nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒01‒28
twelve papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Last-In First-Out Oligopoly Dynamics By Jaap H. Abbring; Jeffrey R. Campbell
  2. Do Auctions select Efficient Firms? By Maarten C.W. Janssen; Vladimir A. Karamychev
  3. Corporate Social Responsibility in Oligopolistic Markets By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  4. Union structure and firms incentives for cooperative R&D investments By Constantine Manasakis; Emmanuel Petrakis
  5. Endogenous Strategic Managerial Incentive Contracts By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  6. The Compromise Game: Two-sided Adverse Selection in the Laboratory By Juan D. Carrillo; Thomas R. Palfrey
  7. The relationship of drug reimbursement with the price and the quality of pharmaceutical innovations By María García-Alonso; Begoña Garcia-Mariñoso
  8. Firm Size and Pricing Policy By Roy Chowdhury, Prabal
  9. Competition and Inter-Firm Credit: Theory and Evidence from Firm-level Data in Indonesia By Hyndman, Kyle; Serio, Giovanni
  10. Delegation and Incentives By Bester, Helmut; Krahmer, Daniel
  11. State Aid to Attract FDI and the European Competition Policy: Should Variable Cost Aid Be Banned? By Mario Mariniello
  12. Entry Liberalization, Export Subsidy and R&D By Roy Chowdhury, Prabal

  1. By: Jaap H. Abbring (Vrije Universiteit Amsterdam); Jeffrey R. Campbell (Federal Reserve Bank of Chicago, and NBER)
    Abstract: This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993)empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure.
    Keywords: Sunk costs; Demand uncertainty; Markov-Perfect equilibrium; LIFO
    JEL: L13
    Date: 2006–12–19
  2. By: Maarten C.W. Janssen (Erasmus Universiteit Rotterdam); Vladimir A. Karamychev (Erasmus Universiteit Rotterdam)
    Keywords: Auctions; cost-efficiency; aftermarkets
    JEL: D43 L11 L13
    Date: 2007–01–04
  3. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper studies firms owners' incentives to engage in Corporate Social Responsibility (CSR) activities in an oligopolistic market, in a strategic delegation and vertical product differentiation context. Firms' owners have the opportunity to hire "socially responsible" managers and delegate to them CSR effort and market competition decisions. In equilibrium, both owners employ socially responsible managers. The strategic behavior of owners to hire socially responsible managers increases both output and profits. The societal consequences of Corporate Social Responsibility are also discussed.
    Keywords: Oligopoly; Vertical Product Differentiation; Corporate Social Responsibility; Strategic Managerial D
    JEL: L15 L22 M14
    Date: 2006–06–10
  4. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper investigates the impact of alternative unionization structures on firms' incentives to spend on cost-reducing R&D activities as well as to form a Research Joint Venture, in the presence of R&D spillovers. We show that, in contrast to the "hold up" argument, if firms invest non-cooperatively and spillovers are low, R&D investments are higher when an industry-wide union sets a uniform wage rate than under firm-level unions. In contrast, investments are always higher under firm-level unions in the case of RJVs. Firms' incentives to form an RJV are non-monotonic in the degree of centralization of the wage-setting, with the incentives being stronger under an industry-wide union if and only if spillovers are low enough. Finally, centralized wage-setting as well as high unemployment benefits may hinder the formation of costly RJVs and their potential welfare benefits.
    Keywords: Unions, Oligopoly, Cost-reducing Innovations, Research Joint Ventures, Spillovers
    JEL: J51 L13 O31
    Date: 2007–01–23
  5. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: This paper studies the endogenous structure of incentive contracts that firms' owners offer to their managers, when these contracts are linear combinations either of own profits and own revenues, or of own profits and competitor's profits or, finally, of own profits and own market share. In equilibrium, each owner has a dominant strategy to reward his manager with a contract combining own profits and competitor's profits. Contrary to the received literature, the case where there is no ex-ante commitment over any type of contract that each owner offers to his manager is also examined. In equilibrium, each type of contract is an owner's best response to the competing owner's choice.
