nep-mic New Economics Papers
on Microeconomics
Issue of 2006‒12‒01
twenty-two papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Private Observation, Tacit Collusion and Collusion with Communication By Mouraviev, Igor
  2. Vertical differentiation, network externalities and compatibility decisions : an alternative approach By Hend Ghazzai; Rim Lahmandi-Ayed
  3. Choosing intellectual protection : imitation, patent strength and licensing By David Encaoua; Yassine Lefouili
  4. Market power and product quality: review of the literature By Cinzia COLAPINTO
  5. Multimarket spatial competition in the Colombian deposit market By Dairo Estrada; Sandra Rozo
  6. Auctions design with private costs of valuation discovery By Lu, Jingfeng
  7. Competition, Imitation and Growth with Non-Diversifiable Risk By Tapio Palokangas
  8. Existence of Equilibria with a Tight Marginal Pricing Rule By Jean-Marc Bonnisseau; Bernard Cornet
  9. Product Market Competition, R&D Effort and Economic Growth By Alberto Bucci
  10. Profitability of Horizontal Mergers in Trigger Strategy Game By CESI BERARDINO
  11. The Marginal Pricing Rule Revisited By Jean-Marc Bonnisseau; Bernard Cornet; Marc-Olivier Czarnecki
  12. Advertising as Distortion of Learning in Markets with Network Externalities By Brekke, Kjell Arne; Rege, Mari
  13. Delay in Bargaining with Externalities By Björnerstedt, Jonas; Westermark, Andreas
  15. Optimal Technology Policy with Imitation and Risk-Averting Households By Tapio Palokangas
  16. Trade and Private R&D in Mexico By Liliana Meza González; Ana Belén Mora Yague
  17. Optimal Rate Base Reviews Under Price-Cap Regulation By COCO GIUSEPPE; DE VINCENTI CLAUDIO
  18. Advertising as a Distortion of Social Learning By Brekke, Kjell Arne; Rege, Mari
  20. Lender and Borrower as Principal and Agent By Karel Janda
  21. The value of downstream information: exploring the effects of business networks on buyer-supplier relationships By Claro, D. P.
  22. New Evidence on Product Quality and Trade By Hasan Faruq

  1. By: Mouraviev, Igor (Research Institute of Industrial Economics)
    Abstract: The paper studies the role of communication in facilitating collusion. The situation of infinitely repeated Cournot competition in the presence of antitrust enforcement is considered. Firms observe only their own production levels and a common market price. The price is assumed to have a stochastic component, so that a low price may signal either deviations from collusive output levels or a 'downward' demand shock. The firms choose between tacit collusion and collusion with communication. Communication implies that the firms meet and exchange information about past outputs and is assumed to be the only legal proof of cartel behavior. The antitrust enforcement takes the form of an exogenous probability to detect the meetings, in which case the firms are sued for cartel behavior and pay a fine. Tacit collusion is assumed to provide no grounds for the legal action but involves inefficiencies due to the lack of complete information about individual output levels. It is shown that there exists a range of discount factors where collusion with communication constitutes the most profitable collusive strategy.
    Keywords: Collusion; Communication; Private Information
    JEL: D82 L41
    Date: 2006–10–25
  2. By: Hend Ghazzai (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], LEGI - [Ecole Polytechnique de Tunisie]); Rim Lahmandi-Ayed (LEGI - [Ecole Polytechnique de Tunisie])
    Abstract: We characterize the equilibrium of a game in vertically differentiated market which exhibits network externalities. There are two firms, an incumbent and a potential entrant. Compatibility means in our model that the inherent qualities of the goods are close enough. By choosing its quality, the entrant chooses in the same time to be compatible or not. The maximal quality difference that allows compatibility i.e the compatibility interval is chosen by the incumbent which involves costs increasing with the width of that interval. We show that in order to have two active firms at price equilibrium, the sufficient condition on the market size of a standard vertical differentiation model remains valid under compatibility. However, an additional condition on the firms' qualities is needed under incompatibility. For a small quality segment, the incumbent can block entry choosing an empty compatibility interval. At the subgame perfect equilibrium, incompatibility prevails if the quality segment is large and the compatibility costs are high. Compatibility prevails for sufficiently large quality segments and low costs of compatibility. Finally there is no entry if the quality segment is small and the compatibility costs are high.
    Keywords: Vertical differentiation, compatibility, network externalities.
    Date: 2006–11–03
  3. By: David Encaoua (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Yassine Lefouili (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    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 competiton 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.
