nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒10‒21
sixteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Technological Progress in Races for Product Supremacy By Nguyen, Thang
  2. Quantity precommitment, Cournot outcome and asymmetric capacity costs By Nicolas Gruyer
  3. Entrepreneurial Innovations, Competition and Competition Policy By Norbäck, Pehr-Johan; Persson, Lars; Vlachos, Jonas
  4. Non-exclusivity and adverse selection: An application to the annuity market By Agar Brugiavini; Gwenaël Piaser
  5. Mobile termination and collusion, revisited By Felix Hoeffler
  6. Assessing effects of price regulation in retail payment systems By Kemppainen , Kari
  7. On the "Adverse Selection" of Organizations By Matthias Kräkel
  8. Degree of Instant Competition: Estimation of Market Power in India's Instant Coffee Market By Deodhar Satish Y.; Pandey Vivek
  9. The Provision and Pricing of Excludable Public Goods: Ramsey-Boiteux Pricing versus Bundling By Martin Hellwig
  10. Informative Voting and the Samuelson Rule By Felix Bierbrauer; Marco Sahm
  11. The stability of electricity prices: estimation and inference of the Lyapunov exponents By Bask , Mikael; Liu , Tung; Widerberg , Anna
  12. Price and wage setting in an integrating Europe : firm level evidence By Filip Abraham; Jozef Konings; Stijn Vanormelingen
  13. Non-linear anonymous pricing in combinatorial auctions By Drexl, Andreas; Jörnsten, Kurt; Knof, Diether
  14. Netting of capacity in interconnector auctions By Felix Hoeffler; Tobias Wittmann
  15. Dynamique de l'innovation dans les services français. By MUSOLESI, Antonio
  16. Quality-improving horizontal innovations By Gerhard Sorger

  1. By: Nguyen, Thang
    Abstract: How does market organization affect quality innovation efforts and social welfare? Three stochastic dynamic market structures considered are monopoly, duopoly, and social planning. Products can be either linearly or nonlinearly substitutable. The introduction of a step function allows richer innovation strategies. First, given nonlinear substitution, a duopoly may follow an unbalanced evolution path and have a technology frontier not dominated by that in social planning. This result does not hold for the linear substitution case. Second, ex ante and long-run welfare values are always the highest in social planning and the lowest in monopoly. Thus, policies should encourage static and dynamic competition.
    Keywords: R&D; quality innovation; product supremacy
    JEL: L13 D43 L15 D92 O31 D21
    Date: 2004–05–01
  2. By: Nicolas Gruyer (LEEA (air transport economics laboratory), ENAC)
    Abstract: This note extends Kreps and Scheinkman's result -showing that a production capacity choice stage followed by price competition yields the same outcome as a Cournot game- to a setting where capacity costs are asymmetric.
    Keywords: capacity, Bertrand competition, Kreps-Scheinkman, asymmetric costs.
    JEL: D43 L13
    Date: 2006–08–11
  3. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics); Persson, Lars (Research Institute of Industrial Economics); Vlachos, Jonas (Research Institute of Industrial Economics)
    Abstract: We show that, in the case when innovations are for sale, increased product market competition, captured by reduced product market profits, can increase the incentives for innovations. The reason is that the incentive to innovate depends on the acquisition price which, in turn, might increase despite firms in the market making lower profits. We also show that stricter, but not too strict, merger and cartel policies tend to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation and by increasing the relative profitability of being the most efficient firm in the industry. Moreover, it is shown that increased intensity of competition can increase the relative profitability of innovation for sale, relative to innovation for entry.
    Keywords: Acquisitions; Entrepreneurship; Innovation; Competition
    JEL: G34 L13 L22 M13 O31
    Date: 2006–09–22
  4. By: Agar Brugiavini (Department of Economics, University Of Venice Cà Foscari); Gwenaël Piaser (Department of Economics, University of Venice Cà Foscari)
    Abstract: Using a common agency framework, we characterize possible equilibria when annuities contracts are not exclusive. We discuss theoretical and empirical implications of these equilibria. First, we show that at equilibrium prices are not linear. Then we characterize an equilibrium. We provide conditions for existence and show that this equilibrium is efficient.
