nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒03‒18
seventeen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Multiproduct Cournot Oligopoly By David P. Myatt; Justin P. Johnson
  2. Parimutuel Betting under Asymmetric Information By Frederic Koessler; Charles Noussair; Anthony Ziegelmeyer
  3. Vertical integration and the licensing of innovation with a fixed fee or a royalty By Lemari‚, S.
  4. Strategic incentives for market share By Robert Ritz
  5. On the Existence of Monotone Pure Strategy Equilibria in Bayesian Games By Philip J. Reny
  6. Robert Aumann's Game and Economic Theory By Sergiu Hart
  7. Prices and Pareto Optima By Flam, Sjur; Jourani, A.
  8. When do more patents reduce R&D? By Robert M. Hunt
  9. Innovation, Competition and Welfare-Enhancing Monopoly By Michael R. Darby; Lynne G. Zucker
  10. Optimal Coordination in Hierarchies By Andrea Patacconi
  11. Determinants of Swiss Firms’ R&D Activities at Foreign Locations: An Empirical Analysis Based on Firm-level Data By Spyros Arvanitis; Heinz Hollenstein
  12. Cooperation through Imitation By James Bergin; Dan Bernhardt
  13. Scale Economies and Imperfect Competition in WorldScan By Roland de Bruijn
  14. Regret Testing Leads to Nash Equilibrium By Dean P Foster; Peyton Young
  15. Asymmetric Information from Physician Agency:Optimal Payment and Healthcare Quantity By Philippe Chone; Ching-to Albert Ma
  16. R&D and Productivity in the UK: evidence from firm-level data in the 1990s By Mark Rogers
  17. Monopoly, Inequality and Redistribution via the Public Provision of Private Goods By Thomas Moutos; Margarita Katsimi

  1. By: David P. Myatt; Justin P. Johnson
    Abstract: We present a general Cournot model in which each firm may sell multiple quality-differentiated products. We use an upgrades approach, working not with the actual products, but instead with upgrades from one quality to the next. The properties of single-product Cournot models carry over to the supply of upgrades, but not necessarily to the supply of complete products. A firm`s product line is determined by the properties of demand, its costs, and competitor characteristics. For symmetric firms, these determinants reduce to returns to quality and changes in demand elasticity as quality increases. For asymmetric firms whose (potentially endogenous) technological capabilities are defined by their maximum feasible qualities, gaps in product lines are determined precisely by the capabilities of lesser rivals. Strategic commitment to product lines prior to quantity competition is considered. Incentives to so commit are markedly different from those under price-setting models.
    Keywords: multiproduct quality competition, multiproduct oligopoly, brands, Cournot competition, price discrimination, product lines
    JEL: D4 L1
    Date: 2005
  2. By: Frederic Koessler; Charles Noussair; Anthony Ziegelmeyer
    Abstract: This paper examines simple parimutuel betting games under asymmetric information, with particular attention to differences between markets in which bets are submitted simultaneously versus sequentially. In the simultaneous parimutuel betting market, all (symmetric and asymmetric) Bayesian-Nash equilibria are generically characterized as a function of the number of bettors and the quality of their private information. There always exists a separating equilibrium, in which all bettors follow their private signals. This equilibrium is unique if the number of bettors is sufficiently large. In the sequential framework, earlier bets have information externalities, because they may reveal private information of bettors. They also have payoff externalities, because they affect the betting odds. One effect of these externalities is that the separating equilibrium disappears if the number of betting periods is sufficiently large.
    Keywords: Parimutuel betting, Asymmetric information, Information aggregation, Herd behavior, Contrarian behavior
    JEL: C72 D82
    Date: 2006–03
  3. By: Lemari‚, S.
    Abstract: In this paper, we analyse a situation where a patent holder is considered as an upstream firm that can license its innovation to some downstream companies that compete on a final market with differentiated products. Licensing contract may be based either on a royalty or a fixed fee. The patent holder can either be independant or vertically integrated with one of the downstream companies. We show that a licence based on a royalty works better with vertical integration, and that consequently, the patent holder have some interest to vertically integrate if it enables him to apply a royalty based license. The effect of vertical integration on the social surplus can be either positive or negative.
