nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒02‒17
twenty papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Taxation in Two-Sided Markets By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm
  2. Advertising and Newspaper Differentiation: On the Role of Readers’ Advertising Taste By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm
  3. Newspapers and Advertising: The Effects of Ad-Valorem Taxation under Duopoly By Kind, Hans Jarle; Schjelderup, Guttorm; Stähler, Frank
  4. Destructive Creation By Calvano, Emilio
  5. Minimum Safety Standard, Consumers’ Information, and Competition (The) By Marette, Stéphan
  6. A note on price-taking and price-making behaviours in pure exchange economies By Ludovic Alexandre Julien; Fabrice Tricou
  7. Firms, nonprofits, and cooperatives: a theory of organizational choice By Herbst,Patrick; Pruefer,Jens
  8. A Note on Cost Arrangement and Market Performance in a Multi-Product Cournot Oligopoly By Lapan, Harvey E.; Hennessy, David A.
  9. The Temporal Dimension of Wage Contracts in Oligopoly with Spillovers By Vasileios Zikos
  10. Mergers and Barriers to Entry In Pharmaceutical Markets By Granier, L.; Trinquard, S.
  11. Finance and Competition By Harris Dellas; Ana Fernandes
  12. Pricing-to-Market Effects in Foreign Trade Prices. Evidence from a Cointegration Approach for Germany By Sabine Stephan
  13. Do Spillovers Stimulate Incremental or Drastic Product Innovations? Hypotheses and Evidence from German Establishment Data By Jirjahn, Uwe; Kraft, Kornelius
  14. Robustness of equilibrium price dispersion in finite market games By Régis Breton; Bertrand Gobillard
  15. Ventes Liées et concurrence sur les marchés énergétiques By Marion PODESTA
  16. Entry, Innovation and Exit. Evidence from the LAN switch Industry By Roberto Fontana; Lionel Nesta
  17. Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry By Hashmi, Aamir Rafique; Van Biesebroeck, Johannes
  18. Public Policy in Network Industries By Nicholas Economides
  19. The Dynamics of Seller Reputation: Evidence from eBay By Luis Cabral; Ali Hortacsu
  20. Persistence of Innovation: Stylised Facts and Panel Data Evidence By Bettina Peters

  1. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Koethenbuerger, Marko (Center for Economic Studies, Ludwig-Maximilians-Universität); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known textbook result in one-sided markets is that a government may increase a monopolist’s output and reduce the deadweight loss by subsidizing output. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher advalorem tax rate - rather than a subsidy - could increase output and enhance welfare.
    Keywords: Two-sided markets; ad-valorem taxes; specific taxes; imperfect competition; industrial organization
    JEL: D40 D43 H21 H22 L13
    Date: 2007–02–13
  2. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Koethenbuerger, Marko (Center for Economic Studies, Ludwig-Maximilians-Universität); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Newspapers have an incentive to moderate their profile in order to gain a larger readership and thus higher advertising revenue. We show that this incentive is weakened both if readers are ad-haters and if they are ad-lovers.
    Keywords: Media; Two-sided Markets; Product Differentiation; Hotelling
    JEL: D40 D43
    Date: 2007–02–13
  3. By: Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Stähler, Frank (Dept. of Economics, University of Otago)
    Abstract: Newspapers are two-sided platforms that sell their product both to readers and advertisers. Media firms in general, and newspapers in particular, are considered important providers of information, culture and language in most countries. Newspapers are therefore given preferential tax treatment. We show that lower ad valorem taxes lead newspapers to become more differentiated. Thereby the competitive pressure falls, possibly resulting in higher newspaper prices and reduced quality investments.