    Date: 2006–11–22
  4. By: Cinzia COLAPINTO
    Abstract: In this paper we focus on the relation between product quality and information, which let us distinguishing search and experience goods. We show how literature has studied the way firms signalling the high quality of their products/services: introductory discount pricing, strong advertising expenditures or commitment (for instance, warranties). For search goods we consider contributions dealing with a single-product monopolist (Spence 1975, Rochet and Stole 1999, Lambertini 1998,…) and a multiproduct monopolist (Mussa and Rosen 1978), this first simple model has been used extensively by applied theorists studying regulation, auctions, and labor contracts (Katz 1984, Rochet and Stole 2002,…) For experience goods, we mention for instance the lemons model (Akerlof 1970) and no milking condition (Shapiro 1983)
    Keywords: Product quality, search goods, experience goods, advertising and reputation
    JEL: L15
    Date: 2006–11
  5. 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 Em- pirical 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 competitive- ness level. The theoretical model is applied to quarterly Colombian data that covers the period between 1996 and 2005. Our results sug- gest 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.
    Date: 2006–10–01
  6. By: Lu, Jingfeng
    Abstract: This paper extends the pre-bid R&D and auctions design literature to an independent private value setting where each bidder incurs a private-information valuation discovery cost upon entry. The seller commits to a mechanism before the bidders' entry decisions. The main findings are as follows. Firstly, a second-price auction with no entry fee and a reserve price equal to seller's valuation is ex ante efficient. Secondly, a second price auction with the same reserve price and appropriate ex ante entry fees is revenue-maximizing. Every bidder's ex ante entry fee equals the hazard rate of his entry cost distribution, evaluated at the desired entry-threshold for him. Thirdly, the revenue-maximizing entry differs from the ex ante efficient entry. Fourthly, even for the symmetric setting, the ex ante efficient/revenue-maximizing entry could be asymmetric. Lastly, for the symmetric setting, when the cumulative distribution function of the entry costs changes rather slowly with respect to its argument, the efficient entry must be symmetric across bidders and it is the unique entry equilibrium of the efficient auction. If the hazard rate of the entry cost distribution is additionally increasing, then the revenue-maximizing entry must also be symmetric and it is the unique entry equilibrium of the revenue-maximizing auction. These results mean that large dispersion in the entry costs restores the symmetry in the efficient/revenue-maximizing entry.
    Keywords: Auctions Design; Endogenous Participation; Valuation Discovery Cost.
    JEL: D82 D44
    Date: 2006–10
  7. By: Tapio Palokangas
    Abstract: This paper analyzes the growth and welfare effects of competition in an endogenously-growing economy with imitation and non-diversifiable risk. The main findings are as follows. There is no imitation without positive profits during innovation races. A larger proportion of competing industries leads to slower economic growth. When competitive profits are high or low, the economy grows faster than when they are of medium size. If the government subsidizes innovation and imitation optimally, then competitive profits are positively associated with welfare. With an optimal uniform subsidy to all R&D, there is an “inverted-U” relationship between competitive profits and welfare.
    Keywords: Imitation, competition, Schumpeterian growth
    JEL: L11 L16 O31 O34
    Date: 2006–06
  8. By: Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Bernard Cornet (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], University of Kansas - [University of Kansas])
    Abstract: This paper deals with the existence of marginal pricing equilibria when it is defined by using a new and tighter normal cone introduced by B. Cornet and M.O. Czarnecki. The main interest of this new definition of the marginal pricing rule comes from the fact that it is more precise in the sense that the set of prices<br />satisfying the condition is smaller than the one given by the Clarke's normal cone. The counterpart is that it is not convex valued, which leads to some mathematical difficulties in the existence proof. The result is obtained through an approximation argument under the same assumptions as in the previous existence results.
    Keywords: General economic equilibrium, increasing returns, marginal pricing rule, existence.
    Date: 2006–11–13
  9. By: Alberto Bucci
    Abstract: Empirical evidence has recently pointed to the lack of any relationship between R&D intensity (variously defined and measured) and economic growth in the post-war period in the United States and other OECD countries. Using a framework that integrates human capital accumulation and purposive (horizontal) innovation activity, this paper looks at product market competition as a possible solution to this puzzle. Indeed, we find that changes in product market competition may well have no influence on human capital investment (the growth engine), while affecting R&D effort.
    Keywords: Endogenous Growth; R&D Investment; Human Capital Accumulation; Product Market Competition
    JEL: D43 J24 L16 O31 O41
    Date: 2006–06
    Abstract: It is shown that, in a dynamic competition, an exogenous horizontal merger is profitable even if a small share of active firms merge. However, each firm has incentive to remain outside the merger because it would benefit more (Insiders' dilemma). We show that in an infinite repeated game in which the firms use trigger strategies an exogenous bilateral merger can be profitable and the Insiders' dilemma is mitigated.
