nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒06‒17
nineteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  2. Fragmented property rights and R&D competition By Derek J. Clark; Kai A. Konrad
  3. Imperfect Competition and Corporate Governance By Frank Milne; David Kelsey
  4. “Ineffective” competition: a puzzle? By Andrej V. Ivanov; Florian Mueller
  5. Multi-battle contests By Kai A. Konrad; Dan Kovenock
  6. Access to Commitment Devices Reduces Investment Incentives in Oligopoly By Veronika Grimm; Gregor Zoettl
  7. A note on Common Agency models of moral hazard By Andrea Attar; Nicolas Porteiro; Gwenaël Piaser
  8. Choosing intellectual protection : imitation, patent strength and licensing. By David Encaoua; Yassine Lefouili
  9. Contests over Public Goods: Evolutionary Stability and the Free-Rider Problem By Wolfgang Leininger
  10. Non-price advertising and price competition: a theory, and evidence from the Brazilian beer market By Renato D.B. Gomes; João Manoel Pinho de Mello
  11. Multi-Product Firms and Product Switching By Andrew B. Bernard; Stephen J. Redding; Peter K. Schott
  12. Closure Options in Duopoly: The Case of Second-Mover Advantages By Thomas Sparla
  13. Imperfect competition, technical progress and capital accumulation. By Biancamaria d'Onofrio; Bertrand Wigniolle
  14. Sequential versus Bundle Auctions for Recurring Procurement By Veronika Grimm
  15. Economic Surplus and Derived Demand By Schlicht, Ekkehart
  17. Exchange rates and transition economies` export prices: is there evidence for pricing-to-market behaviour? By Emilia Penkova
  18. STRATEGIC EFFECTS OF AIRLINE ALLIANCES By Rafael Moner Colonques; Ricardo Flores Fillol
  19. Determinants influencing the choice of a cooperation partner By Uwe Cantner; Andreas Meder

  1. By: Frank Milne (Queen's University); David Kelsey (Exeter University)
    Abstract: This paper provides a theory of general equilibrium with externalities and/or monopoly. We assume that the …rm’s decisions are based on the preferences of shareholders and/or other stakeholders. Under these assumptions a …rm will produce fewer negative externalities than the comparable pro…t maximising …rm. In the absence of externalities, equilibrium with a monopoly will be Pareto efficient if the …rm can price discriminate. The equilibrium can be implemented by a 2-part tariff.
    Keywords: Externality, general equilibrium, 2-part tariff, objective function of the firm
    JEL: D52 D70 L20
    Date: 2005–05
  2. By: Derek J. Clark (Department of Economics and Management, University of Tromsø, N-9037 Tromsø, Norway.; Kai A. Konrad (WZB, Reichpietschufer 50, D-10785 Berlin, Germany, and Free University of Berlin.
    Abstract: Where product innovation requires several complementary patents, fragmented property rights can be a factor that limits firms’ willingness to invest in the development and commercialization of new products. This paper studies multiple simultaneous R&D contests for complementary patents and how they interact with patent portfolios that firms may have acquired already. We also consider how this interaction and the intensity of the contests depends on the type of patent trade regimes and the product market equilibria that result from these regimes. We solve for the contest equilibria and show that the multiple patent product involves an important hold-up problem that considerably reduces the overall contest effort.
    Keywords: fragmented property rights, patents, contests, hold-up, R&D, patent pools, licensing
    JEL: D44
    Date: 2006–06
  3. By: Frank Milne (Queen's University); David Kelsey (University of Exeter)
    Abstract: This paper studies corporate governance when a firm operates in imperfect markets. We derive firms’ decisions from utility maximisation by individuals. If those involved in decisions are also consumers, the usual monopoly distortion is reduced. Corporate governance can effect the equilibrium in the product (or input) markets. This enables us to endogenise the objective function of the firm. If the firm cannot commit not to change its constitution, we find a Coase-like result where all market power is lost in the limit. We present a more abstract model of governance in the presence of market distortions.