    JEL: D45 L22 L42 O31 O32
    Date: 2005
  4. By: Robert Ritz
    Abstract: Market share objectives are prominent in many industries, especially where managers pay much attention to league table rankings. This paper explores the strategic rationale for giving managers incentives based on market share in an oligopoly competing in strategic substitutes. Moreover, the paper discusses evidence on executive compensation practice in the automotive and investment banking industries. As predicted by the theory, firms in both industries use explicit contractual incentives based on market share. The profitability squeeze in the US car industry due to aggressive buyer discount programs can thus be understood as a consequence of prevailing management incentives.
    Keywords: Strategic Delegation, Market Share, Executive Compensation, League Tables
    JEL: D21 D43 G24 J33 L62
    Date: 2005
  5. By: Philip J. Reny
    Date: 2005–05–19
  6. By: Sergiu Hart
    Abstract: n overview of the landmark contributions of Robert J. Aumann, winner of the 2005 Nobel Memorial Prize in Economic Sciences.
    Keywords: Robert Aumann; game theory; repeated games; correlated equilibrium; common knowledge; continuum of agents
    JEL: C7 D4 D8 B31
    Date: 2006–03
  7. By: Flam, Sjur (Economics Department, Bergen University); Jourani, A. (Institut de Mathématiques de Bourgogne)
    Abstract: We provide necessary conditions for Pareto optimum in economies where tastes or technologies may be nonconvex, nonsmooth, and affected by externalities. Firms can pursue own objectives, much like the consumers. Infinite-dimensional commodity spaces are accommodated. Public goods and material balances are accounted for as special instances of linear restrictions.
    Keywords: first and second welfare theorem; weak and strong Pareto optimum; nonconvex tastes or technologies; public goods; externalities; local separation; subdifferentials; normal cones
    JEL: C60 D50 D60
    Date: 2006–03–06
  8. By: Robert M. Hunt
    Abstract: This paper develops a simple duopoly model in which investments in R&D and patents are inputs in the production of firm rents. Patents are necessary to appropriate the returns to the firm’s own R&D, but patents also create potential claims against the rents of rival firms. Analysis of the model reveals a general necessary condition for the existence of a positive correlation between the firm’s R&D intensity and the number of patents it obtains. When that condition is violated, changes in exogenous parameters that induce an increase in firms’ patenting can also induce a decline in R&D intensity. Such a negative relationship is more likely when (1) there is sufficient overlap in firms’ technologies so that each firm’s inventions are likely to infringe the patents of another firm, (2) firms are sufficiently R&D intensive, and (3) patents are cheap relative to both the cost of R&D and the value of final output.
    Keywords: Patents ; Research and development
    Date: 2006
  9. By: Michael R. Darby; Lynne G. Zucker
    Abstract: The basic competitive model with freely available technology is suited for static industries but misleading as applied to major innovative economies for which development of new technologies equals in magnitude around 10% of gross domestic investment. We distinguish free generic technology from proprietary technologies resulting from risky investment with uncertain outcome. The totality of possible outcomes drives the national innovation system and the returns to a particular successful technology cannot be compared to its own direct investment costs. Eureka moments are hardly ever self-enabling and incentives are required to motivate investment attempting to turn them into an innovation. The alternative to a valuable proprietary innovation is not the same innovation freely available but the unchanged generic technology. Growth is concentrated in any country at any time in a few firms in a few industries that are achieving metamorphic technological progress as a result of breakthrough innovations. So long as the entry and exit of firms using the generic technology sets the price in an industry, one or more price-taking firms can coexist with proprietary technologies yielding more or less substantial quasi-rents to the sunk development costs. Consumer welfare is increased if an innovator creates a proprietary technology such that the market equilibrium price is reduced and output increased. If the technological breakthrough is sufficiently large for the innovator to drive all generic producers out of the industry and increase output as a wealth-maximizing monopolist, consumer welfare is surely increased. After some time, the innovative technology will diffuse into an imitative generic technology. The best innovators develop a stream of innovations so that technological leaders can maintain their status as dominant firm or monopolist for extended periods of time despite lagged diffusion, and consumers benefit from this stream as well. The economics of an innovative nation are different from those of the no-growth stationary state which we teach and fall back on. We propose an ambitious agenda to integrate major research streams treating innovation as an object of economic analysis into our standard models.
