nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒11‒18
thirty-two papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. One-Way Essential Complements By M. Keith Chen; Barry J. Nalebuff
  2. Downstream Research Joint Venture with Upstream Market Power By Constantine Manasakis; Emmanuel Petrakis
  3. Upstream Horizontal Mergers, Bargaining and Vertical Contracts By Chrysovalantou Miliou; Emmanuel Petrakis
  4. Reference Pricing of Pharmaceuticals By Kurt R. Brekke; Ingrid Königbauer; Odd Rune Straume
  5. Bailouts in a common market: a strategic approach By Ela Glowicka
  6. comparative Advertising By Simon P. Anderson; Régis Renault
  7. Does Greater Competition Increase R&D Investments? Evidence from a Laboratory Experiment By Dario Sacco; Armin Schmutzler
  8. Optimum Commodity Taxation in Pooling Equilibria By Eytan Sheshinski
  9. Minimum Quality Standards and Consumers Information By Paolo Garella; Emmanuel Petrakis
  10. Integration versus Outsourcing in Stable Industry Equilibrium with Communication Networks By Okamoto, Yusuke
  11. Alliances between competitors and consumer information By Paolo Garella; Martin Peitz
  12. Competing for Customers in a Social Network By Pradeep Dubey; Rahul Garg; Bernard De Meyer
  13. Health Insurance as a Two-Part Pricing Contract By Darius Lakdawalla; Neeraj Sood
  14. Newspapers market shares and the theory of the circulation spiral By J. J. Gabszewicz; Paolo Garella; N. Sonnac
  15. Demand Elasticity and Market Power in the Spanish Electricity Market By Aitor Ciarreta; Maria Paz Espinosa
  16. Price Variation Antagonism and Firm Pricing Policies By Pascal Courty; Mario Pagliero
  17. To Commit or Not to Commit: Environmental Policy In Imperfectly Competitive Markets By Emmanuel Petrakis; Anastasios Xepapadeas
  18. Market Power, Innovative Activity and Exchange Rate Pass-Through By Sophocles N. Brissimis; Theodora S. Kosma
  19. Multimarket spatial competition in the Colombian deposit market By Dairo Estrada; Sandra Rozo
  20. Differentiated Annuities in a Pooling Equilibrium By Eytan Sheshinski
  21. The Effect of Wal-Mart Supercenters on Grocery Prices in New England By Richard J. Volpe III; Nathalie Lavoie
  22. Searching the eBay Marketplace By Katharina Sailer
  23. A Product-Market Theory of Industry-Specific Training By Hans Gersbach; Armin Schmutzler
  24. Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium By Fred Espen Benth; Alvaro Cartea; Ruediger Kiesel
  25. Cooperation in the Classroom: Experimenting with R&D Cooperatives By Michelle Sovinsky Goeree; Jeroen Hinloopen
  26. Sequential Innovation, Patents, and Imitation By James Bessen; Eric Maskin
  27. Decentralized Matching Markets with Endogenous Salaries By Hideo Konishi; Margarita Sapozhnikov
  28. Opt In Versus Opt Out: A Free-Entry Analysis of Privacy Policies By Jan Bouckaert; Hans Degryse
  29. Market Power in Direct Marketing of Fresh Produce: Community Supported Agriculture Farms By Daniel A. Lass; Nathalie Lavoie; T. Robert Fetter
  31. How to induce entry in railway markets: The German experience By Rafael Lalive; Armin Schmutzler
  32. The structure of R&D collaboration networks in the European Framework Programmes By Roediger-Schluga, Thomas; Barber, Michael J.

  1. By: M. Keith Chen (Yale School of Management, Yale University); Barry J. Nalebuff (Yale School of Management, Yale University)
    Abstract: While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good.
    Keywords: Bundling, Complements, Monopoly leverage, Net neutrality, Price discrimination, Tying, Versioning
    JEL: C7 D42 D43 K21 L11 L12 L13 L41 M21
    Date: 2006–11
  2. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: In this paper, we examine how the structure of an imperfectly competitive input market affects final-good producers’ incentives to form a Research Joint Venture (RJV), in a differentiated duopoly where R&D investments exhibit spillovers. Although a RJV is always profitable, downstream firms’ incentives for R&D cooperation are non-monotone in the structure of the input market, with incentives being stronger under a monopolistic input supplier, whenever spillovers are low. In contrast to the hold-up argument, we also find that under non-cooperative R&D investments and weak free-riding, final-good producers invest more when facing a monopolistic input supplier, compared with investments under competing vertical chains. Integrated innovation and competition policies are also discussed.