    Keywords: Menus, Common Agency, Insurance, Annuity Markets, Adverse Selection, Efficiency
    JEL: D82 H5 J2 G1
    Date: 2006
  5. By: Felix Hoeffler (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The standard model by Laffont, Rey and Tirole (1998) treats termination fees as an instrument to increase market power in a one-shot game of horizontal product differentiation. We offer an alternative view in an infinitely repeated Bertrand competition. We focus on symmetrical call-ing patterns and investigate simple two-part tariffs for two types, as well as general non-linear tariffs for two types and for a continuum of types. In this framework, termination fees make deviations from the collusive outcome less attractive. The optimum deviation strategy is usually to try to attract the high valuation customers since they exhibit the highest profits. Thus, a deviator will have a pool of high users which will have more outgoing than incoming calls, implying net termination payments. A cooperatively chosen termination rate can increase the deviator’s cost and thereby always stabilizes collusion.
    Keywords: Two way access, mobile telecommunications, non-linear tariffs
    Date: 2006–06
  6. By: Kemppainen , Kari (Bank of Finland Research)
    Abstract: This paper considers effects of price regulation in retail payment systems by applying the model of tele-communications competition by Laffont-Rey-Tirole (1998). In our two-country model world there is one retail payment network located in each country and markets are segmented à la Hotelling. We show that the optimal price under price regulation is the weighted average of pre-regulation domestic and cross-border prices where the degree of home-bias in making payments serves as the weight. Furthermore, we find that the general welfare effects of price regulation are ambiguous: gross social welfare is higher un-der price discrimination than under price regulation in the special case where costs of access to banking services (transportation costs) are high. However, there also exist cases where prohibitively high transac-tion costs make price discrimination to reduce total welfare. Finally, if transportation costs are reduced sufficiently, segmentation of payment markets is eliminated. Markets then become fully-served as in the original Laffont-Rey-Tirole model, suggesting that price discrimination would be beneficial for welfare.
    Keywords: payment systems; price regulation; retail payments
    JEL: D49 G28 L59
    Date: 2005–07–11
  7. By: Matthias Kräkel (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, Tel: +49 228 733914, Fax: +49 228 739210.
    Abstract: According to New Institutional Economics, two or more individuals will found an organization, if it leads to a benefit compared to market allocation. A natural consequence will then be internal rent seeking. We discuss the interrelation between profits, rent seeking and the foundation of organizations. Typically, we expect that highly profitable firms are always founded but it is not clear whether the same is true for firms with less optimistic prospects. We will show that internal rent seeking may lead to a completely reversed result. The impact of internal rent seeking on overall investment and the implications of firm size and competition on the foundation of organizations are also addressed.
    Keywords: contests, foundation of organizations, internal rent seeking
    JEL: D2 L2 M2
    Date: 2006–10
  8. By: Deodhar Satish Y.; Pandey Vivek
    Abstract: The new competition policy of the Government of India seeks to promote competition to protect consumer interests and increase market efficiency. In fact, the degree of price transmission between farmers and final consumers also depends on the degree of competition in the processing sector. Moreover, policy of trade liberalization too is expected to have impact on domestic markets. It becomes imperative, therefore, that one knows the degree of competition in various domestic industries. Instant coffee market in India is a duopoly of Nestlé and Hindustan Lever for decades. They also differentiate their products through branding. At the same time, however, incumbents might have perceived potential competition from another firm, Tata Coffee. In fact, instant coffee can be considered as a part of a larger beverage market with numerous competing products. With trade liberalization, imports have also started trickling in. Thus, circumstantial evidence regarding degree of competition or the market power in the instant coffee market is rather mixed one. By econometrically estimating the perceived first-order supply relation and the demand function, we calculate the market power parameter. Results indicate that the market is not characterized by collusive behaviour. It is quite close to perfectly competitive behaviour although we cannot reject the Cournot-Nash behaviour as well. The econometric study may be complemented by in-depth case study on coffee procurement, processing, and pricing by leading producers. Similar estimations of market power and case studies may be undertaken for other industries as well.