    Keywords: Two-sided markets; ad-valorem taxes
    JEL: D40 D43 H21 H22 L13
    Date: 2007–02–13
  4. By: Calvano, Emilio (GREMAQ, Université de Toulouse 1 and Dept. of Economics, Stockholm School of Economics)
    Abstract: "Destructive Creation" is the deliberate introduction of new, perhaps improved generations of durable goods that destroy, directly or indirectly, the usage value of units previously sold inducing consumers to repeat their purchase. This paper discusses this practice by a single seller in an infinite-horizon, discrete time model with heterogeneous consumers. Despite the lack of commitment power over future prices and introduction policies, this practice restores partially or totally market power even though consumers anticipate opportunistic behavior. However, the monopoly resorts "too much" to this mechanism from an ex-ante, profit maximizing perspective. High prices in earlier periods allow the seller to commit to defer innovation and therefore to maintain buyers' confidence over "durability". The paper characterizes the equilibrium properties of the resulting innovation cycles such as existence, uniqueness and asymptotic stability and discusses potential regulatory remedies in those instances where destructive creation generates economic inefficiencies. This theory applies, among others, to markets characterized by network externalities, compatibility issues, standard setting, social consumption and signal provision and may help explain many restrictive aftermarket practices as well as excessive add-on pricing without relying on any leverage hypothesis.
    Keywords: durable goods; aftermarkets; planned obsolescence;
    JEL: D42 L12 L15 O31
    Date: 2006–12–22
  5. By: Marette, Stéphan
    Abstract: This paper explores the effects of a standard influencing care choice. Firm(s) may increase the probability of offering safe products by incurring a cost. Under duopoly, they compete either in prices or in quantities. Under perfect information about safety for consumers, the selected standard that corrects a safety underinvestment is always compatible with competition. Safety overinvestment only emerges under competition in quantities and relatively low values of the cost. Under imperfect information about safety for consumers, the standard leads to a monopoly situation. However, for relatively large values of the cost, a standard cannot impede the market failure coming from the lack of information.
    Keywords: information, market structure, safety, standard.
    Date: 2007–02–12
  6. By: Ludovic Alexandre Julien; Fabrice Tricou
    Abstract: This paper explores the rationale of price-taking and price-making behaviours in the context of Walrasian and Cournotian pure exchange economies. Beside the influence of the number of agents, we underline the role of the structure of preferences in the definition and in the working of market power. Through three equilibrium variations of the same basic economy, we obtain several results about price manipulation, about asymptotic identifications for large economies and for degenerate preferences, and about welfare comparisons. Perfect competition does not only correspond to the case of large economies, but may also concern economies where fundamental market powers are more or less equivalent.
    JEL: D43 D51
    Date: 2006
  7. By: Herbst,Patrick; Pruefer,Jens (Tilburg University, Center for Economic Research)
    Abstract: This paper formalizes the difference between firms, nonprofits, and cooperatives and identifies optimal organizational choice. In a model of quality provision, we find a clear ranking of quality produced: Firms provide lowest and nonprofits highest levels of quality. Efficiency, however, depends on the competitive environment, the decision making process and technology. Cooperatives are optimal when decision making costs are low. Else, cooperatives are increasingly dominated by either nonprofits or firms (depending on the incremental costs of quality production). Finally, changes in the competitive environment affect organizational choice: Increased competition induces a shift towards firm organization and away from nonprofits.
    Keywords: theory of the firm;cooperatives;nonprofits;organizational choice; organizational change
    JEL: L21 L31 D23
    Date: 2007
  8. By: Lapan, Harvey E.; Hennessy, David A.
    Abstract: Model invariances have been used extensively to understand welfare and conduct consequences of firm heterogeneity in a one-product Cournot oligopoly. Nothing is known about the richer and more realistic context of firm heterogeneity in multi-product Cournot oligopoly. In this note, welfare in a two-product Cournot oligopoly is shown to increase (decrease) with an increase in correlation between unit costs when the outputs complement (substitute) in demand. A more qualified correlation structure is required for the result to apply in a three-product Cournot oligopoly when products complement in demand.