    Keywords: Oligopoly; Process Innovations, Research Joint Ventures
    JEL: L13 O31
    Date: 2005–09
  3. By: Chrysovalantou Miliou (Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, Getafe (Madrid)); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: Contrary to the seminal paper of Horn and Wolinsky (1988), we demonstrate that upstream firms, which sell their products to competing downstream firms, do not always have incentives to merge horizontally. In particular, we show that when bargaining takes place over two-part tariffs, and not over wholesale prices, upstream firms prefer to act as independent suppliers rather than as a monopolist supplier. Moreover, we show that horizontal mergers can be procompetitive, even in the absence of efficiency gains.
    Keywords: horizontal mergers; bargaining; vertical relations; two-part tariffs; wholesale
    JEL: L41 L42 L22
    Date: 2005–03
  4. By: Kurt R. Brekke; Ingrid Königbauer; Odd Rune Straume
    Abstract: We consider a therapeutic market with potentially three pharmaceutical firms. Two of the firms offer horizontally differentiated brand-name drugs. One of the brand-name drugs is a new treatment under patent protection that will be introduced if the profits are sufficient to cover the entry costs. The other brand-name drug has already lost its patent and faces competition from a third firm offering a generic version perceived to be of lower quality. This model allows us to compare generic reference pricing (GRP), therapeutic reference pricing (TRP), and no reference pricing (NRP). We show that competition is strongest under TRP, resulting in the lowest drug prices (and medical expenditures). However, TRP also provides the lowest profits to the patent-holding firm, making entry of the new drug treatment least likely. Surprisingly, we find that GRP distorts drug choices most, exposing patients to higher health risks.
    Keywords: pharmaceuticals, reference pricing, product differentiation
    JEL: I11 L13 L51 L65
    Date: 2006
  5. By: Ela Glowicka (Wissenschaftszentrum Berlin, Reichpietschufer 50, 10785 Berlin, Germany.
    Abstract: Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.
    Keywords: subsidies, asymmetric oligopoly, exit, European Union
    JEL: F13 L13 L52
    Date: 2005–10
  6. By: Simon P. Anderson (Department of Economics, University of Virginia); Régis Renault (Université de Cergy-Pontoise (Théma))
    Abstract: Consumer information on products affects competition and profits. We analyze firms' decisions to impart product information through advertising: comparative advertising also allows them to impart information about rivals' products. If firms sell products of similar qualities, both want to advertise detailed product information that enables consumers to determine their matches: there is no role for comparative advertising. If qualities are sufficiently dissimilar, the high-quality one will not want to disclose match information. If legal, the low-quality firm rival would like to advertise match information about its rival. Such "comparative" advertising may have a detrimental impact on welfare by leading more consumers to consume the low quality product: this effect can dominate the benefits from improved consumer information and reduce social welfare if qualities are different enough.
    Keywords: comparative advertising, information, product differentiation, quality
    JEL: D42 L15 M37
    Date: 2006
  7. By: Dario Sacco (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: Using an experiment based on two-stage games, we analyze the effects of competitive intensity on firms’ incentives to invest in process innovations. The experiment suggests that intense competition is favorable to investments.
    Keywords: R&D investment, intensity of competition, experiment
    JEL: C92 L13 O31
    Date: 2006–11
  8. 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 modified Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that they include general-equilibrium effects which reflect 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
  9. By: Paolo Garella (University of Milano, Italy); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The literature so far has analyzed the effects of Minimum Quality Standards in oligopoly, using models of pure vertical differentiation, with only two firms, and perfect information. We analyze products that are differentiated horizontally and vertically, with imperfect consumers information, and more than two firms. We show that a MQS changes the consumers’ perception of produced qualities. This increases the firms’ returns from quality enhancing investments, notwithstanding contrary strategic effects. As a consequence, MQS policies may be desirable as both, firms and consumers, can gain. This contrasts with previous results in the literature and provides a justification for the use of MQS to improve social welfare.
    Keywords: Minimum Quality Standards, Imperfect Consumer Information,
    JEL: L0 L5
    Date: 2005–02–16
  10. By: Okamoto, Yusuke
    Abstract: For the selection of a firm's structure between vertical integration and arm's-length outsourcing, the importance of the thickness of the market had been emphasized in the previous literature. Here we take account of communication networks such as telephone, telex, fax, and the Internet. By doing so, we could illustrate the relationship between communication networks and the make-or-buy decision. With communication network technology differing in each type of firm, both vertically integrated firms and arm's-length outsourcing firms coexist, which was never indicated in the previous literature. However, when common network technology is introduced, such coexistence generically does not occur.
