nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒05‒12
twenty papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Why Are Firms Sometimes Unwilling to Reduce Costs? By X. Henry Wang; Jingang Zhao
  2. Competition and Waiting Times in Hospital Markets By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  3. Reciprocity, inequity-aversion, and oligopolistic competition By Santos-Pinto, Luís
  4. Competition in product design: An experiment exploring innovation behavior By Uwe Cantner; Werner Güth; Andreas Nicklisch; Torsten Weiland
  5. How (not) to measure competition By van der Wiel, Henry; Boone, Jan; van Ours, Jan C
  6. Competing with Menus of Tariff Options By Miravete, Eugenio J
  7. Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration By Glenn Ellison; Sara Fisher Ellison
  8. Are Sunk Costs a Barrier to Entry? By Luís Cabral; Thomas Ross
  9. Advertising and Cost Reduction By Giovanni Immordino
  10. Are two-part tariffs efficient when consumers plan ahead?: An empirical study By Laura Fernàndez-Villadangos
  11. The Welfare Cost of Market Power. Accounting for Intermediate Good Firms By Geir H. Bjertnæs
  12. A.-R.-J. Turgot on a General Market: Competition, Price and History By José M. Menudo
  13. Price Elasticities of Demand Are Minus One-half By Kenneth Clements
  14. The Welfare Impact of Competition in Fixed Telephony By Toker Doganoglu; Pedro Pereira
  15. Productivity growth and competition in spanish manufacturing firms: What has happened in recent years? By Agustí Segarra-Blasco; Mercedes Teruel-Carrizosa
  16. Multinational Firms and Innovation: The Role of R&D Collaboration, Markets and Ownership By Lööf, Hans
  17. Economic Geography and the Evolution of Networks By Johannes Gluckler
  18. Iterative Reasoning in an Experimental "Lemons" Market. By Annette Kirstein; Roland Kirstein
  19. An evolutionary model of industry dynamics and firms' institutional behavior with job search, bargaining and matching By Sandra T. Silva; Jorge M. S. Valente; Aurora A. C. Teixeira
  20. Private-collective Software Business Models: Cordinatitons and Commercialization via Licensing By Heli Koski

  1. By: X. Henry Wang (Department of Economics, University of Missouri-Columbia); Jingang Zhao
    Abstract: This paper establishes three new results for multiproduct oligopolies: 1) it presents the first explicit expression of Nash equilibria for asymmetric multiproduct oligopolies; 2) it shows that reducing a multiproduct firms cost in Bertrand oligopolies will reduce its profits if the cost-reducing unit is sufficiently small; and 3) it demonstrates that a multiproduct firm has no incentive to eliminate a product whose sales are zero. Because a single-product firm whose sales are zero is indifferent between exiting and staying, and its cost reductions always increase its profits, our results are unique to the multiproduct firm, and they suggest that extending oligopoly studies from a single product to multi-products could be as significant as the extension of calculus from a single variable to multi-variables.
    Keywords: Effect of cost reduction, multiproduct oligopoly, price competition, quantity competition
    JEL: C63 D43 L13
    Date: 2007–01–15
  2. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    Abstract: This paper studies the impact of hospital competition on waiting times. We use a Salop-type model, with hospitals that differ in (geographical) location and, potentially, waiting time, and two types of patients; high-benefit patients who choose between neighbouring hospitals (competitive segment), and low-benefit patients who decide whether or not to demand treatment from the closest hospital (monopoly segment). Compared with a benchmark case of regulated monopolies, we find that hospital competition leads to longer waiting times in equilibrium if the competitive segment is sufficiently large. Given a policy regime of hospital competition, the effect of increased competition depends on the parameter of measurement: Lower travelling costs increase waiting times, higher hospital density reduces waiting times, while the effect of a larger competitive segment is ambiguous. We also show that, if the competitive segment is large, hospital competition is socially preferable to regulated monopolies only if the (regulated) treatment price is sufficiently high.
    Keywords: competition; hospitals; waiting times
    JEL: H42 I11 I18 L13
    Date: 2007–05
  3. By: Santos-Pinto, Luís
    Abstract: This paper extends the Cournot and Bertrand models of strategic interaction between firms by assuming that managers are not only profit maximizers, but also have preferences for reciprocity or are averse to inequity. A reciprocal manager responds to unkind behavior of rivals with unkind actions, while at the same time, it responds to kind behavior of rivals with kind actions. An inequity averse manager likes to reduce the difference between own profits and the rivals’ profits. The paper finds that if firms with reciprocal managers compete à la Cournot, then they may be able to sustain “collusive” outcomes under a constructive reciprocity equilibrium. By contrast, Stackelberg warfare may emerge under a destructive reciprocity equilibrium. If there is Cournot competition between firms and their managers are averse to advantageous (disadvantageous) inequity, then firms are better (worse) off than if managers only care about maximizing profits. If firms compete à la Bertrand, then only under very restrictive conditions will managers’ preferences for reciprocity or inequity aversion have an impact on equilibrium outcomes.