    Keywords: Arrangement increasing; Complementarity; Invariance
    Date: 2007–02–14
  9. By: Vasileios Zikos (Dept of Economics, Loughborough University)
    Abstract: This paper examines how the duration of wage contracts influences innovation incentives, wages and employment. We find that wages are non-monotone in the duration of wage contracts. Furthermore, a positive and one-to-one relation between innovation and union utility exists and both attain their highest value under a long-term contract. Profits may vary depending on the extent of R&D spillovers and the associated raising rivals' cost incentive, although they are highest when union/firms engage in a long-term contractual relation. Testable predictions to discriminate between short-term and long-term contracts are also discussed.
    Keywords: Wage contracts; R&D; Spillovers; Raising rivals' cost.
    JEL: J41 J51 L13 O31
    Date: 2007–02
  10. By: Granier, L.; Trinquard, S.
    Abstract: After patent expirations in pharmaceutical markets, brand-name laboratories are threatened by generic firms'entry. To fill the gap in the theoretical literature on this topic, we study brand-name .rms.incentives either to deter entry, or to merge with the entrant. These strategies are considered along with the possibility of the brandname firm producing its own generic drug, called a pseudo-generic drug. Using a vertical differentiation model with Bertrand-Stackelberg competition, we show that each strategy, merging and deterring entry, may be Nash equilibrium, according to the generic firm's setup cost level and to the rate of discount.
    Keywords: barriers, endogenous mergers, limit pricing, pharmaceuticals, pseudo-
    JEL: I11 L12
    Date: 2007
  11. By: Harris Dellas; Ana Fernandes
    Abstract: Financial constraints are often thought as representing a barrier to entry for new firms, thus potentially limiting competition in product markets. We investigate the relationship between finance and product market competition in the context of a general equilibrium, two-sector model. The analysis highlights the role played by firm heterogeneity as well as by the level and distribution of wealth. Financial development may lead to lower markups (and thus to more competitive markets) in financially dependent sectors, even when it reduces the number of firms and increases standard market concentration indexes. The analysis implies that incumbency is not a sufficient condition to oppose financial liberalization. It also implies that, for a given level of imperfect financial development, poorer countries will tend to have less competitive product markets.
    Keywords: Financial Development; Liberalization; Market Structure; Product Market Competition.
    JEL: L1 E2
    Date: 2007–02
  12. By: Sabine Stephan (IMK at the Hans Boeckler Foundation)
    Abstract: The article analyses the impact of exchange rate changes on German export and import prices. The analytical framework is a mark-up model which is based on the assumption that the markets under consideration are imperfectly competitive as well as segmented. Hence, firms will no longer set prices at marginal costs, but charge a mark-up on costs to earn above normal profits. The mark-up is not fixed, but can be adjusted in response to demand pressure and competitive pressure in the relevant market. Consequently, firms can practice price discrimination. We find evidence that domestic and foreign producers follow different price setting strategies: German exporters largely pass-through exchange rate changes; i.e. an appreciation of domestic currency is reflected in a significant increase in export prices (expressed in terms of foreign currency) indicating that German exporters have significant market power and/or face a fairly inelastic export demand curve. Foreign exporters to Germany, however, largely follow a pricing-to-market strategy; i.e. they absorb price increases due to an appreciation of foreign currency into their profit margins in order to stabilise export prices (expressed in terms of domestic currency). Thus, they can protect market shares in the highly competitive German market.
    Keywords: export prices, import prices, exchange rate pass-through, pric- ing to market, error correction model
    JEL: C51 E31 F31
    Date: 2005–12
  13. By: Jirjahn, Uwe; Kraft, Kornelius
    Abstract: We estimate the determinants of various types of product innovation. Knowledge spillovers from rivals have a positive impact on incremental innovations. This impact is largely independent of the participation in R&D cooperations. Spillovers exert no such independent influence on drastic innovation activities. The results support the hypothesis that establishments face difficulties in using knowledge that comes from areas they are not familiar with. Establishments exploit spillovers for incremental innovations rather than for drastic innovations. To a limited degree R&D cooperations can help to overcome the difficulties in using spillovers for drastic innovations. Furthermore, our estimates provide evidence that a firm’s own R&D effort and the use of outside information are substitutive.