    Keywords: Buyer-supplier relationship, Communication networks, International outsourcing, Vertical integration, Communication, Network, Industrial management, Telecommunication
    JEL: D23 D43 F23
    Date: 2006–03
  11. By: Paolo Garella (University of Milano, Italy); Martin Peitz (International University in Germany, Bruchsal (Germany))
    Abstract: Alliances between competitors in which established firms provide access to proprietary resources, e.g. their distribution channels, are important business practices. We analyze a market where an established firm, firm A, produces a product of well-known quality, and a firm with an unknown brand, firm B, has to choose to produce high or low quality. Firm A observes firm B's quality choice but consumers do not. Hence, firm B is subject to a moral hazard problem which can potentially be solved by firm A. Firm A can accept or reject to form an alliance with firm B, which is observed by consumers. If an alliance is formed, firm A implicitly certifies the rival's product. Consumers infer that firm B is a competitor with high quality, as otherwise why would the established firm accept to form an alliance? The mechanism we discover allows for an economic interpretation of several types of business practices.
    Keywords: alliances, brand sharing, asymmetric information, signaling, exclusion, moral hazard, entry assistan
    JEL: L15 L13 L24 L42
    Date: 2006–00–01
  12. By: Pradeep Dubey (Dept. of Economics, SUNY-Stony Brook); Rahul Garg (IBM India Research Lab); Bernard De Meyer (PSE, Universite Paris)
    Abstract: There are many situations in which a customer's proclivity to buy the product of any firm depends not only on the classical attributes of the product such as its price and quality, but also on who else is buying the same product. We model these situations as games in which firms compete for customers located in a "social network." Nash Equilibrium (NE) in pure strategies exist in general. In the quasi-linear version of the model, NE turn out to be unique and can be precisely characterized. If there are no a priori biases between customers and firms, then there is a cut-off level above which high cost firms are blockaded at an NE, while the rest compete uniformly throughout the network. We also explore the relation between the connectivity of a customer and the money firms spend on him. This relation becomes particularly transparent when externalities are dominant: NE can be characterized in terms of the invariant measures on the recurrent classes of the Markov chain underlying the social network. Finally we consider convex (instead of linear) cost functions for the firms. Here NE need not be unique as we show via an example. But uniqueness is restored if there is enough competition between firms or if their valuations of clients are anonymous.
    Keywords: Social network, Game theory, Nash equilibrium, Competition game on a social network
    JEL: A14 C72 D11 D21 L1 L2
    Date: 2006–11
  13. By: Darius Lakdawalla; Neeraj Sood
    Abstract: Monopolies appear throughout health care markets, as a result of patents, limits to the extent of the market, or the presence of unique inputs and skills. In the health care industry, however, the deadweight costs of monopoly may be small or even absent. Health insurance, frequently implemented as an ex ante premium coupled with an ex post co-payment per unit consumed, effectively operates as a two-part pricing contract. This allows monopolists to extract consumer surplus without inefficiently constraining quantity. This view of health insurance contracts has several implications: (1) Low ex post copayments to insured consumers substantially reduce deadweight losses from medical care monopolies -- we calculate, for instance, that the presence of health insurance lowers monopoly loss in the US pharmaceutical market by 82 percent; (2) Price regulation or break-up of health care monopolies may be inferior to laissez-faire or simple redistribution of monopoly profits; and (3) Promoting efficiency in the health insurance market can reduce static losses in the goods market while improving the dynamic efficiency of innovation.
    JEL: D42 I11
    Date: 2006–11
  14. By: J. J. Gabszewicz (CORE, Universit´e Catholique de Louvain); Paolo Garella (University of Milano, Italy); N. Sonnac (CREST-LEI and Universit´e Paris II)
    Abstract: We consider a model of daily newspapers’ competition to test the validity of the so called ”theory of the circulation spiral”. According to it, the interaction between the newspapers and the advertising markets drives the newspaper with the smaller readership into a vicious circle, finally leading it to death. In a model with two newspapers, we show that, contrary to this conjecture, the dynamics envisaged by the proposers of the theory, does not always lead to the elimination of one of them.
