT and a simultaneous increase of energy taxes. The results show that the reform brings about significant efficiency and distributional effects, in some cases counterintuitive, and demonstrate the academic and social utility of this approximation.
  24. By: Paul H. Jensen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper examines the effects of market power and product differentiation on demand for grocery products in Australia over the period 2002 to 2005. We construct a model of the relationship between demand, market power and brand characteristics and then estimate the model using monthly data on price, quantity and volume sold for a bundle of 92 brands in 12 product categories from major supermarket stores across Australia. We also use data on the characteristics of each brand such as whether the product is environment-friendly, is a “private label”, or is made from recyclable materials. Our results suggest that firms are able to affect their demand curves through both product differentiation strategies and through market power.
    Date: 2006–02
  25. By: Beatriz Domínguez; Juan José Ganuza; Gerard Llobet
    Abstract: It is commonly argued that in recent years pharmaceutical companies have directed their R&D towards small improvements of existing compounds instead of more risky drastic innovations. In this paper we show that the proliferation of these small innovations is likely to be linked to the lack of market sensitivity of a part of the demand to changes in prices. Compared to their social contribution, small innovations are relatively more profitable than large ones because they are targeted to the smaller but more inelastic part of the demand. We also study the effect of regulatory instruments such as price ceilings, copayments and reference prices and extend the analysis to competition in research.
    Keywords: Health-care, pharmaceuticals, innovation
    JEL: I11 I18 L51 O31
    Date: 2005–12
  26. By: Murray Carlson; Zeigham Khoker; Sheridan Titman
    Abstract: We develop equilibrium models of an exhaustible resource market where both prices and extraction choices are determined endogenously. Our analysis highlights a role for adjustment costs in generating price dynamics that are consistent with observed oil and gas forward prices as well as with the two-factor prices processes that were calibrated in Schwartz and Smith (2000). Stochastic volatility aries in our two-factor model as a natural consequence of production for oil and natural gas prices. Differences between the endogenous price processes considered in earlier papers can generate significant differences in both financial and real option values.
    JEL: Q4 G1
    Date: 2006–02
  27. By: Junmin Wan (Osaka School of International Public Policy, Osaka University)
    Abstract: I estimated inter-brand cigarette demands with nicotine, tar content and policy event information in Japan during 1950-84. The demand for all brands increased but the demand for plain (non-filter) brands decreased due to the dissemination ofgA Note about Health Damage from Smoking h in 1964. The demand for all brands increased but the demand for high-nicotine brands decreased due to the disclosure of nicotine and tar content in 1967 and the labeling warnings in 1972, however consumers had still preferred high-nicotine brands after 1972. Contrastively, the demand for high-tar brands increased in 1967 but decreased in 1972, and consumers had switched to prefer low-tar brands after 1972. Disclosure did not reduce the intake of nicotine but reduced the intake of tar, accordingly disclosure may benefit consumers by reducing the health risk as tar causes cancers. In line with changes in inter-brand demands, the monopolistic firm discontinued old products with poorer quality (plain, high-tar) but provided new better ones (filter-tipped, low-tar).
    Keywords: disclosure, nicotine, tar, cigarette, inter-brand, panel estimation, difference in difference
    JEL: I18 D12 D82
    Date: 2004–06
  28. By: Austan Goolsbee
    Abstract: With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates this by analyzing the impact that taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generate a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes would have also delayed entry in several markets. In these places, the lost consumer surplus from delay is an additional deadweight loss and it more than doubles the estimated efficiency costs of taxation. The conventional model also dramatically understates the share of tax burden that would have been borne by customers.
    JEL: H2 D6
    Date: 2006–02

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