nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒07‒13
nine papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. “Net Neutrality,” Non-Discrimination and Digital Distribution of Content Through the Internet By Nicholas Economides;
  2. Exclusionary Discounts By Janusz Ordover; Greg Shaffer
  3. Do Consumers Switch to the Best Supplier? By Chris Wilson; Catherine Waddams Price
  4. Tacit Collusion, Firm Asymmetries and Numbers: Evidence from EC Merger Cases By Stephen Davies; Matthew Olczak; Heather Coles
  5. Convergence in Finite Cournot Oligopoly with Social and Individual Learning By Thomas VALLEE (LEN - IAE Nantes); Murat YILDIZOGLU (GREThA)
  6. Bargaining over Remedies in Merger Regulation By Bruce Lyons; Andrei Medvedev
  7. (Corporate Governance Series 003) The Ownership of Ratings By Antoine Faure-Grimaud; Eloïc Peyrache; Lucia Quesada
  8. Optimal Patent Breadth: Quantifying the Effects of Increasing Patent Breadth By Chu, Angus C.
  9. Welfare and growth impacts of innovation policies in a small, open economy. An applied general equilibrium analysis By Brita Bye, Taran Fæhn and Tom-Reiel Heggedal

  1. By: Nicholas Economides (Stern School of Business, New York University);
    Abstract: The vast majority of US residential consumers face a monopoly or duopoly in broadband Internet access. Up to now, the Internet was characterized by a regime of “net neutrality” where there was no discrimination in the price of a transmitted information packet based on the identities of either the transmitter or the receiver or based on the application or type of content that it contained. The providers of DSL or cable modem access in the United States, taking advantage of a recent regulatory change that effectively abolished net neutrality and non-discrimination protections, and possessing significant market power, have recently discussed implementing a variety of discriminatory pricing schemes. This paper discusses and evaluates the implication of a number of these schemes on prices, profits of the network access providers and those of the complementary applications and content providers, as well as the impact on consumers. We also discuss an assortment of anti-competitive effects of such price discrimination, and evaluate the possibility of imposition of net neutrality by law.
    Keywords: net neutrality, Internet, price discrimination, vertical restrictions, two-sided pricing, horizontal cooperation, raising rivals’ costs
    JEL: L1 D4 L12 L13 C63 D42 D43
    Date: 2007–03
  2. By: Janusz Ordover (New York University and Competition Policy Associates); Greg Shaffer (Simon School of Business, University of Rochester)
    Abstract: We consider a two-period model with two sellers and one buyer in which the efficient outcome calls for the buyer to purchase one unit from each seller in each period. We show that when the buyer's valuations between periods are linked by switching costs and at least one seller is financially constrained, there are plausible conditions under which exclusion arises as the unique equilibrium outcome (the buyer buys both units from the same seller). The exclusionary equilibria are supported by price-quantity offers in which the excluding seller offeres its second unit at a price that is below its marginal cost of production. In some cases, the price of this second unit is negative. Our findings contribute to the literatures on exclusive dealing, bundling, and loyalty rebates/payments.
    Keywords: Exclusive dealing, bundling, market-share discounts, all-units discounts
    JEL: L13 L41 L42
    Date: 2007–05
  3. By: Chris Wilson (Department of Economics, University of Oxford); Catherine Waddams Price (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper assesses the ability of consumers to choose between alternative suppliers. Across two independent datasets from the UK electricity market we find that consumers switching exclusively for price reasons appropriated only a quarter to half of the maximum gains available. While such behaviour can be explained by high search costs, the observation that 20-31% of the consumers actually reduced their surplus as a result of switching cannot. A brief analysis rejects an explanation involving suppliers' mis-selling tactics. Consumers may need direct protection, as well as good information, if their decisions are insufficiently accurate to engender competitive markets.
    Keywords: Search costs, switching costs, decision errors, mis-selling
    JEL: L00 D83
    Date: 2007–04
  4. By: Stephen Davies (Centre for Competition Policy, University of East Anglia); Matthew Olczak (Centre for Competition Policy, University of East Anglia); Heather Coles
    Abstract: The purpose of this paper is to identify empirically the implicit structural model, especially the roles of size asymmetries and concentration, used by the European Commission to identify mergers with coordinated effects (i.e. collective dominance). Apart from its obvious policy-relevance, the paper is designed to shed empirical light on the condition under which tacit collusion is most likely. We construct a database relating to 62 candidate mergers and find that, in the eyes of the Commission, tacit collusion in this context virtually never involves more than two firms and requires close symmetry in the market shares of the two firms.