    Date: 2005–11–05
  15. By: Aitor Ciarreta (Departamento de Fundamentos del Analisis Economico II, Universidad del Pais Vasco); Maria Paz Espinosa (Departamento de Fundamentos del Analisis Economico II, Universidad del Pais Vasco)
    Abstract: In this paper we check whether generators' bid behavior at the Spanish wholesale electricity market is consistent with the hypothesis of pro?fit maximization on their residual demands. Using OMEL data, we ?find the arc-elasticity of the residual demand around the system marginal price. The results suggest that the larger ?firms are not actually pro?fit-maximizing on their residual demands while smaller generators' behavior is consistent with profit maximization. We argue how the regulatory environment may drive these results. Finally, we repeat the analysis for the ?first session of the intra-day market where presumably ?firms may not have the same incentives as in the day-ahead market
    Keywords: market power, electricity market, residual demand elasticity, pro?fit maximization
    JEL: L11 L13 L51
    Date: 2006–07
  16. By: Pascal Courty; Mario Pagliero
    Abstract: Survey evidence suggests firms do not use pricing policies that vary prices in response to demand changes because they fear that such practices would antagonize consumers. We investigate this hypothesis using a dataset from a firm that has experimented with different pricing schemes. Each scheme is characterized by how much prices respond to demand variations. We find evidence that is consistent with the hypothesis that consumers take advantage of the opportunities offered by price changes and inconsistent with the hypothesis that consumers are antagonized by price changes caused by demand shocks.
    Keywords: Consumer demand, responsive pricing, fairness, price rigidit
    JEL: D01 D12 L86
    Date: 2006
  17. By: Emmanuel Petrakis (Department of Economics, University of Crete, Greece); Anastasios Xepapadeas (Department of Economics, University of Crete, Greece)
    Abstract: This paper investigates the effect of the government’s ability to commit, or not, to a specific level of environmental policy instrument, or environmental innovation and welfare in imperfectly competitive markets. We that under monopoly if the government is unable to commit, and follows thus a time consistent policy, then in general emission taxes are lower, while environmental innovation, profits and welfare are higher relative to the precommitment case. The monopoly results extend to the small numbers oligopoly, but they are reserved for the last numbers oligopoly case. Thus of the sufficiently large numbers of firms, emission taxes can be lower and innovation efforts and welfare can be higher under government commitment. The two policy regimes converge, regarding emission taxes, abetment effort and welfare, when the numbers of firms tends to infinity. Our findings indicate that, contrary to most of the results obtained previously, welfare gains can be achieve by either policy regime- precommitment or time consistent-depending on the numbers of firms in the industry.
    Keywords: Emision Tax, Apatement effort, Time Consistent Policies, Precommitment, Monopoly, Oligopoly
    JEL: L12 Q25 Q28
  18. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Theodora S. Kosma (Bank of Greece, Economic Research Department)
    Abstract: This paper considers an international oligopoly where firms simultaneously choose both the amount of output produced and the proportion of R&D investment to output. The model captures the links between the exchange rate, market power, innovative activity and price, which are important for the determination of the optimal degree of exchange rate pass-through. It is found that in the long run the pass-through elasticity can be less than, equal to or greater than one depending on R&D effectiveness but in any case it is higher than in models that do not endogenise innovation decisions. The empirical implications of the model are tested using data for Japanese firms exporting to the US market and applying the Johansen multivariate cointegration technique. Particular attention is given to the estimation and identification of the equilibrium price and R&D-intensity equations. The empirical results indicate that price-setting and R&D-intensity decisions of firms are jointly determined in the long run. This interdependence must be taken into account if an accurate estimate of the exchange rate pass-through is to be obtained.
    Keywords: Exchange rate pass-through; market power; innovative activity; multivariate cointegration
    JEL: C32 F39 L13 O31
    Date: 2005–04
  19. By: Dairo Estrada; Sandra Rozo
    Abstract: This paper presents a multimarket spatial competition oligopoly model for the Colombian deposit market, in line with the New Empirical Industrial Organization (NEIO) approach. In this framework, banks use price and non-price strategies to compete in the market, which allows us to analyze the country and the regional competitiveness level. The theoretical model is applied to quarterly Colombian data that covers the period between 1996 and 2005. Our results suggest that, although the country deposit market appears to be more competitive than the Nash equilibrium, there are some local areas within the country that present evidence of market power.
    Keywords: Banking; Location; Competition; Colombia. Classification JEL: D4; G21; L13; R12.
