nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒06‒11
thirteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Dynamic Price Competition with Network Effects By Luís Cabral
  2. Bertrand-Edgeworth equilibrium with a large number of firms By Roy Chowdhury, Prabal
  3. Mixed Oligopoly under Demand Uncertainty By Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
  4. Innovation and Market Structure in Presence of Spillover Effects By Khazabi, Massoud
  5. Incentives for Process Innovation in a Collusive Duopoly By Christoph Engel
  7. Exclusionary contracts, entry, and communication By Gerlach, Heiko
  8. Pricing and Profits Under Globalized Competition: A Post Keynesian Perspective on U.S. Economic Hegemony By William Milberg
  9. Minimum Safety Standard, Consumers' Information, and Competition, The By Stephan Marette
  10. Radical Innovation and Network Evolution By Sandra Phlippen; Massimo Riccaboni
  11. Competing in Organizations: Firm Heterogeneity and International Trade By Marin, Dalia; Verdier, Thierry
  12. Directed Networks with Global Spillovers By Sudipta Sarangi; Pascal Billand; Christophe Bravard
  13. Are Firms That Received R&D Subsidies More Innovative? By Mohnen, Pierre; Bérubé, Charles

  1. By: Luís Cabral (New York University)
    Abstract: I consider a dynamic model of competition between two proprietary networks. Consumers die with a constant hazard rate and are replaced by new consumers. Firms compete for new consumers to join their network by offering network entry prices (which may be below cost). New consumers have a privately known preference for each network. Upon joining a network, in each period consumers enjoy a benefit which is increasing in network size during that period. Firms receive revenues from new consumers as well as from consumers already belonging to their network. I discuss various properties of the equilibrium, including the pricing function, the system’s expected motion, and the stationary distribution of market shares. I derive several results analytically. I then confirm and extend these results by numerical computation. Finally, I use the model to estimate the barrier to entry create by network effects.
    Date: 2007–04
  2. By: Roy Chowdhury, Prabal
    Abstract: We examine a model of price competition with strictly convex costs where the firms simultaneously decide on both price and quantity, are free to supply less than the quantity demanded, and there is discrete pricing. If firms are symmetric then, for a large class of residual demand functions, there is a unique equilibrium in pure strategies whenever, for a fixed grid size, the number of firms is sufficiently large. Moreover, this equilibrium price is within a grid-unit of the competitive price. The results go through to a large extent when the firms are asymmetric, or they are symmetric but play a two stage game and the tie-breaking rule is `weakly manipulable'.
    Keywords: Bertrand equilibrium; Edgeworth paradox; tie-breaking rule; rationing rule; folk theorem of perfect competition.
    JEL: D41 D43 L13
    Date: 2007–04
  3. By: Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
    Abstract: In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when the public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.
    Keywords: Mixed oligopoly; Partial privatization; Demand Uncertainty.
    JEL: L13 D8 C72
    Date: 2007–06–08
  4. By: Khazabi, Massoud
    Abstract: The paper proposes a theory of innovation and market structure. The model incorporates n firms with horizontal spillovers all interacting within a hypothetical industry. In a two-stage sequential game framework, four types of cooperation are studied: full non-cooperation; cooperation in both stages; cooperation only in the R&D stage; and simultaneous cooperation and non-cooperation in the R&D stage. It is shown that the effect of competition on total innovation investment varies among all four cases and mostly depends on the level of spillover.
    Keywords: R&D; Innovation; competition; cooperation; spillover; market structure
    JEL: L1
    Date: 2007
  5. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Two suppliers of a homogenous good know that, in the second period, they will be able to collude. Gains from collusion are split according to the Nash bargaining solution. In the first period, either of them is able to invest into process innovation. Innovation changes the status quo pay-off, and thereby affects the distribution of the gains from collusion. The resulting innovation incentive is strictly smaller than in the competitive case.