    Keywords: Reciprocity; Inequity Aversion; Cournot; Bertrand.
    JEL: D43 D63 L21 L13
    Date: 2006–05–17
  4. By: Uwe Cantner (University of Jena, School of Busniess and Economics); Werner Güth (Max Planck Institute of Economics Jena, Strategic Interaction Unit); Andreas Nicklisch (Max Planck Institute for Research on Collective Goods, Bonn, Germany); Torsten Weiland (Max Planck Institute of Economics Jena, Strategic Interaction Unit)
    Abstract: We experimentally investigate competition in innovation in a patent race scenario. Pairs of subjects compete as seller firms on a duopoly market, engaging in risky search investments. Successful innovation is rewarded through temporary monopoly rents. Throughout the interaction, subjects receive feedback on own and other’s search success and profit margin. Partitioning subjects into subgroups of investor types reveals that the majority of subjects condition investments on the degree of competition as measured by sales shares, while for others no correlation is ascertained. Heterogeneity in individual risk attitudes and differing experiences with related search tasks may explain this finding.
    Keywords: innovation, competition, imitation, patent race
    JEL: D81 L11 O31
    Date: 2007–05–07
  5. By: van der Wiel, Henry; Boone, Jan; van Ours, Jan C
    Abstract: We introduce a new measure of competition: the elasticity of a firm's profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competition. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.
    Keywords: competition; concentration; measures of competition; price cost margin; profit elasticity; profits
    JEL: D43 L13
    Date: 2007–05
  6. By: Miravete, Eugenio J
    Abstract: I study how firms actually compete in nonlinear tariffs by analyzing whether the incumbent and entrant's decisions to offer a given number of tariff options are interrelated. The goal is to shed some light on those dynamic and strategic aspects of tariff menus that are currently ignored by theoretical models of nonlinear pricing competition in order to highlight some basic features of the market that future theoretical work should address. This paper also introduces a generalized multivariate count data model that allows me to account for the possibility of correlation of any sign among the pricing decisions of competing firms in a manner that is robust to the existence of over and underdispersion of counts. Pricing strategies appear to be strategic complements that respond positively to the existing heterogeneity of consumers' tastes. While this is a common source driving the number of tariff options offered, results also show that previous pricing decisions by the incumbent affect the entrant's current offering of tariff options, thus implying free riding by the entrant on information about the market revealed by the likely better informed firm of the industry. The strategic complementarity result disappears when I only consider non-dominated tariffs.
    Keywords: Bivariate Count Data Regression; Nonlinear Pricing Competition; Strategic Complementarity; Tariff Menus
    JEL: C35 D43 M21
    Date: 2007–05
  7. By: Glenn Ellison; Sara Fisher Ellison
    Abstract: This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents just before they lose patent protection. The approach involves looking at a cross-section of markets and examining whether behavior is nonmonotonic in the size of the market. Under certain conditions, investment levels will be monotone in market size if firms are not influenced by a desire to deter entry. Strategic investments, however, may be nonmonotone because entry deterrence is unnecessary in very small markets and impossible in very large ones, resulting in overall nonmonotonic investment. The pharmaceutical data contain advertising, product proliferation, and pricing information for a sample of drugs which lost patent protection between 1986 and 1992. Among the findings consistent with an entry deterrence motivation are that incumbents in markets of intermediate size have lower levels of advertising and are more likely to reduce advertising immediately prior to patent expiration.
    JEL: L13 L65
    Date: 2007–04
  8. By: Luís Cabral (New York University); Thomas Ross (University of British Columbia)
    Abstract: The received wisdom is that sunk costs create a barrier to entry— if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.
    Date: 2007–02
  9. By: Giovanni Immordino (Università di Salerno and CSEF)
    Abstract: The empirical literature on internalization has found a positive relationship between advertising intensity and foreign direct investment. The model presented in this paper explains this evidence by a technological change in the communications environment and makes predictions for other cost-reducing investments. We consider a market in which a single producer launches a new product. At first potential buyers are unaware of the product and its price, and the producer decides the optimal advertising strategy. We find that both advertising spending and investment in per unit cost reduction are higher under targeting than under mass advertising when the advertising technology exhibits marginal economies of targeting.