  20. 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 conclusion 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: 2006
  21. By: Richard J. Volpe III (Department of Agricultural and Resource Economics, University of California at Davis); Nathalie Lavoie (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This study examines the competitive price effect of Wal-Mart Supercenters on national brand and private label grocery prices in New England. For this purpose, we use primary price data collected on a basket of identical products from six Supercenters in Massachusetts, Connecticut, and Rhode Island as well as a sample of conventional supermarkets. Taking into account demographics, store characteristics, and market conditions, we estimate the average prices charged by (1) Supercenters, (2) supermarkets competing directly with Supercenters, and by (3) supermarkets geographically distant from Supercenters. By comparing prices at competing stores and at distant stores, we show that the effect of Wal-Mart Supercenters is to decrease prices by 6 to 7 percent for national brand goods and 3 to 7 percent for private label goods. Price decreases are most significant in the dry grocery and dairy departments. Moreover, Wal-Mart sets prices significantly lower than its competitors in the food industry.
    Keywords: Wal-Mart; Supermarket Competition; Grocery Prices; National Brands, Private Labels
    JEL: D21 D43 L11 L13 L81
    Date: 2006–10
  22. By: Katharina Sailer
    Abstract: This paper proposes a framework for demand estimation with data on bids, bidders' identities, and auction covariates from a sequence of eBay auctions. First the aspect of bidding in a marketplace environment is developed. Form the simple dynamic auction model with IPV and private bidding costs it follows that if participation is optimal the bidder searches with a "reservation bid" for low-price auctions. Extending results from the empirical auction literature and employing a similar two-stage procedure as has recently been used when estimating dynamic games it is shown that bidding costs are non-parametrically identified. The procedure is tried on a new data set. The median cost is estimated at less than 2% of transaction prices.
    JEL: C23 C51 D44 D82 D83 L10 L81
    Date: 2006
  23. By: Hans Gersbach (Alfred-Weber-Institut, Department of Economics, University of Heidelberg); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: We develop a product market theory that explains why firms provide their workers with skills that are sufficiently general to be potentially useful for competitors. We consider a model where firms first decide whether to invest in industry-specific human capital, then make wage offers for each others’ trained employees and finally engage in imperfect product market competition. Equilibria with and without training, and multiple equilibria can emerge. If competition is sufficiently soft and returns to the number of trained workers decrease sufficiently, firms may invest in non-specific training if others do the same, because they would otherwise suffer a competitive disadvantage or need to pay high wages in order to attract trained workers.
    Keywords: industry-specific training, human capital, oligopoly, turnover
    JEL: D42 L22 L43 L92
    Date: 2006–11
  24. By: Fred Espen Benth; Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Ruediger Kiesel
    Abstract: In this paper we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players. In commodities markets this premium is an important indicator of the behaviour of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium.
    Keywords: Contango, backwardation, market price of risk, electricity forwards, market risk premium, forward risk premium, forward bias.
    Date: 2006–10
  25. By: Michelle Sovinsky Goeree (Claremont McKenna College); Jeroen Hinloopen (Universiteit van Amsterdam)
    Abstract: This paper describes a classroom experiment that illustrates the research and development investment incentives facing firms when technological spillovers are present. The game involves two stages in which student sellers first make investment decisions then production decisions. The classroom game can be used to motivate discussions of research joint ventures, the free-rider problem, collusion, and antitrust policy regarding research and development.
    Keywords: classroom games; research and development; research joint ventures; technological spillovers
    JEL: C91 L13 L41
    Date: 2006–09–27
  26. By: James Bessen (Boston University School of Law and Research on Innovation); Eric Maskin (School of Social Science, Institute for Advanced Study)
    Abstract: We argue that when discoveries are "sequential" (so that each successive invention builds in an essential way on its predecessors) patent protection is not as useful for encouraging innovation as in a static setting. Indeed, society and even inventors themselves may be better off without such protection. Furthermore, an inventor's prospective profit may actually be enhanced by competition and imitation. Our sequential model of innovation appears to explain evidence from a natural experiment in the software industry.
    Date: 2006–03
  27. By: Hideo Konishi (Boston College); Margarita Sapozhnikov (Boston College)
    Abstract: In a Shapley-Shubik assignment problem with a supermodular output matrix, we consider games in which each firm makes a take-it-or-leave-it salary offer to one applicant, and a match is made only when the offer is accepted by her. We consider both one-shot and multistage games. In either game, we show that there can be many equilibrium salary vectors which are higher or lower than the minimal competitive salary vector. If we exclude artificial equilibria, applicants' equilibrium salary vectors are bounded above by the minimal competitive salary vector, while firms' equilibrium payoff vectors are bounded below by the payoff vector under the minimal competitive salary vector. This suggests that adopting the minimal competitive salary vector as the equilibrium outcome in decentralized markets does not have a strong justification.