    Keywords: New Products, Patents, Spillovers, Learning, R&D
    JEL: L15 L60 O31 O32
    Date: 2006
  14. By: Régis Breton; Bertrand Gobillard
    Abstract: We propose an approach to restricting the set of equilibria in a strategic market game and use it to assess the robustness of the price dispersion results obtained by Koutsougeras [2003, J. Econ. Theory 108, 169-175] in the multiple trading posts setup. More precisely, we perturb the initial game by the introduction of transaction costs and our main results are the following. (i) No equilibrium with price dispersion of the game with costless transactions can be approached by equilibria with positive transaction costs as costs get arbitrarily small. (ii) When this type of perturbation is considered the set of equilibrium outcomes is not a®ected by the number of trading posts.
    Keywords: Strategic market games, law of one price, equilibrium selection.
    JEL: C72 D43 D50
    Date: 2006
  15. By: Marion PODESTA
    Abstract: Dans cet article nous nous proposons d'analyser les effets de l'ouverture à la concurrence sur les stratégies de tarification des ventes liées à travers un modèle de choix discret. Nous montrons que dans une situation de duopole vendre les biens de manière indépendante est un équilibre de Nash pareto dominant pour les deux firmes, cependant elles peuvent également se coordonner sur d'autres équilibres et notamment suivre une stratégie de ventes liées. Ce résultat vient à l'encontre de celui du monopole qui incite les firmes à pratiquer une stratégie de tarification mixte, alors que dans un environnement duopolistique, l'intensité concurrentielle domine l'effet positif des ventes liées via la discrimination par les prix.
    JEL: D43 L13 Q4
    Date: 2006
  16. By: Roberto Fontana; Lionel Nesta (Observatoire Français des Conjonctures Économiques)
    Date: 2007
  17. By: Hashmi, Aamir Rafique; Van Biesebroeck, Johannes
    Abstract: The question that how market structure and innovation are related has been extensively studied in the literature. However, there is hardly any notable study on this question for the global automobile industry. We fill this gap by studying the relationship between market structure and innovation in the global automobile industry for the 1980-2005 period. We use the dynamic industry framework of Ericson and Pakes (Review of Economic Studies, 1995) and estimate the parameters of the model using a two-step procedure proposed by Bajari et al (Econometrica, forthcoming). Since the global auto industry has seen a lot of consolidation since 1980, mergers are an important ingredient of our model. After estimating the parameters of the model, we simulate the industry forward and study how changing market structure (mainly due to mergers) affects innovative activity at the firm as well as the industry level. Our findings are the following. (1) The effect of market structure on innovation in the global auto industry depends on the initial state of the industry. If the industry is not very concentrated, as it was in 1980, some consolidation may increase the innovative activity. However, if the industry is already concentrated, as in 2005, further consolidation may reduce the innovation incentives. (2) Mergers reduce the value of merging firms though they may increase the aggregate value of the industry. (3) Mergers between big firms eventually reduce consumers' utility.
    Keywords: Competition and Innovation; Automobile Industry; Dynamic Games
    JEL: O31 L62 L13
    Date: 2007–02–13
  18. By: Nicholas Economides
    Date: 2006
  19. By: Luis Cabral; Ali Hortacsu
    Date: 2006
  20. By: Bettina Peters
    Abstract: This paper investigates whether firms innovate persistently or discontinuously over time using an innovation panel data set on German manufacturing and service firms for the period 1994–2002. It turns out that innovation behaviour is permanent at the firm–level to a very large extent. Using a dynamic random effects discrete choice model and a new estimator recently proposed by Wooldrigde (2005), I further shed some light on the driving forces for this phenomenon. The econometric results show that past innovation experience is an important determinant for manufacturing as well as for service sector firms, and hence confirm the hypothesis of true state dependence. In addition, the results highlight the important role of knowledge provided by skilled employees and unobserved individual heterogeneity in explaining the persistence of innovation.
    Keywords: Innovation; persistence; state dependence; unobserved heterogeneity; dynamic random effects panel probit model
    JEL: O31 C23 C25 L20
    Date: 2006

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