    JEL: D40 D24 O31 L1
    Date: 2006–03
  10. By: Andrea Patacconi
    Abstract: This paper studies the optimal allocation of coordination responsibilities in organizations where duplication of effort is a serious concern. The planner`s objective is to minimize a weighted average of the wage bill and the cost of delay. The paper provides conditions under which, in balanced hierarches, communication effort is increasing and the span of control is decreasing as one travels up the hierarchy, with equalities holding if wages are negligible relative to the weight attached to the cost of delay. The analysis suggests that concerns for fast decision-making may be key in explaining the recent trend towards empowerment in firms. Several variants of the basic model are studied, including one focusing on communicative skills and another in which, as urgency increases, the optimal span of control increases and the hierarchy flattens. Evidence supporting these results is discussed.
    Keywords: Coordination, Hierarchy, Duplication, Delay, Information Processing
    JEL: D21 L23
    Date: 2005
  11. By: Spyros Arvanitis (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)); Heinz Hollenstein (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: Using the OLI paradigm as theoretical framework, we explain econometrically why a firm invests in foreign R&D (model A), and, if it does, which factors determine the level of foreign R&D expenditures (model B). It turns out that the pattern of explanation is quite similar for both types of decisions. In both cases, O- and I-advantages are the main drivers of foreign R&D, whereas L-disadvantages of the Swiss location do not play any role. A descriptive analysis of a series of motives of Swiss firms for performing R&D abroad shows that market-seeking is the most important motive. Knowledge-seeking and (human) resource-seeking are of intermediate importance as motives of foreign R&D, whereas efficiency-seeking objectives are hardly relevant. These results are fully in line with those of the econometric modelling. The findings of both approaches imply that foreign and domestic R&D are complements rather than substitutes. “Asset exploiting” is more prevalent as a strategy of foreign R&D than “asset augmenting”.
    Keywords: Foreign R&D, Determinants of foreign R&D, Motives of foreign R&D; OLI paradigm; Asset augmenting, Asset exploiting
    JEL: O30
    Date: 2006–01
  12. By: James Bergin (Queen's University); Dan Bernhardt (University of Illinois)
    Abstract: This paper characterizes long-run outcomes for broad classes of symmetric games, when players select actions on the basis of average historical performance. Received wisdom is that when agent's interests are partially opposed, behavior is excessively competitive: ``keeping up with the Jones' '' lowers everyones' welfare. Here, we study the long-run consequences of imitative behavior when agents have sufficiently long memories --- and the outcome is dramatically different. Imitation robustly leads to cooperative outcomes (with highest symmetric payoffs) in the long run. This provides a rationale, for example, for collusive cartel-like behavior without collusive intent on the part of the agents.