    JEL: C73 C78
    Date: 2006–11–10
  28. By: Jan Bouckaert; Hans Degryse
    Abstract: There is much debate on how the flow of information between firms should be organized, and whether existing privacy laws should be amended. We offer a welfare comparison of the three main current policies towards consumer privacy — anonymity, opt in, and opt out — within a two-period model of localized competition. We show that when consumers find it too costly to opt in or opt out, privacy policies shape firms’ ability to collect and use customer information, and affect their pricing strategy and entry decision differently. The free-entry analysis reveals that social welfare is non-monotonic in the degree of privacy protection. Opt out is the socially preferred privacy policy while opt in socially underperforms anonymity. Consumers never opt out and choose to opt in only when its cost is sufficiently low. Only when opting in is cost-free do the opt-in and opt-out privacy policies coincide.
    Keywords: privacy, price discrimination, monopolistic competition, welfare
    JEL: D11
    Date: 2006
  29. By: Daniel A. Lass (Department of Resource Economics, University of Massachusetts Amherst); Nathalie Lavoie (Department of Resource Economics, University of Massachusetts Amherst); T. Robert Fetter (Science Applications International Corporation)
    Abstract: CSA farms establish a loyal customer base and, potentially, market power. A new empirical industrial organization (NEIO) approach and survey data from Northeast CSA farms are used to determine whether CSA farms have market power and the extent to which they exercise their market power. Results suggest CSA farms exert about two percent of their potential monopoly power.
    Keywords: Community Supported Agriculture; New Empirical Industrial Organization; Market Power; Fresh Produce; Organic Agriculture
    JEL: D42 L12 Q13
    Date: 2005–01
  30. By: Chrysovalantou Milliou
    Abstract: We examine firms' incentives to protect their non-cooperative R&D investments from spilling over to competitors. Contrary to most of the existing literature, we show that the lack of full appropriability can lead to an increase in R&D investments. We also show that even if protection is costless, firms sometimes choose to let their R&D investments unprotected. Our welfare analysis indicates that public policies that promote the dissemination of technological knowledge should be adopted.
    Date: 2006–11
  31. By: Rafael Lalive (HEC Lausanne, University of Lausanne); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: In Germany, competitive franchising is increasingly being used to procure passenger railway services. This paper analyzes the 77 tenders that have taken place since the railway reform in 1994. The tenders differ with respect to the size of the franchise network, the required frequency of service, the duration of the contract and the proximity to other lines that are already run by competitors of DB Regio, a subsidiary of the successor of the former state monopolist. Our analysis shows that larger networks are less likely to be won by the competitors. Also, more recent auctions have been won by competitors more frequently than earlier auctions. Other control variables such as the duration of the contract and the adjacency to other lines run by entrants are insignificant.
    Keywords: Competition for the market, liberalization, passenger railways, procurement auctions
    JEL: D43 D44 R48
    Date: 2006–11
  32. By: Roediger-Schluga, Thomas (Department of Technology Policy, ARC Systems Research); Barber, Michael J. (Centro de Ciências Matemáticas, Universidade da Madeira)
    Abstract: Using a large and novel data source, we study the structure of R&D collaboration net-works in the first five EU Framework Programmes (FPs). The networks display proper-ties typical for complex networks, including scale-free degree distributions and the small-world property. Structural features are common across FPs, indicating similar network formation mechanisms despite changes in governance rules. Several findings point towards the existence of a stable core of interlinked actors since the early FPs with integration increasing over time. This core consists mainly of universities and research organisations. We observe assortative mixing by degree of projects, but not by degree of organisations. Unexpectedly, we find only weak association between central projects and project size, suggesting that different types of projects attract different groups of actors. In particular, large projects appear to have included few of the pivotal actors in the networks studied. Central projects only partially mirror funding priorities, indicating field-specific differences in network structures. The paper concludes with an agenda for future research.
    Keywords: R&D collaboration, EU Framework Programmes, Complex Networks, Small World Effect, Centrality Measures, European Research Area
    JEL: L14 O38 Z13
    Date: 2006

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