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on Microeconomics |
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Issue of 2006‒10‒28
seven papers chosen by Joao Carlos Correia Leitao Universidade da Beira Interior |
| By: | Farrell, Joseph; Klemperer, Paul |
| Abstract: | Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power - over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such 'competition for the market' or 'life-cycle competition' can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later 'tips' to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and so also discourage more aggressive entry. Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favour thoughtfully pro-compatibility public policy. |
| Keywords: | coordination; indirect network effects; lock-in; network effects; network externalities; switching costs |
| JEL: | D42 D43 L12 L13 L14 L15 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5798&r=mic |
| By: | Bernard, Andrew; Redding, Stephen J; Schott, Peter |
| 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 behaviour 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. |
| Keywords: | heterogeneous firms; product differentiation; product market entry and exit |
| JEL: | D21 E23 L11 L60 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5708&r=mic |
| By: | Siebert, Ralph; von Graevenitz, Georg |
| Abstract: | Licensing in a patent thicket allows firms to either avoid or resolve hold-up. Firms’ R&D incentives depend on whether they license ex ante or ex post. We develop a model of a patent portfolio race, which allows for endogenous R&D efforts, to study firms’ choice between ex ante and ex post licensing. The model shows that firms’ relationships in product markets and technology space jointly determine the type of licensing contract chosen. In particular, product market competitors are more likely to avoid patent portfolio races, since the threat of hold-up increases. On the other hand, more valuable technologies are more likely to give rise to patent portfolio races. We also discuss the welfare implications of these results. |
| Keywords: | hold-up problem; innovation; licensing; patent race; patent thicket; research joint ventures |
| JEL: | L13 L49 L63 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5753&r=mic |
| By: | Guilherme Carmona (Universidade Nova de Lisboa); José Fajardo (IBMEC Business School - Rio de Janeiro) |
| Abstract: | We establish the existence of sequential equilibria in general menu games, known to be sufficient to analyze common agency problems. In particular, we show that our result solves some unpleasant features of early approaches. |
| Keywords: | Common Agency, Menu Games, Sequential Equilibrium |
| JEL: | D43 D82 D89 |
| Date: | 2006–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:ibr:dpaper:2006-05&r=mic |
| By: | Smith, Howard; Thanassoulis, John |
| Abstract: | This paper considers buyer power in the presence of upstream competition to supply a homogeneous product. A likely consequence of upstream competition is that each supplier is uncertain of its final output, because it does not know how many downstream buyers will select it as a seller. We present a model where, for this reason, final volumes are uncertain for each seller. We find a new source of buyer power when the surplus function is nonlinear: the event of negotiation with a large buyer increases the seller's expected output, which changes the expected average net surplus from the deal; this increases buyer power when the seller's surplus function is concave (and diminishes it when convex). We explore consequences for welfare, industry productivity, and investment incentives. |
| Keywords: | buyer power |
| JEL: | L13 L42 L66 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5803&r=mic |
| By: | Naghavi, Alireza; Ottaviano, Gianmarco I P |
| Abstract: | We study the decision of firms between vertical integration and outsourcing in a dynamic setting with product innovation. In so doing, we model an industry in which R&D is performed by independent research labs and outsourcing production requires complementary upstream and downstream inventions. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back to R&D incentives, thus affecting the emergence and the performance of labs specialized in complementary inventions. |
| Keywords: | incomplete contracts; innovation; outsourcing |
| JEL: | F12 F23 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5681&r=mic |
| By: | Schmitz, Patrick W. |
| Abstract: | Consider a revenue-maximizing seller who can sell an object to one of n potential buyers. Each buyer either has hard information about his valuation (i.e., evidence that cannot be forged) or is ignorant. The optimal mechanism is characterized. It turns out that more ignorance can increase the expected total surplus. Even when the buyers are ex ante symmetric, the object may be sold to a buyer who does not have the largest willingness-to-pay. Nevertheless, an additional buyer increases the expected total surplus in the symmetric case, whereas more competition can be harmful if there are ex ante asymmetries. |
| Keywords: | hard information; mechanism design |
| JEL: | D42 D82 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5747&r=mic |