    Date: 2006–10–10
  9. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper studies the relation between Bayesian mechanism design and the Ramsey-Boiteux approach to the provision and pricing of excludable public goods. For a large economy with private information about individual preferences, the two approaches are shown to be equivalent if and only if, in addition to incentive compatibility and participation constraints, the .nal allocation of private-good consumption and admission tickets to public goods a condition of renegotiation proofness. Without this condition, a mechanism involving mixed bundling, i.e. combination tickets at a discount, is superior.
    Keywords: Mechanism Design, Excludable Public Goods, Ramsey-Boiteux Pricing, Renegotiation Proofness, Bundling
    JEL: D61 H21 H41 H42
    Date: 2006–09
  10. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Marco Sahm (Lehrstuhl fuer Finanzwissenschaft, Munich, Germany.)
    Abstract: We study the classical free-rider problem in public goods provision in a large economy with uncertainty about the average valuation of the public good. Individual preferences over public goods are shaped by a skill and a taste parameter. We use a mechanism design approach to solve for the optimal utilitarian provision rule. The relevant incentive constraints for information aggregation ensure that individuals be-have as if they were engaging in informative voting over the level of public good provision. It is shown that the use of information by an optimal provision rule is inversely related to the polarization of preferences which results from the properties of the skill distribution.
    Keywords: information aggregation, informative voting, public goods, two-dimensional heterogeneity
    JEL: H41 D71 D72 D82
    Date: 2006–08
  11. By: Bask , Mikael (Bank of Finland Research); Liu , Tung (Department of Economics, Ball State University); Widerberg , Anna (Department of Economics)
    Abstract: The aim of this paper is to illustrate how the stability of a stochastic dynamic system is measured using the Lyapunov exponents. Specifically, we use a feedforward neural network to estimate these exponents as well as asymptotic results for this estimator to test for unstable (chaotic) dynamics. The data set used is spot electricity prices from the Nordic power exchange market. Nord Pool, and the dynamic system that generates these prices appears to be chaotic in one case.
    Keywords: feedforward neural network; Nord Pool; Lyapunov exponents; spot electricity prices; stochastic dynamic system
    JEL: C12 C14 C22
    Date: 2006–06–12
  12. By: Filip Abraham (Faculty of Economics and Applied Economics, Katholieke Universiteit Leuven); Jozef Konings (Faculty of Economics and Applied Economics, Katholieke Universiteit Leuven; LICOS, Centre for Transition Economics; Katholieke Universiteit Leuven; CEPR, London); Stijn Vanormelingen (Faculty of Economics and Applied Economics, Katholieke Universiteit Leuven)
    Abstract: Europe has witnessed the last decade an accelerated process of economic integration. Trade barriers were removed, the euro was introduced and ten new member states entered the European Union. Economic integration is likely to have an impact on both labor and product markets. Unlike most other papers, that focus on product and labor markets separately, we look at the link between globalization and product and labor market imperfections simultaneously. To this end, we rely on a rich panel of manufacturing firms in Belgium, a small open economy. We find that union bargaining power is higher in sectors characterized by high price cost margins. Moreover, ignoring imperfections on the labor market, leads to an underestimation of product market power. Concerning the influence of globalization, our main findings are that both price cost margins and union bargaining power are typically lower in sectors that are subject higher international competition. This result is especially true for competition from low wage countries
    Keywords: Mark-ups, Trade Unions, International Trade
    JEL: F16 J50 L13
    Date: 2006–10
  13. By: Drexl, Andreas (Lehrstuhl für Produktion und Logistik, Institut für Betriebswirtschaftslehre, Christian-Albrechts-Universität zu Kiel); Jörnsten, Kurt (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Knof, Diether (Fachgruppe Stochastik, Mathematisches Seminar, Christian-Albrechts-Universität zu Kiel)