    Keywords: Duopoly, Collusion, Innovation Incentives
    JEL: D43 K21 L13 O31
    Date: 2007–05
  6. By: Ramón Faulí-Oller (Universidad de Alicante); Marc Escrihuela (Universidad de Alicante)
    Abstract: It is well known that the profitability of horizontal mergers with quantity competition is scarce. However, in an asymmetric Stackelberg market we obtain that some mergers are profitable. Our main result is that mergers among followers become profitable when the followers are inefficient enough. In this case, leaders reduce their output when followers merge and this reduction renders the merger profitable. This merger increases price and welfare is reduced.
    Keywords: Mergers; Asymmetries; Stackelberg.
    JEL: L13 L40 L41
    Date: 2007–05
  7. By: Gerlach, Heiko (University of Auckland)
    Abstract: I examine the incentives of firms to communicate entry into an industry where the incumbent writes exclusionary, long-term contracts with consumers. The entrant's information provision affects the optimal contract proposal by the incumbent and leads to communication incentives that are highly non-linear in the size of the innovation. Entry with small and medium-to-large innovations is announced whereas small-to-medium and large innovations are not communicated. It is demonstrated that this equilibrium communication behavior maximizes ex ante total welfare by reducing the anti-competitive impact of excessively exclusive contracts. By contrast, consumers always prefer more communication and the incumbent's equilibrium contract maximizes ex ante consumer surplus.
    Keywords: Long-term contracts; communication; contractual switching costs; exclusionary conduct;
    JEL: D86 L12 L41
    Date: 2007–05–15
  8. By: William Milberg (New School for Social Research, New York, NY)
    Keywords: pricing; profits; globalization; competition; post keynesian; economic hegemony
    Date: 2007–02–03
  9. By: Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI))
    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. JEL Classification: C L1, L5
    Date: 2007–02
  10. By: Sandra Phlippen (Erasmus Universiteit Rotterdam); Massimo Riccaboni (University of Florida)
    Abstract: This paper examines how a radical technological innovation affects alliance formation of firms and subsequent network structures. We use longitudinal data of interfirm R&D collaborations in the biopharmaceutical industry in which a new technological regime is established. Our findings suggest that it requires radical technological change for firms to leave their embedded path of existing alliances and form new alliances with new partners. While new partners are mostly found through the firms’ existing network, we provide some insight into distant link formation with unknown partners, which contributes to our understanding of how ‘small-worlds’ might emerge.
    Keywords: Pharmaceutical industry; Biotechnology industry; R&D; Technological change; Alliances; Networks
    JEL: O32 O31 L14 L24 M13 M21
    Date: 2007–05–10
  11. By: Marin, Dalia; Verdier, Thierry
    Abstract: This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition.
    Keywords: international trade with endogenous firm organizations and endogenous toughness of competition; firm heterogeneity; power struggle in the firm
    JEL: F12 F14 L22 D23
    Date: 2007–05
  12. By: Sudipta Sarangi; Pascal Billand; Christophe Bravard
    Abstract: This paper examines directed networks in which the payoff of a player depends on the total number links formed by her and the other players. After showing that these networks with global spillovers may not always have Nash equilibria in pure strategies, we introduce two additional properties for the payoff function. The first called increasing (or decreasing) difference property states that player i’s payoff increases (decreases) as the number of links between the other n - 1 players increases. The second condition called the strict smaller midpoint property imposes a monotonicity restriction on the payoff function. We show that pure strategy Nash networks always exist under both conditions. The paper then characterizes these Nash equilibria showing that symmetric networks play a crucial role.
  13. By: Mohnen, Pierre (UNU-MERIT and Maastricht University); Bérubé, Charles (Industry Canada)
    Abstract: This paper looks at the effectiveness of R&D grants for Canadian plants that already benefit from R&D tax credits. Using a non-parametric matching estimator, we find that firms that benefited from both policy measures introduced more new products than their counterparts that only benefited from R&D tax incentives. They also made more world-first product innovations and were more successful in commercializing their innovations.
    Keywords: Innovations, R&D, Matching Estimators, Mahalanobis, Innovation Survey, Tax Credits, Grants
    JEL: O31 O32 O38 C13 H25
    Date: 2007

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