    Keywords: corporate governance, stakeholder, oligopoly, strategic delegation
    JEL: D70 L13 L20
    Date: 2006–04
  4. By: Andrej V. Ivanov (Chair for Applied Microeconomics, Department of Economics, Mannheim University, D-68131 Mannheim, Germany,; Florian Mueller (Chair for Applied Microeconomics, Department of Economics, Mannheim University, D-68131 Mannheim, Germany,
    Abstract: Conventionally, we think of an increase in competition as weakly decreasing prices, increasing the number of consumers served, thus increasing consumer surplus, decreasing firms profits, etc. Here, we demonstrate that, under some tame circumstances, an increase in competition may lead to a price increase in a horizontally differentiated market. We show this relationship for the petrol market in German cities.
    Date: 2006–05
  5. By: Kai A. Konrad (Kai A. Konrad, WZB, Reichpietschufer 50, D-10785 Berlin, Germany, e-mail:; Dan Kovenock (Dan Kovenock, Krannert School of Management, Purdue University, West Lafayette, IN 47907, USA, fax: +1-765-494-9658, e-mail:
    Abstract: We study equilibrium in a multistage race in which players compete in a sequence of simultaneous move component contests. Players may win a prize for winning each component contest, as well as a prize for winning the overall race. Each component contest is an all-pay auction with complete information. We characterize the unique equilibrium analytically and demonstrate that it exhibits endogenous uncertainty. Even a large lead by one player does not fully discourage the other player, and each feasible state is reached with positive probability in equilibrium (pervasiveness). Total effort may exceed the value of the prize by a factor that is proportional to the maximum number of stages. Important applications are to war, sports, and R&D contests and the results have empirical counterparts there.
    Keywords: all-pay auction, contest, race, conflict, multi-stage, R&D, endogenous uncertainty, preemption, discouragement
    JEL: D72 D74
    Date: 2006–03
  6. By: Veronika Grimm; Gregor Zoettl
    Abstract: In this paper we analyze incentives to invest in capacity prior to a sequence of Cournot spot markets with varying demand. We compare equilibrium investment in the absence and in presence of the possibility to trade on forward markets. We find that the access to strategic devices (such as forward contracts as analyzed by Allaz and Vila (1993), or, equivalently strategic delegation as analyzed by Fershtman and Judd (1987) or Vickers (1985)) prior to spot market competition reduces equilibrium investments.
    Keywords: Investment incentives, commitment devices, oligopoly, demand fluctuations, forward markets
    JEL: D43 L13
    Date: 2006–06–06
  7. By: Andrea Attar (IDEI, Toulouse); Nicolas Porteiro (Universidad Pablo de Olavide); Gwenaël Piaser (Department of Economics, University of Venice Cà Foscari)
    Abstract: We consider Common Agency games of moral hazard and we suggest that there is only a very weak support for the standard restriction to take-it or leave-it contracts.
    Keywords: Menus, Common Agency.
    JEL: D82
    Date: 2006
  8. By: David Encaoua (Centre d'Economie de la Sorbonne); Yassine Lefouili (Centre d'Economie de la Sorbonne)
    Abstract: This paper investigates the choice of an intellectual protection regime for a process innovation. We set up a multi-stage model in which choosing between patent and trade secrecy is affected by three parameters : the patent strength defined as the probability that the right is upheld by the court, the cost of imitating a patented innovation relative to the cost of imitating a secret innovation, and the innovation size defined as the extent of the cost reduction. The choice of the protection regime is the result of two effects : the damage effect evaluated under the unjust enrichment doctrine and the effect of market competition that occurs under the shadow of infringement. We find that large innovations are likely to be kept secret whereas small innovations are always patented. Furthermore, medium innovations are patented only when patent strength is sufficiently high. Finally, we investigate a class of licensing agreements used to settle patent disputes between patent holders and their competitors.
