nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒10‒07
fifteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Equilibrium Mode of Competition in Unionized Oligopolies: Do Unions Act as Commitment Devices to Cournot Outcomes? By Constantine Manasakis; Minas Vlassis
  2. Two-Sided Markets with Pecuniary and Participation Externalities By Richard Schmidtke
  3. On R&D Information Sharing and Merger By Uday Bhanu Sinha
  4. Disclosing vs. Withholding Technology Knowledge in a Duopoly By Emanuele Bacchiega; Paolo Garella
  5. R&D IN THE PHARMACEUTICAL INDUSTRY: A WORLD OF SMALL INNOVATION By Beatriz Dominguez; Juan-José Ganuza; Gerard Llobet
  6. Risky Arbitrage, Asset Prices, and Externalities By Cuong Le Van; Frank H. Page; Myrna H. Wooders
  7. Optimum Commodity Taxation in Pooling Equilibria By Eytan Sheshinski
  8. "Innocuous" Minimum Quality Standards By Paolo Garella
  9. Tax competition, location, and horizontal foreign direct investment By Kristian Behrens; Pierre M. Picard
  10. Research Joint Ventures, Optimal Licensing, and R&D Subsidy Policy By Cuihong Fan; Elmar Wolfstetter
  11. Overinvestment in European Football Leagues By Helmut Dietl; Egon Franck; Markus Lang
  12. NETWORK SIZE AND NETWORK CAPTURE By Gerard Llobet; Michael Manove
  13. Differentiated Annuities in a Pooling Equilibrium By Eytan Sheshinski
  14. PRODUCTION TARGETS By Guillermo Caruana; Liran Einav

  1. By: Constantine Manasakis (Department of Economics, University of Crete); Minas Vlassis (Department of Economics, University of Crete)
    Abstract: In contrast with previous studies, we postulate that there is no ex-ante commitment over the type of contract (i.e., price or quantity) which a firm offers consumers. In the context of a unionized symmetric duopoly we instead argue that the mode of competition which in equilibrium emerges is the one that entails the most beneficial outcome for both the firm and its labour union, in each firm/union pair, given the choice of the rival pair. Our findings suggest that monopoly unions with risk-averse/neutral members may effectively act as commitment devices driving firms to the symmetric Cournot mode of competition.
    Keywords: Oligopoly, Monopoly unions, Equilibrium mode of competition
    JEL: D43 J51 L13
    Date: 2006–03
  2. By: Richard Schmidtke
    Abstract: The existing literature on "two-sided markets" addresses participation externalities, but so far it has neglected pecuniary externalities between competing platforms. In this paper we build a model that incorporates both externalities. In our setup differentiated platforms compete in advertising and offer consumers a service free of charge (such as a TV program) that is financed through advertising. We show that advertising can exhibit the properties of a strategic substitute or complement. Surprisingly, there exist cases in which platforms benefit from market entry. Moreover, we show that from a welfare point of view perfect competition is not always desirable.
    Keywords: two-sided markets, broadcasting, advertising, market entry, digital television
    JEL: D43 L13 L82
    Date: 2006
  3. By: Uday Bhanu Sinha (Delhi School of Economics)
    Abstract: The paper deals with the issue of information sharing in a Cournot duopoly by an innovating firm in the face of a merger with its rival. The innovating firm would share information about the cost realization with its rival provided the market size is relatively small or, the R&D technology is relatively more efficient in a medium market size. However, in a large market, or in a medium market size with less efficient R&D technology, the innovating firm does not share information with its rival. We also show that the social welfare may be higher under incomplete information regime.
    Keywords: Information sharing, market size, R&D, merger and welfare.
    JEL: L13 O32
    Date: 2006–08
  4. By: Emanuele Bacchiega; Paolo Garella (Dipartimento di Scienze Economiche, University of Bologna, Italy)
    Keywords: Oligopoly, Information disclosure, R&D Joint Ventures, R&D Consortia, Returns to scale
    JEL: L13 O30
    Date: 2006–05–02
  5. By: Beatriz Dominguez; Juan-José Ganuza; Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros)
    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, copyments and reference prices and extend the analysis to competition in research.
    Keywords: Health-care, pharmaceuticals, innovation.