    Keywords: Informative advertising, Targeting, Foreign Direct Investment, Cost reduction
    JEL: F23 L12 M37
    Date: 2007–05–01
  10. By: Laura Fernàndez-Villadangos (Grup de Recerca en Polítiques Públiques i Regulació Económiques (GPRE), Institut de Recerca d'Economia Aplicada (IREA), Departament de Política Econòmica i EEM, Universitat de Barcelona)
    Abstract: During the last two decades there has been an increase in using dynamic tariffs for billing household electricity consumption. This has questioned the suitability of traditional pricing schemes, such as two-part tariffs, since they contribute to create marked peak and offpeak demands. The aim of this paper is to assess if two-part tariffs are an efficient pricing scheme using Spanish household electricity microdata. An ordered probit model with instrumental variables on the determinants of power level choice and non-paramentric spline regressions on the electricity price distribution will allow us to distinguish between the tariff structure choice and the simultaneous demand decisions. We conclude that electricity consumption and dwellings’ and individuals’ characteristics are key determinants of the fixed charge paid by Spanish households Finally, the results point to the inefficiency of the two-part tariff as those consumers who consume more electricity pay a lower price than the others.
    Keywords: Regulation, electricity, consumer behavior: empirical analysis.
    JEL: L94 Q41 D12
    Date: 2006–10
  11. By: Geir H. Bjertnæs (Statistics Norway)
    Abstract: The market power of firms in intermediate good markets is found to generate a substantial welfare cost. Markup pricing of intermediate good firms contributes to increase the wedge between the marginal product of labor and the wage rate received by workers, as intermediate good firms add additional markups to the unit cost of a consumer good. This creates an additional wedge in the labor market, and is costly due to the existing substantial tax wedge in the labor market. The welfare cost of distortions in the supply of labor created by market power of firms is found to be more than 40 times larger than the welfare cost of distortions in the allocation of consumer goods created by differences in market power of firms. This welfare cost is substantial compared to previous estimates.
    Keywords: Monopoly; Taxation; Welfare costs
    JEL: D60 H20
    Date: 2007–04
  12. By: José M. Menudo (Department of Economics, Universidad Pablo de Olavide)
    Abstract: The purpose of this paper is to re-examine the notion of price determination in A.-R.-J. Turgot’s writings. Consideration is given to the evolution of the concept of market during the 18th century. It is argued that Turgot provided a model of multiple exchanges with merchants, called General market, in order to tackle economic problems, as is the market integration, price stability and the hoarding of capital. Further, we demonstrate how a uniform price, which is kept constantly, required that Turgot made use of theoretical tools from other disciplines.
    Keywords: Turgot, Equilibrium and Disequilibrium, price formation, Information and Knowledge.
    JEL: B1 D50 L11 B41 D83
    Date: 2007–05
  13. By: Kenneth Clements (Business School, The University of Western Australia)
    Abstract: As an empirical regularity for broad commodity groups, we show that price elasticities of demand are scattered around the value of minus one-half. We also show that this finding is not inconsistent with the utility-maximising theory of the consumer under the conditions of preference independence. When nothing is known about the price-sensitivity of a good, a reasonable first approximation to its price elasticity is thus minus one-half.
    Date: 2006
  14. By: Toker Doganoglu (University of Munich); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In Portugal, fixed telephony was liberalized in 2000. In this article, we estimate the impact on prices and consumer welfare of the liberalization process. We use a panel of household level data to estimate a structural model of demand for duration and number of calls of fixed telephony services. We focus on local and national peak period calls. The demand for duration is inelastic. Given these estimates, we perform several simulation exercises. Our results indicate that the per consumer average monthly gain of switching from the basic tariff plan of the incumbent to an alternative tariff plan is of about 70 cents. For some consumers, these gains could be as large as 2 euros.
    Keywords: Fixed Telephony, Liberalization, Prices
    JEL: L25 L51 L96
    Date: 2006–06
  15. By: Agustí Segarra-Blasco (Grup de Recerca d'Indústria i Territori (GRIT), Department d'Economia, Universitat Rovira i Virgili); Mercedes Teruel-Carrizosa (Grup de Recerca d'Indústria i Territori (GRIT), Department d'Economia, Universitat Rovira i Virgili)
    Abstract: This paper addresses the issue of the relationship between productivity and market competition. In comparison to the economies of other European countries, the Spanish economy has been growing, while productivity growth has stagnated. Here we provide empirical evidence about the relationship between productivity and market competition from Spanish manufacturing firms at firm level between 1994 and 2004. Correcting for selection bias, our study pays special attention to the patterns of productivity growth between openness and non-openness firms. When market competition increases the effect on firms operating in domestic markets is positive but when the level of competition is high incentives to invest in innovation and productivity gains disappear. The empirical relationship between competition and productivity is an inverted U-shape, where productivity growth is highest at intermediate levels of competition. The productivity growth of firms operating in international markets is higher than that of non-openness firms, but when market competition rises they moderate their productivity growth. Our empirical results suggest that the correct competition policy in the Spanish economy should remove the barriers to competition in internal markets in order to increase the incentives for manufacturing firms to invest in innovation and productivity growth.
