nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒03‒17
eight papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Entry into a network industry: consumers’ expectations and firms’ pricing policies By Angelo Baglioni
  2. Multi-Product Firms, R&D, and Growth By Minniti, Antonio
  3. Fences and competition in patent races By Schneider, Cédric
  4. Equilibrium and Optimal R&D Roles in a Mixed Market By Vasileios Zikos
  5. Cooperation without Coordination: Signaling, Types and Tacit Collusion in Laboratory Oligopolies By Douglas D. Davis; Korenok Oleg; Robert Reilly
  6. First-Price Equilibrium and Revenue Equivalence in a Sequential Procurement Auction Model By Reiss J. Philipp; Schöndube Jens Robert
  7. Le système d’innovation de Benetton et ses limites By Giovanni Favero
  8. Clicks, Discontinuities, and Firm Demand Online By Michael R. Baye; J. Rupert J. Gatti; Paul Kattuman; John Morgan

  1. By: Angelo Baglioni (DISCE, Università Cattolica)
    Abstract: This paper presents a model of entry into a network industry. The entrant tries to attract the customer base of the incumbent service provider. While the entrant is more efficient, the incumbent enjoys an advantage thanks to a bias in consumers’ expectations. Buyers enter the game with heterogenous beliefs as to which of the two firms is going to win competition. Then expectations converge - through higher order beliefs - and select one winner, who ends up being the single supplier. The path of expectations convergence crucially depends on the pricing policy followed by firms: so equilibrium beliefs are endogenous. Depending on parameter values, one of two outcomes obtains: (i) the incumbent is able to exclude the entrant, by lowering his price below the monopoly level; (ii) the entrant is successful, by undercutting the incumbent price. Productive efficiency and consumers’ welfare are hurt by exclusion; the entry threat is beneficial to consumers anyway. Imposing compatibility among networks is welfare improving, as it removes the exclusionary potential enjoyed by the incumbent.
    Keywords: network industries, critical mass, entry, exclusion, higher order beliefs
    JEL: D42 D84 L12 L41
    Date: 2006–11
  2. By: Minniti, Antonio
    Abstract: Multi-product firms dominate production activity in the global economy. There is widespread evidence showing that large corporations improve their efficiency by increasing the scale of their operations; this objective can be realized either by consistently investing in R&D or by expanding the product range. In this paper, we explore the implications of this fact by embedding multi-product firms in a General Equilibrium model of endogenous growth. We analyze an economy with oligopolistic firms that carry out in-house R&D programs in order to achieve cost-reducing innovations. Market structure is endogenous in the model and is jointly determined by the number of firms and the number of product varieties per firm. Both economies of scope and scale characterize the economic environment. We show that the market equilibrium involves too many firms (too much inter-firm diversity) and too few products per firm (too little intra-firm diversity); moreover, we find out that the total number of products and productivity growth are inefficiently low under laissez-faire. The nature of these distortions is discussed in detail.
    Keywords: imperfect competition; multi-product firms; endogenous growth; R&D
    JEL: E0 O31 O3
    Date: 2006
  3. By: Schneider, Cédric
    Abstract: This paper studies the behaviour of firms facing the decision to create a patent fence, defined as a portfolio of substitute patents. We set up a patent race model, where firms can decide either to patent their inventions, or to rely on secrecy. It is shown that firms build patent fences, when the duopoly profits net of R&D costs are positive. We also demonstrate that in this context, a firm will rely on secrecy when the speed of discovery of the subsequent invention is high compared to the competitors. Furthermore, we compare the model under the First-to-Invent and First-to-File legal rules. Finally, we analyze the welfare implications of patent fence
    JEL: L10 O34
    Date: 2005–12–02
  4. By: Vasileios Zikos (Dept of Economics, Loughborough University)
    Abstract: This is the first paper to investigate the timing of the R&D decisions in a mixed market. Considering a model in which a public firm competes against a private one, we examine the desirable (welfare-maximizing) and the equilibrium R&D role of the public firm. Our results suggest that from a social point of view, the public firm should carry out its investment as a Stackelberg follower. Using the observable delay game of Hamilton and Slutsky [Games and Economic Behavior 2 (1990) 29], we show that the public firm may play this desirable role.
    Keywords: Endogenous timing; R&D; Stackelberg; mixed market.
    JEL: L13 L31 L32
    Date: 2007–02
  5. By: Douglas D. Davis (Department of Economics, VCU School of Business); Korenok Oleg (Department of Economics, VCU School of Business); Robert Reilly (Department of Economics, VCU School of Business)
    Abstract: This paper reports an experiment conducted to examine tacit collusion in posted offer markets. In addition to a baseline treatment, we study a ‘forecasting’ treatment, which allows an improved identification of intended signals, and a ‘types’ treatment, which examines pricing outcomes among cohorts of homogeneously ‘cooperative’ or ‘competitive’ subjects. Results indicate that while signals tend to affect subsequent pricing decisions, signaling does not affect long term transaction prices. On the other hand ‘types’ are stable across sessions and powerfully affect results. Markets comprised of ‘cooperative’ types tend to generate persistently higher transaction prices than do markets comprised of ‘competitive’ types.
    Keywords: Experiments, Tacit Collusion, Price Signaling, Types
    JEL: C9 L11 L13
    Date: 2007–03
  6. By: Reiss J. Philipp; Schöndube Jens Robert (METEOR)
    Abstract: We analyze first-price equilibrium bidding behavior of capacity-constrained firms in a sequence of two procurement auctions. In the model, firms with a cost advantage in completing the project auctioned off at the end of the sequence may enter the unfavored first auction hoping to lose it. Equilibrium bidding in both auctions deviates from the standard Symmetric Independent Private Value auction model (SIPV) due to opportunity costs of bidding created by possibly employed capacity.For this sequential auction model with non-identical objects, we show that revenue equivalence holds.
    Keywords: microeconomics ;
    Date: 2007
  7. By: Giovanni Favero
    Abstract: This paper focuses on the innovation system in the Benetton case: on the one hand, it puts in evidence the ability of the company in exploiting institutional conditions in order to develop a network organisation and a series of coordinated innovations; on the other hand, it investigates on the characteristics of the circulation of innovation among Benetton suppliers and distributors. The paper was presented at the conference Les systèmes d’innovations: multiplicité des échelles, diversité des espaces, Bordeaux, Maison de Sciences de l’Homme d’Aquitaine, November 16-17, 2006.
    Keywords: Innovation, network firm, industrial policies.
    JEL: N84 N44 N64
  8. By: Michael R. Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); J. Rupert J. Gatti (University of Cambridge); Paul Kattuman (University of Cambridge); John Morgan (University of California at Berkeley)
    Abstract: The market values of online platforms, such as Yahoo, stem from their ability to monetize the clicks they generate for firms advertising on their sites. We exploit a unique dataset on clicks from one of Yahoo's price comparison sites to estimate the determinants of clicks received by online retailers. We find that a firm enjoys a 60% jump in its clicks when it offers the lowest price at the site. This discontinuity is consistent with a variety of models that have been used to rationalize the price dispersion observed in online markets. We also show that one may use estimates of the determinants of a firm's clicks to obtain bounds on its underlying demand parameters, including own- and cross-price elasticities. Our results have potentially significant ramifications for online retailers, platforms, and policymakers: Failure to account for discontinuities distorts parameter estimates by 50 to 100 percent.
    JEL: D4 D8 L14 M3
    Date: 2006

This nep-mic issue is ©2007 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.