    Keywords: Evolution, Imitation
    JEL: C72 C73 D21 D43
    Date: 2006–01
  13. By: Roland de Bruijn
    Abstract: WorldScan, the CGE model for international policy analysis and long-term scenario studies, is applied regularly at the CPB. The production technology in the model is that of constant returns to scale and the market structure is characterized by perfect competition. However, it is a well known fact that many sectors such as manufacturing and service sectors feature increasing returns and firms compete imperfectly. To give the model more realism, it is therefore necessary to expand the model. Besides that, several research projects require an identification of scale economies in order to perform a sound welfare analysis. In this memorandum, I review the literature on scale economies and imperfect competition and analyze which approach is most suitable to implement in WorldScan. For the objectives at hand it appears most efficient to expand the model with an extended Dixit-Stiglitz approach. Simulations with an aggregated version of WorldScan show that the effects of incorporating scale economies are significant. Evidently, in a liberalisation scenario, sectors with increasing returns can exploit their technology more than sectors with constant returns, implying considerable increases in production and exports for these sectors. Concluding, this expansion of the model allows for an identification of formerly unidentified welfare effects.
    Keywords: Love of variety; monopolistic competition; general equilibrium; specialisation
    JEL: D43 D58 F12 L13
    Date: 2006–01
  14. By: Dean P Foster; Peyton Young
    Date: 2006–03–02
  15. By: Philippe Chone (CREST-LEI and CNRS URA 2200); Ching-to Albert Ma (Department of Economics, Boston University)
    Abstract: We model asymmetric information arising from physician agency, and its effect on the design of payment and healthcare quantity. The physician-patient coalition aims to maximize a combination of physician profit and patient benefit. The degree of substitution between profit and patient benefit in the physician-patient coalition is the physician’s private information, as is the patient’s intrinsic valuation of treatment quantity. The equilibrium mechanism depends only on the physician-patient coalition parameter. Moreover, the equilibrium mechanism exhibits extensive pooling, with prescribed quantity and payment being insensitive to the agency characteristics or patient’s actual benefit. The optimal mechanism is interpreted as managed care where strict approval protocols are placed on treatments.
    Keywords: Physician Agency, Altruism, Optimal Payment, Healthcare Quantity, Managed Care
    JEL: D82 I1 I10 L15
    Date: 2004–08
  16. By: Mark Rogers
    Abstract: The UK`s business R&D (BERD) to GDP ratio is low compared to other leading economies, and the ratio has slowly declined over the 1990s. This paper uses data on large UK firms to analyse the link between R&D and productivity over the 1989-2000 period. Using a production function approach, and a sample of up to 719 firms, various different samples and estimators are used to assess the elasticity of, and rate of return to, R&D. The results indicate that UK returns to R&D are similar to returns in other leading economies. Furthermore, the returns to R&D have been relatively stable over the 1990s. There is no evidence to suggest that stock market listed firms, or firms with higher past profitability, have significantly different returns. Overall, the results suggest that the low BERD to GDP ratio in the UK is unlikely to be due to direct financial or human capital constraints (as these imply finding relatively high rates of return). Instead, the low BERD to GDP ratio appears to reflect low (perceived) opportunities by firms and the inability of firms to manage R&D to generate value. The paper provides some, tentative evidence, that high rates of competition in the science-based sector are associated with low returns to R&D.
    Keywords: R&D, Productivity
    JEL: L10 O31 O34
    Date: 2006
  17. By: Thomas Moutos (AUEB and CESifo); Margarita Katsimi (AUEB and CESifo)
    Abstract: The relationship between inequality and redistribution is usually studied under the assumption that the government collects different amounts of taxes from each citizen (voter) but gives back the same amount (in cash or in kind) to everyone. In this paper we consider what happens if the government can redistribute through both sides of its budget (revenue and expenditure). We study the effects of inequality on the size (and structure) of redistributive programs in both perfectly competitive and monopolistic settings. We find that the presence of monopoly results in a higher tax rate than in the competitive case and that in the latter case an increase in inequality can be associated with a fall in the tax rate. We find also that although the median voter may not vote for a positive tax rate in the presence of public sector inefficiency under perfect competition, she may prefer – ceteris paribus – a positive tax rate in the presence of monopoly.
    Keywords: Monopoly, Redistribution, Inequality, Public Goods, Median Voter
    JEL: H23 H42 P16
    Date: 2006

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