    Keywords: Manufacturing industries, innovation, competitiveness, international trade, Heckman equation
    JEL: L25 O14 O33
    Date: 2006–12
  16. By: Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: In this paper, we examine the relationship between R&D collaboration, corporate ownership, market orientation and innovation. In doing so, we classify a Swedish sample of 1,249 multinational enterprises, MNEs, on the basis of their main market, corporate ownership structure and whether their collaborators are foreign-owned or not. We then apply a knowledge production model and estimate the contribution to innovation output from regional and foreign collaboration on innovation with other firms within the group, universities, suppliers and customers, competitors and consultants, controlling for internal R&D investment, human capital, physical capital, trade, financial resources and industry classification. Empirical evidence based on cross-sectional data sheds new light on how innovation is affected by local and global technology spillover.
    Keywords: Multinational enterprises; R&D; R&D collaboration; spillovers; export; import; corporate ownership structure; community innovation survey; innovation output; micro econometrics
    JEL: D21 F23 L21 L22 O31 O32
    Date: 2007–05–02
  17. By: Johannes Gluckler
    Abstract: An evolutionary perspective on economic geography requires a dynamic understanding of change in networks. This paper explores theories of network evolution for their use in geography and develops the conceptual framework of geographical network trajectories. It specifically assesses how tie selection constitutes the evolutionary process of retention and variation in network structure and how geography affects these mechanisms. Finally, a typology of regional network formations is used to discuss opportunities for innovation in and across regions.
    Keywords: evolution, network trajectory, evolutionary economic geography, social network analysis, innovation
    Date: 2007–04
  18. By: Annette Kirstein; Roland Kirstein (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: In this paper we experimentally test a theory of boundedly rational behavior in a "lemons" market. We analyze two different market designs, for which perfect rationality implies complete and partial market collapse, respectively. Our empirical observations deviate substantially from the predictions of rational choice theory: Even after 20 repetitions, the actual outcome is closer to efficiency than expected. We examine to which extent the theory of iterated reasoning contributes to the explanation of these observations. Perfectly rational behavior requires a player to perform an infinite number of iterative reasoning steps. Boundedly rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between the iteration types and the observed price offers.
    Keywords: bounded rationality, market failure, adverse selection, regulatory failure, paternalistic regulation
    JEL: D8 C7 B4
    Date: 2007–04
  19. By: Sandra T. Silva (CEMPRE, Faculdade de Economia da Universidade do Porto, Portugal); Jorge M. S. Valente (LIACC/NIAAD, Faculdade de Economia da Universidade do Porto, Portugal); Aurora A. C. Teixeira (INESC-Porto, Faculdade de Economia da Universidade do Porto, Portugal)
    Abstract: This paper proposes an evolutionary model that captures the main dynamics of a world where heterogeneous firms and workers interact and co-evolve. Within a micro-meso perspective, the model focuses on the influence of firms' "institutional settings" on industry dynamics, formalizing these settings as firms' labor choices. Benefiting from insights offered by mainstream labor economics, we introduce the dynamic processes of job search, bargaining and matching in an evolutionary framework. The results of a computer simulation model show that in a stable environment there is an initial clear improvement in the average fitness of the population of incumbent firms, which then evolves around an evolutionary stationary threshold. The consideration of endogenous matching and bargaining processes in the labor market results in important frictions. Furthermore, the simulation results show an increasing wage inequality between the two types of workers considered in the model. We also consider the effect of both positive and negative demand shocks. The turbulence in the industry increases (decreases) after the negative (positive) demand shock. As expected, the negative demand shock causes a decrease in the number of vacancies and, consequently, the unemployment rates increase considerably. Following the positive demand shock, on the other hand, the firms slightly increase the number of vacancies, so the behavior in terms of unemployment rates is better than in the model without shocks.
    Keywords: evolutionary, firm behavior, job search, bargaining and matching, microfoundations, industrial dynamics
    JEL: B52 D21 L2 J2 J3 O12
    Date: 2007–04
  20. By: Heli Koski
    Abstract: The private-collective business models that involve both private investment incentives and the production of public goods are not well understood. This empirically oriented research uses the unique data from the software industries of five European countries (Finland, Germany, Italy, Portugal and Spain) to illuminate the patterns of private, entrepreneurial provision of software placed in the public domain. The estimation results strongly suggest that the highly restrictive GPL (General Public License) works as an efficient coordination mechanism for the (leading) developers of the OSS community and spreads particularly via the firms that have participated in the OSS development projects. The software companies supplying the OSS, instead, tend not to aim at using the GPL to coordinate the further development of their own OSS. The firms are rather the origin of more flexibly licensed OSS products though gener-ally the software firms’ OSS business strategies relate to the restrictive licensing strategy choices
    Keywords: Open Source software, licensing, business strategies
    JEL: D21 D23 L23 L86
    Date: 2007–05–02

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