    Keywords: Patent, trade secrecy, imitation, licensing.
    JEL: D45 L10 O32 O34
    Date: 2005–12
  9. By: Wolfgang Leininger
    Abstract: We analyze group contests for public goods by applying the solution concept of an evolutionary stable strategy (ESS). We show that a global ESS cannot exist, because a mutant free-rider can always invade group behavior succesfully. There does exist, however, a unique local ESS, which we identify with evolutionary equilibrium. It coincides with Nash equilibrium, the hitherto dominant solution concept in contest theory, if and only if groups are symmetric. For asymmetric groups it always proposes a different and arguably more sensible solution than Nash equilibrium. We explore the properties of (local) ESS in detail.
  10. By: Renato D.B. Gomes (Ph.D. Student, Department of Economics - Northwestern University.); João Manoel Pinho de Mello (Department of Economics PUC-Rio.)
    Abstract: By engendering horizontal differentiation, non-price advertising increases the incentives to accommodate on the price dimension. However, advertising also increases the size of the market and, consequently, the payoffs to price undercutting, which induces more aggressive price competition. We propose a theory in which advertising has a different effect on price competition according to the level of market maturity. In mature markets - where potential growth in low - only the price accommodation effect is present. In immature markets, both effects are present. Therefore, advertising is more procompetitive (less anti-competitive) in immature markets. Evidence from several Brazilian beer markets corroborates the theory.
    Date: 2006–05
  11. By: Andrew B. Bernard; Stephen J. Redding; Peter K. Schott
    Abstract: This paper examines the frequency, pervasiveness and determinants of product switching among U.S. manufacturing firms. We find that two-thirds of firms alter their mix of five-digit SIC products every five years, that one-third of the increase in real U.S. manufacturing shipments between 1972 and 1997 is due to the net adding and dropping of products by survivors, and that firms are more likely to drop products which are younger and have smaller production volumes relative to other firms producing the same product. The product-switching behavior we observe is consistent with an extended model of industry dynamics emphasizing firm heterogeneity and self-selection into individual product markets. Our findings suggest that product switching contributes towards a reallocation of economic activity within firms towards more productive uses.
    JEL: D21 E23 L11 L60
    Date: 2006–06
  12. By: Thomas Sparla
    Abstract: This paper examines exercise policies for capacity reduction options in a duopolistic market that is subject to aggregate shocks. Firms face an inverse demand that exhibits second-mover advantages rather than the complementary property of first-mover advantages commonly assumed in the literature on games of investment timing. We identify a joint-reduction scenario to be the unique equilibrium outcome of the disinvestment timing game with identical firms. With heterogeneous firms one out of three scenarios occurs. Depending on the degree of heterogeneity either firms disinvest jointly or the high-cost firm moves first or a multiplicity of equilibria arises. All optimal exercise policies turn out to be different from the closure rules suggested by the standard real options theory: Identical as well as heterogeneous firms in duopoly should disinvest earlier than price-taking firms but later than a monopolist. A discussion of welfare and policy issues suggests a restrictive approach to the assessment of mergers in declining industries.
  13. By: Biancamaria d'Onofrio (Universita di Roma); Bertrand Wigniolle (Centre d'Economie de la Sorbonne)
    Abstract: This paper explores the consequences of imperfect competition on capital accumulation. The framework is an OLG growth model with altruistic agents. Two types of long run equilibria exist : egoistic or altruistic.We assume both competitive and non-competitive firms exist, the latter being endowed with more productive technology. They behave strategically on the labor market : they take into account the impact of their demand for labor on the equilibrium wage and on their profit. The effect of technical progress for a non-competitive firm depends on the initial productivity of the firm and on the type of steady state (egoistic or altruistic). An increase in the productivity of the most productive firm has a negative impact on capital accumulation in an egoistic steady state, and a positive one in an altruistic steady state. An increase in the productivity of the competitive sector can have various effects on capital accumulation. If the productivity levels of the non-competitive firms are close enough, capital accumulation increases in an egoistic steady state and decreases in an altruistic one. But, the impact of increasing productivity in the competitive sector can be reversed if the productivity of the less productive non-competitive firm is low enough.