    Date: 2006–03
  11. By: Jean-Marc Bonnisseau (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Bernard Cornet (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], University of Kansas - [University of Kansas]); Marc-Olivier Czarnecki (ACSIOM - UMR 5149 - [Université Montpellier 2])
    Abstract: The purpose of the paper is to introduce a tighter definition for the marginal pricing rule. By means of an example, we illustrate the improvements that one gets with the new definition with respect to the former one with the Clarke's normal come.
    Keywords: General economic equilibrium, increasing returns, marginal pricing rule.
    Date: 2006–11–13
  12. By: Brekke, Kjell Arne (The Ragnar Frisch Centre for Economic Research); Rege, Mari (University of Stavanger)
    Abstract: We present a theory of how advertising can break a lock-in by distorting beliefs about market shares in markets with network externalities. On the background of the availability heuristic we assume that people learn about market shares by observing product adoption of others, but are not able to fully distinguish between observations of real people and …ctitious characters in advertisements. We look at a game between an incumbent and an entrant producing close substitutes. Our analysis shows that if the entrant’s product is of su¢ ciently high quality, then the entrant will use advertising in order to break the lock-in and the incumbent will not advertise at all. However, if the quality di¤erential between the two products is small, then the incumbent may advertise and make it unpro…table for the entrant to break the lock-in.
    Keywords: Advertising; availability heuristic; herding behavior; information; lock-in
    JEL: D21 L10 M37
    Date: 2006–11–23
  13. By: Björnerstedt, Jonas (Swedish Competition Authority); Westermark, Andreas (Department of Economics)
    Abstract: This paper studies infinite-horizon bargaining between a seller and multiple buyers when externalities are present. We extend the analysis in Jehiel & Moldovanu (1995a), by allowing for both pure and mixed equilibria. This extension is warranted, since under some circumstances,the complexity of the equilibria with bounded recall they analyze tend to infinity as players become very patient. We show that stationary subgame perfect equilibria always exist. Moreover, a characterization of the stationary subgame perfect equilibria in generic games is presented. Equilibria with delay exist only for strong positive externalities. Since ach buyer receives a positive payoff when the seller agrees with some other buyer, positive externalities induces a war of attrition between buyers. Furthermore, the results when analyzing mixed stationary equilibria are different than when focusing on pure strategies with bounded recall as Jehiel & Moldovanu (1995a). Specifically, they find delay only when externalities are negative.
    Keywords: Bargaining; externalities; delay
    JEL: C72 C78 D62
    Date: 2006–11–24
  14. By: Patrick Guy (LAMETA - Laboratoire Montpellierain d'économie théorique et appliquée - [CNRS : UMR5474][INRA] - [Université Montpellier I] - [Ecole Nationale Supérieure Agronomique de Montpellier])
    Abstract: In this paper, we develop an adverse selection model where a monopoly choices a non-linear pricing associated with an investment level which defines the technology of production used. We show that, in general, to implement a non-linear pricing the monopoly choice a level of investment, which depends of the type of consumer and, also, that the level of investment for each type is correlated with the recovery degree of the investment.
    Keywords: Adverse selection, Investment, Non linear pricing, Technology of production.
    Date: 2006–11–05
  15. By: Tapio Palokangas
    Abstract: A Schumpeterian growth model is constructed where R&D firms innovate to produce better versions of the products or imitate to copy existing innovations. Because firms cannot use their innovations or imitations as collateral, they finance their investment by issuing shares. Households save by purchasing these shares. The government affects the level of profits through competition policy. The main findings are the following. A small imitation subsidy slows down growth. In the first-best optimum collusion is socially optimal, but when the government cannot discriminate between innovation and imitation, it should promote product market competition.
    Keywords: Innovation, Imitation, Endogenous growth, Technology policy
    JEL: O41 O38
    Date: 2005–06
  16. By: Liliana Meza González; Ana Belén Mora Yague
    Abstract: Using the National Survey on Employment, Wages, Technology and Training (Enestyc), this paper tries to find the relationship between increasing trade and the proportion of total income Mexican manufacturing firms invest on R&D. Based on two cross-sectional and a panel estimation procedures, the results confirm the idea that increasing the exposure to foreign markets affect the innovative efforts of Mexican firms. We also find that the firms engaging in some kind of R&D do not conform a random sample. More specifically, our results show that, in 1992, the probability of finding a firm engaging resources in some kind of R&D increased with size, a market diversification measure, and a measure of industrial market power at a 2-digit level, while the intensity of the R&D effort depended, on market power and an industry concentration measure. For the 1999 estimation our results show that the probability of R&D investment at a firm level increased with size, a market diversification measure, and exposure to foreign competition, while the magnitude of the R&D effort of a firm was determined by the decrease in average import tariffs at the industry level and by the exporting efforts of the firm. We find strong complementarities between public and private innovation efforts in both years, but find that younger firms are doing stronger R&D efforts in 1999. The 1992- 99 balanced panel results show that exporting firms invest more in R&D while import competing firms invest less, once size, market power and other control variables are taken into account. Our estimation indicates that exporting give firms a great incentive to innovate, and that not only large, but also small firms contribute to the R&D efforts of a nation.