    JEL: I11 I18 O31
    Date: 2006–01
  6. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Frank H. Page (University of Alabama - [University of Alabama]); Myrna H. Wooders (Vanderbilt University - [Vanderbilt University])
    Abstract: We introduce a no-risky-arbitrage price condition (NRAP) for asset market models allowing both unbounded short sales and externalities such as trading volume. We then demonstrate that NRAP is sufficient for the existence of competitive equilibrium in the presence ofexternalities. Moreover, we show that if all risky arbitrages are utility increasing, then NRAP characterizes competitive equilibrium in the<br />presence of externalities.
    Keywords: Risky Arbitrage, Competitive Equilibrium, Viable<br />Asset Prices
    Date: 2006–10–02
  7. By: Eytan Sheshinski
    Abstract: This paper extends the standard model of optimum commodity taxation (Ramsey (1927) and Diamond-Mirrlees (1971)) to a competitive economy in which some markets are inefficient due to asymmetric information. As in most insurance markets, consumers impose varying costs on suppliers but …firms cannot associate costs to customers and consequently all are charged equal prices. In a competitive pooling equilibrium, the price of each good is equal to average marginal costs weighted by equilibrium quantities. We derive modi…ed Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that they include general-equilibrium effects which re‡flect the initial deviations of producer prices from marginal costs, and the response of equilibrium prices to the taxes levied. It is shown that condition on the monotonicity of demand elasticities enables to sign the deviations from the standard formula. The general analysis is applied to the optimum taxation of annuities and life insurance.
    Keywords: Asymmetric Information; Pooling Equilibrium; Ramsey-Boiteux Conditions; Annuities
    JEL: D43 H21
    Date: 2006–08
  8. By: Paolo Garella (Dipartimento di Scienze Economiche, University of Bologna, Italy)
    Abstract: The present note shows that "innocuous" Minimum Quality Standards, namely below the lowest quality in a market, may have effects on equilibrium outcomes. Such a MQS reduces the incentive to invest in R&D by the quality-leading firm.
    Keywords: Regulation, Minimum Quality Standards, Oligopoly, R&D
    JEL: L0 L5
    Date: 2006–03–06
  9. By: Kristian Behrens (CORE, Université catholique de Louvain, 34 voie du Roman Pays, 1348 Louvain-la-Neuve, Belgium); Pierre M. Picard (Université catholique de Louvain; Belgium; and University of Manchester, UK)
    Abstract: We develop a model of capital tax/subsidy competition in which imperfectly competitive firms choose both the number and the location of the plants they operate. The endogenous presence of horizontal multinationals is shown to attenuate the "race to the bottom" and yields some results that are opposite to traditional findings in the tax competition literature. First, in the presence of horizontal multinationals, increasing subsidies decrease firms' profits by exacerbating price competition due to more firms "going multinationa"’. Second, instead of being always subsidized, capital may actually be taxed in equilibrium. Third, taxes/subsidies become strategically independent policy instruments, instead of being strategic complements. Last, there may exist multiple equilibria with either low or high subsidies.
    Keywords: capital tax competition; international trade; horizontal multinationals; foreign direct investment; imperfect competition
    JEL: F12 F23 H27 H73 R12
    Date: 2006–10
  10. By: Cuihong Fan (Shanghai University of Finance and Economics, School of Economics, Guoding Road 777 200433 Shanghai, China.; Elmar Wolfstetter (Dept. of Economics, Institute of Economic Theory I, Humboldt University at Berlin, Spandauer Str. 1, 10099 Berlin,Germany.
    Abstract: We reconsider the justifications of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to pool R&D investments and license innovations. In equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the subsequent oligopoly game. Nevertheless, governments subsidize their domestic firms in order to raise their bargaining position in the joint venture. This holds true regardless of whether governments offer either unconditional or conditional subsidies. This suggests an alternative explanation of the observed proliferation of R&D subsidies.
    Keywords: patent licensing, industrial organization, R&D subsidies, research joint ventures, technology policy
    JEL: L13 O34
    Date: 2006–09
  11. By: Helmut Dietl; Egon Franck; Markus Lang (Institute for Strategy and Business Economics, University of Zurich; Institute for Strategy and Business Economics, University of Zurich; Institute for Strategy and Business Economics, University of Zurich)
    Abstract: In the last decade most clubs in European football leagues have experienced the paradox of rising revenues and declining profits. The present paper applies contest theory to provide an integrated framework of a team sports league and analyses the competitive interaction between clubs. We show that dissipation of the league rev- enue arises from "overinvestment" in playing talent. This overinvestment problem increases if the discriminatory power of the contest function increases, revenue- sharing decreases, and the size of an additional exogenous prize increases. We fur- ther show that clubs invest more when they play in an open compared to a closed league. The overinvestment problem within open leagues increases with the revenue differential between leagues.