    Keywords: Oligopoly; Managerial delegation; Endogenous contracts
    JEL: D43 L21
    Date: 2007–01–23
  6. By: Juan D. Carrillo; Thomas R. Palfrey
    Date: 2007–01–12
  7. By: María García-Alonso; Begoña Garcia-Mariñoso (Department of Economics, City University, London)
    Abstract: This paper studies the strategic interaction between pharmaceutical firms’ pricing decisions and government agencies´ reimbursement decisions which discriminate between patients by giving reimbursement rights to patients for whom the drug is most effective. We show that if the reimbursement decision precedes the pricing decision, the agency only reimburses some patients if the private and public health benefits from the new drug diverge. That is, when (i) there are large externalities of consuming the drug and (ii) the difference in costs between the new drug and the alternative treatment is large. Alternatively, if the firm can commit to a price in advance of the reimbursement decision, we identify a strategic effect which implies that by committing to a high price ex ante, the firm can force a listing outcome and make the agency more willing to reimburse than in the absence of commitment.
    Keywords: Pharmaceutical industry, innovation, health policy
    JEL: I10 I18 L65
    Date: 2005–06
  8. By: Roy Chowdhury, Prabal
    Abstract: We relate the pricing policy of the firms to their size, where firm size is interpreted as the size of the clientele served by the concerned firm. We argue that a firm with a large clientele faces a more severe reputational backlash if it reneges. This allows the firm to effectively commit to its offers, leading to a unique equilibrium without delay, where the firm extracts the whole of the surplus. For smaller firms, however, the reputational effects are much less intense and, consequently, the equilibria involve reneging possibilities. In this case the equilibria are non-unique, and may involve delays as well.
    Keywords: Firm size; reneging; reputation.
    JEL: D40 C78
    Date: 2006–06
  9. By: Hyndman, Kyle (SMU); Serio, Giovanni (Goldman Sachs)
    Abstract: Using firm-level data we investigate the relationship between trade credit and suppliers’ market structure and find an inverted U-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.
    Keywords: Trade Credit, Competition, Development, Industrial Organization.
    JEL: L1 O16
    Date: 2007–01
  10. By: Bester, Helmut; Krahmer, Daniel
    Abstract: This paper analyses the relation between authority and incentives. It extends the standard principal--agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority. The agent's subsequent choice of effort depends both on monetary incentives and the selected project. We find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent. In fact, if the agent is protected by limited liability, delegation is never optimal.
    Keywords: Authority; Delegation; Limited liability; Moral hazard; Principal-agent problem
    JEL: D82 D86
    Date: 2007–01
  11. By: Mario Mariniello
    Abstract: The purpose of this paper is to analyze the European Commission's approach to state aid for foreign direct investment in a competition policy framework. The Commission shows to consider variable cost aid (VCA) to be more distortive than start-up or fixed cost aid (FCA). This paper addresses that issue and checks whether allowing FCA while banning VCA is a first-best strategy for a rational Authority maximizing welfare. The model shows that a rational forward-looking government maximizing domestic welfare always prefers VCA to FCA if both the incumbent and the entrant are foreign firms and if granting VCA does not cause to the incumbent firm to exit the market. On the other hand, a VCA which causes the incumbent firm to be crowded out by the entrant never occurs at the equilibrium. The model shows that the Commission's approach may lead to sub-optimal equilibria where market competition and consumers.welfare are not maximized.
    Keywords: state aid, competition policy, start-up aid, variable cost aid
    JEL: L11 L13 L40 L53
    Date: 2006
  12. By: Roy Chowdhury, Prabal
    Abstract: We examine, in the context of less developed countries, the R&D behaviour of igopolistic firms who compete over R&D, as well as output levels. We also assume that the firms can sell in either of the two markets - the domestic, or the foreign. We show that entry liberalization, despite increasing the level of competitiveness, does not affect the level of R&D. An increase in export subsidy may, however, lead to an increase in domestic R&D. Both these results contradict the popular argument that the levels of domestic R&D is positively related to the level of domestic competitiveness. We also demonstrate that any foreign firm that may enter selects a level of R&D that is atleast as efficient as that selected by any domestic firm. Finally, we demonstrate that entry liberalization has a positive effect on exports, as well as aggregate output.
    Keywords: Entry liberalization; export subsidy; R&D; competitiveness.
    JEL: F13 O32
    Date: 2006–02

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