    Keywords: Tacit collusion, collective dominance, coordinated effects, European mergers, asymmetries
    JEL: L13 L41
    Date: 2007–03
  5. By: Thomas VALLEE (LEN - IAE Nantes); Murat YILDIZOGLU (GREThA)
    Abstract: Convergence to Nash equilibrium in Cournot oligopoly is a problem that recurrently arises as a subject of study in economics. The development of evolutionary game theory has provided an equilibrium concept more directly connected with adjustment dynamics and the evolutionary stability of the equilibria of the Cournot game has been studied by several articles. Several articles show that the Walrasian equilibrium is the stable evolutionary solution of the Cournot game. Vriend (2000) proposes to use genetic algorithm for studying learning dynamics in this game and obtains convergence to Cournot equilibrium with individual learning. We show in this article how social learning gives rise to Walras equilibrium and why, in a general setup, individual learning can effectively yield convergence to Cournot instead of Walras equilibrium. We illustrate these general results by computational experiments.
    Keywords: Cournot oligopoly; Learning; Evolution; Selection; Evolutionary stability; Nash equilibrium; Genetic algorithms
    JEL: L13 L20 D43 C63 C73
    Date: 2007
  6. By: Bruce Lyons (Centre for Competition Policy, University of East Anglia); Andrei Medvedev (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper provides a first attempt to understand how outcomes are determined by the standard institutions of merger control. In particular, we focus on the internationally standard 2-phase investigation structure and remedy negotiations of the form practiced by the EC. We find that there are inherent biases in remedy outcomes, and identifiable circumstances where offers will be excessive and where they will be deficient. In particular, we find clear circumstances in which firms offer excessive remedies, which goes against a possible intuition that firms should expect to extract an information rent for possessing superior information about competition in the market.
    Keywords: Merger regulation, merger remedies, competition policy, bargaining
    JEL: K21 L41 L51
    Date: 2007–02
  7. By: Antoine Faure-Grimaud; Eloïc Peyrache; Lucia Quesada
    Abstract: A prevalent feature in rating markets is the possibility for the client to hide the outcome of the rating process, after learning that outcome. This paper identities the optimal contracting arrangement and the circumstances under which simple ownership contracts over ratings implement this optimal solution. We place ourselves in a setting where the decision to obtain a rating is endogenous and where the cost of such a piece of information is a strategic variable (a price) chosen by a rating agency. We then show that clients hiding their ratings can only be an equilibrium outcome if they are sufficiently uncertain of their quality at the time of hiring a certification intermediary and if the decision to get a rating is not observable. For somedistribution functions of clients' qualities, a competitiverating market is a necessary condition for this result toobtain. Competition between rating intermediaries willunambiguously lead to less information being revealed inequilibrium.Key Words: Certification, Corporate Governance.Jel Classification: D23, D82, G34, L15
    Date: 2007–07
  8. By: Chu, Angus C.
    Abstract: In a generalized quality-ladder growth model, this paper firstly derives the optimal patent breadth and the socially optimal profit-sharing arrangement between patentholders. In this general-equilibrium setting, it identifies and derives a dynamic distortion of markup pricing on capital accumulation that has been neglected by previous studies on patent policy. Then, it quantitatively evaluates the effects of eliminating blocking patent and increasing patent breadth, and this exercise suggests a number of findings. Firstly, the market economy underinvests in R&D so long as a non-negligible fraction of long-run TFP growth is driven by R&D. Secondly, increasing patent breadth may be an effective solution to R&D underinvestment. The resulting effect on long-run consumption can be substantial because the harmful distortionary effects are relatively insignificant. However, the damaging effect of blocking patent arising from suboptimal profit-sharing arrangements between patentholders can be quantitatively significant. Finally, it considers the effect on consumption during the transition dynamics.
    Keywords: endogenous growth; intellectual property rights; patent breadth; R&D
    JEL: O34 O31
    Date: 2007–07
  9. By: Brita Bye, Taran Fæhn and Tom-Reiel Heggedal (Statistics Norway)
    Abstract: We explore how innovation incentives in a small, open economy should be designed in order to achieve the highest welfare and growth, by means of a computable general equilibrium model with R&D-driven endogenous technological change embodied in varieties of capital. We study policy alternatives targeted towards R&D, capital varieties formation, and domestic investments in capital varieties. Subsidising domestic investments, thereby excluding stimuli to world market deliveries, generates less R&D, capital formation, economic growth, and welfare, than do the other alternatives, reflecting that the domestic market for capital varieties is limited. Directing support to R&D rather than to capital formation generates stronger economic growth, a higher number of patents and capital varieties, and a higher share of R&D in total production. However, it costs in terms of lower production within each firm, where presence of sunk patent costs and mark-ups result in efficiency losses. The welfare result is, thus, slightly lower.
    Keywords: Applied general equilibrium; Endogenous growth; Research and Development
    JEL: C68 E62 H32 O38 O41
    Date: 2007–07

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