    Keywords: contests, sports league, overinvestment, revenue-sharing, promotion and relegation
    JEL: L83 C72 D43 D72
    Date: 2005
  12. By: Gerard Llobet; Michael Manove (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Most types of networks, over time, spawn the creation of complementary stocks that enhance network value. Computer operating systems, for example, induce the development of the complementary stock of software applications that increase the value of the operating system. In this paper, we challenge the conventional wisdom that a large network, which induces the creation of large complementary stocks, serves as a barrier to entry that protects the incumbent from competition or network capture. We show that a larger network may either deter or attract entry depending on the relation between the network quality and the cost of an innovator's network product. The probability of entry also depends on the level of compatibility between the potential entrant's technology and existing complementary stocks, which in turn is influenced by the strength of the intellectual-property-rigths environment. Intellectual property rigths and the associated threat of entry may affect and incumbent's choice of network size in counterintuitive ways.
    JEL: L41 O34
    Date: 2006–04
  13. By: Eytan Sheshinski
    Abstract: Regular annuities provide payment for the duration of an owner's lifetime. Period-Certain annuities provide additional payment after death to a beneficiary provided the insured dies within a certain period after annuitization. It has been argued that the bequest option offered by the latter is dominated by life insurance which provides non-random bequests. This is correct if competitive annuity and life insurance markets have full information about individual longevities. In contrast, this paper shows that when individual longevities are private information, a competitive pooling equilibrium which offers annuities at common prices to all individuals may have positive amounts of both types of annuities in addition to life insurance. In this equilibrium, individuals self-select the types of annuities that they purchase according to their longevity prospects. The break-even price of each type of annuity reflects the average longevity of its buyers. The broad conclusion that emerges from this paper is that adverse-selection due to asymmetric information is reflected not only in the amounts of insurance purchased but, importantly, also in the choice of insurance products suitable for different individual characteristics. This con- clusion is supported by recent empirical work about the UK annuity market (Finkelstein and Poterba (2004)).
    Keywords: Annuities; Period-Certain Annuities; Pooling Equilibrium
    JEL: D11 D82
    Date: 2005–11
  14. By: Guillermo Caruana; Liran Einav (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We present a dynamic quantity setting game, where players may continuosly adjust their quantity targets, but incur convex adjustment costs when they do so. These costs allow players to use quantity targets as a partial commitment device. We show that the equilibrium path of such a game is hump-shaped and that the final equilibrium outcome is more competitive than its static analog. We then test the theory using monthly production targets of the Big Three U.S. auto manufacturers during 1965-1995 and show that the hump-shaped dynamic pattern is present in the data. Initially, production targets steadily increase until they peak about 2-3 months before production. Then, they gradually decline to eventual production levels. This quealitative pattern is fairly robust across a range of similar exercises. We conclude that strategic considerations play a role in the planning phase in the auto industry, and that static models may therefore under-estimate the industry's competitiveness.
    JEL: C72 C73 D43 L13 L62
    Date: 2006–01
  15. By: Sudhir A. Shah (Delhi School of Economics)
    Abstract: We consider organizations with a single principal and many agents who interact in an environment with the following features -- (a) Nature im-perfectly informs the principal via a state-contingent signal, but not the agents, about the state of the world, (b) the principal selectively shares this information with the agents, thereby endogenously endow-ing them with private information that is coarser than his own, (c) the principal assigns action spaces to the agents, and (d) an agent’s control over the choice from his assigned action space is inalienable. Designing an organization involves specifying (c) and specifying an information dissemination system for implementing (b). Searching for an optimal design involves (1) deriving optimal performance from each design, and (2) comparing designs on the basis of their best performances. Our ex-istence results show the feasibility of performing Step (1) in a large class of cases.
    Keywords: Existence theorems, optimal design, team, organization, principal-agent model
    JEL: C62 D02 D23 D82 L23
    Date: 2006–08

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