    Keywords: Imperfect competition, capital accumulation, technical progress.
    JEL: D43 D9 O3
    Date: 2006–05
  14. By: Veronika Grimm
    Abstract: We compare sequential and bundle procurement auctions in a framework of successive procurement situations, where current success positively or negatively affects future market opportunities. We find that in bundle auctions procurement cost is lower and less risky than in sequential standard auctions, but still higher than in the optimal sequential auction. Only a sequential second price auction leads to the efficient outcome.
    Keywords: Sequential auctions, bundling, stochastic scale effects, procurement
    JEL: D44 H57 D92
    Date: 2006–06–06
  15. By: Schlicht, Ekkehart
    Abstract: Most demand -- especially labor demand -- is derived from the demand for some other product. This note demonstrates that the usual analysis of economic rent, as typically explained for the case of consumers' surplus, carries over to the case of derived demand.
    Keywords: derived demand; indirect demand; consumers' surplus; economic rent
    JEL: D00 D61
    Date: 2006–06
  16. By: Ángel Hernando Veciana (Universidad de Alicante)
    Abstract: This paper studies the incentives of a bidder to acquire information in anauction when her information acquisition decision is observed by the otherbidders before they bid. Our results show that the sealed bid (second price)auction induces more information acquisition about a common component ofthe value than the open (English) auction, but less about the private componentof the value. Moreover, under our assumptions more information about theprivate value and less information about the common value improves efficiencyand revenue in some sense. Consequently, our results suggest new argumentsin favor of the open auction.
    Keywords: auctions, open information acquisition, asymmetric information.
    JEL: D41 D44 D82
    Date: 2006–06
  17. By: Emilia Penkova
    Abstract: The paper tests for potential pricing-to-market for a wide range of export industries in selected transition economies, namely Poland, Hungary and Bulgaria, at the four-digit level over the period 1990-1998. Panel estimation is undertaken and a fixed-effects linear model is estimated. The empirical evidence reported here offers new evidence for transition economies that have not been investigated before. Given the industries sampled, more price discrimination across destination is observed in Bulgaria than in Poland and Hungary. There is no evidence showing pricing-to-market in relation to common industries across source countries.
  18. By: Rafael Moner Colonques (Universitat de València); Ricardo Flores Fillol (Universidad Autónoma de Barcelona)
    Abstract: This paper looks at the endogenous formation of airline alliances bymeans of a two-stage game where first airlines decide whether to form analliance and then fares are determined. We analyze the profitability and thestrategic effects of airline alliances when two complementary alliances,following different paths, may be formed to serve a certain city-pair market.The formation of a complementary alliance is shown to hurt outsiders and thatfares decrease in the interline market. Contrary to what might be expected, wefind that complementary alliances are not always profitable, even in thepresence of economies of traffic density. The interplay between market size, thedegree of product differentiation and the intensity of economies of trafficdensity determines whether the market equilibrium entails no alliances, a singlealliance or a double alliance.
    Keywords: complementary airline alliances, economies of traffic density, product differentiation
    JEL: L13 L2 L93
    Date: 2006–06
  19. By: Uwe Cantner (University of Jena, Faculty of Economics); Andreas Meder (University of Jena, Faculty of Economics)
    Abstract: This paper provides empirical tests of hypotheses of cooperative behavior provided by evolutionary approaches in the resource-based view of the firm. The influences of "technological proximity", individual incentives to cooperate and managerial tools to the choice of research partner are analyzed. Using German patent data we can show the positive influence of those three determinants. The results of this paper confirm theories dealing with the path-dependency of research activities.
    Keywords: innovation, resource-based view of the firm, cooperation, technological proximity, organizational know-how
    JEL: C30 L14 O32
    Date: 2006–06–10

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