    Keywords: R&D, trade liberalization, foreign direct investment, exposure to foreing markets
    Date: 2005–06
    Abstract: This paper demonstrates, in a dynamic model of monopoly regulation with price-cap, that a periodical price review may increase productive efficiency. When the firm’s choice of cost-reducing effort depends on the output supplied, a revision allows the regulator to set more binding prices thus inducing the monopolist to exert more cost-reducing effort in the future. In a continuous-time setting, we find the optimal timing for the review from a cost-efficiency point of view and the conditions under which, within a given concession period, a single full rate base review improves cost-efficiency and by this route the optimal number of reviews. This number depends on the length of the concession period in relation to the slope of the demand function and the intensity of the disutility of effort. This result adds a theoretical argument in favour of the practice of periodical reviews in price-cap regulation and provides regulators with a basis for calculation of the optimal regulatory lag. JEL classification: L 51, D42
    Keywords: Price-cap; Rate base review.
    Date: 2005–11
  18. By: Brekke, Kjell Arne (The Ragnar Frisch Centre for Economic Research); Rege, Mari (University of Stavanger)
    Abstract: By combining a theory of herding behavior with the phenomenon of availability heuristic, this paper shows that non-informative advertisements can affect people’s choices by influencing their perception of product quality. We present a model in which people can learn about product quality by observing the choices of others. Consumers are, however, not able to fully distinguish between the observations of real people and fictitious characters in advertisements. Even if a person is aware of this limitation and updates his beliefs accordingly, it is still rational for him to choose the product he has observed most often. In equilibrium the most observed product is always most likely to be of the highest quality. The analysis has important policy implications.
    Keywords: Advertising; availability heuristic; herding behavior; information; product quality
    JEL: D21 L15 M37
    Date: 2006–11–14
  19. By: José Ramón Ruiz Tamarit (Universitat de València); Manuel Sánchez Moreno (Universitat de València)
    Abstract: This paper develops a two-sector model for a renewable natural resource based economy. Pareto efficient results show the optimal harvesting rate that allows for sustained long-run optimal growth, which is upper-bounded by the biological rate of reproduction. Regulation prevents from resource over-exploitation and exhaustion which arise under open access. The Ramsey policy allowing the competitive economy to reach the first-best solution, leads the government to tax harvesting activity from firms and distribute the receipts among households. In the short-run the tax is variable. In the long-run, the lower the intrinsic rate of reproduction the higher the constant unit tax on the resource use.
    Keywords: Natural Resources, Efficiency, Open Access, Ramsey Regulation, Growth.
    JEL: C62 D90 O41 Q2 H2
    Date: 2006–11
  20. By: Karel Janda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; University of Economics, Department of Banking and Insurance, Prague, Czech Republic)
    Abstract: This paper provides a critical survey of some recent developments in the principal-agent approach to the relationship between lenders and borrowers. The costly state verification model of optimal debt contract is introduced and new results with respect to optimality of standard debt contracts in this model are discussed. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the problems with collateral as a screening instrument are outlined. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.
    Keywords: principal; agent; contracts; credit; adverse selection; moral hazard
    JEL: C72 D82 G21
    Date: 2006–07
  21. By: Claro, D. P.
    Date: 2006–10
  22. By: Hasan Faruq (Indiana University Bloomington)
    Abstract: This paper examines why different countries export different qualities of products.Previous studies have attributed quality dispersion to differences in factor endowments while no empirical work has been done examining the effect of technology on quality. Using panel data on U.S. imports from 58 countries, we find that the export of high quality differentiated goods is associated with both higher stock of physical capital endowments and research and development (R&D) activities. We also observe that foreign direct investment (FDI) has a positive effect on quality, which is consistent with the literature on FDI and intra-industry trade. These results cannot be replicated by using the reduced form OLS price regression which is commonly used in the literature. Instead, we use a two-equation system in price and quantity to identify the determinants of quality.
    Keywords: Product Quality, Differentiated Products, Heckscher-Ohlin Model, R&D
    JEL: L15 F11 Q16
    Date: 2006–11

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