    Abstract: In combinatorial auctions the pricing problem is of main concern since it is the means by which the auctioneer signals the result of the auction to the participants. In order for the auction to be regarded as fair among the various participants the price signals should be such that a participant that has won a subset of items knows why his bid was a winning bid and that agents that have not acquired any item easily can detect why they lost. The problem in the combinatorial auction setting is that the winner determination problem is a hard integer programming problem and hence in general there does not exist a linear pricing scheme supporting the optimal allocation. This means that single item prices, that support the optimal allocation can in general not be found. In this article we present an alternative. <p> From integer programming duality theory we know that there exist non-linear anonymous price functions that support the optimal allocation. In this paper we will provide a means to obtain a simple form of a non-linear anonymous price system that supports the optimal allocation. Our method relies on the fact that we separate the solution of the winner determination problem and the pricing problem. This separation yields a non-linear price function of a much simpler form compared to when the two problems are solved simultaneously. The pure pricing problem is formulated as a mixed-integer program. If solving this program is too demanding computationally a heuristic can be used which essentially requires us to solve a sequence of linear programming relaxations of a new mixed-integer programming formulation of the pricing problem. The procedure is computationally tested using instances of the combinatorial auctions test suite.
    Keywords: Combinatorial auctions; set packing; duality theory; non-linear anonymous prices
    JEL: D44
    Date: 2005–10–12
  14. By: Felix Hoeffler (Max Planck Institute for Research on Collective Goods, Bonn); Tobias Wittmann (Technische Universität, Berlin)
    Abstract: Scarce interconnector capacities are a severe obstacle to transregional competition and a unified market for electricity in the European Union. However, physically the interconnectors are rarely used up to capacity. This is due to the fact that the current allocation schemes make only limited use of the fact that currents in opposing directions cancel out. We propose a "netting" auction mechanism which makes use of this and in which even small transmission capacities can generate large competitive pressure in adjacent markets. Netting increases the usage of capacity and reduces the auctioneer's incentive to withhold capacity from the auction.
    Keywords: Divisible good auctions, interconnector, electricity marktes, competition policy
    JEL: L94 D44
    Date: 2006–03
  15. By: MUSOLESI, Antonio (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: Cette étude, suite aux contributions de Crépon, Duguet et Mairesse (1998) et de Duguet (2002), propose une approche structurelle qui cherche à faire le lien entre les travaux visant à étudier la fonction d’innovation et ceux sur l’évaluation des effets de l’innovation. Ici, toutefois nous analysons la relation R&D-innovation-productivité d’une manière dynamique. De plus, notre analyse focalise sur le secteur des services qui a été longtemps mis à l’écart de l’analyse empirique. Nos résultats indiquent, d’une part, l’existence d’un haut degré de persistance de l’innovation et, d’autre part, que l’effet de la mise en oeuvre d’une innovation sur la productivité s’estompe assez rapidement dans le temps.
    Keywords: R&D ; innovation ; diffusion des connaissances ; modèle structurel ; dynamique de l’innovation
    JEL: C35 O30
    Date: 2006–07
  16. By: Gerhard Sorger
    Abstract: We modify the growth model with horizontal innovations from Romer (1990) and Jones (1995) by assuming that researchers can determine the quality of the products they invent. Because research effort increases with product quality, the researchers face a tradeoff between the quantity and the quality of their innovations. We show (i) that every product is slowly but steadily driven out of the market by superior goods, (ii) that the model does not exhibit a strong scale effect, (iii) that the long-run growth rate of the economy is not policy-invariant but can be controlled by quality-contingent R&D subsidies, and (iv) that the optimal solution can be decentralized using a mix of production subsidies, R&D subsidies, and lump-sum taxation.
    Date: 2006–10

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