nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒07‒27
three papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Counterintuitive Number Effects in Experimental Oligopolies By Henrik Orzen
  2. Perishable Durable Goods By In-Koo Cho
  3. The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure By Long, Ngo Van; Raff, Horst; Stähler, Frank

  1. By: Henrik Orzen (University of Nottingham)
    Abstract: Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the gametheoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.
    Keywords: Market Concentration; Experiments; Tacit Collusion
    JEL: C72 C92 D43
    Date: 2006–12
  2. By: In-Koo Cho (Department of Economics, University of Illinois)
    Abstract: We examine whether the Coase conjecture [7, 14, 4, 10] is robust against slight ability of commitment of the monopolist not to sell the durable goods to consumers. We quantify the commitment ability in terms of the speed that the durable goods perish, while keeping the time between the offers small. We demonstrate that the slight commitment capability makes a substantial difference by constructing two kinds of reservation price equilibria [10] that refute the Coase conjecture. In the first equilibrium, the monopolist can credibly delay to make an acceptable offer. All consumers are served, but only after extremely long delay. Most of gains from trading is discounted away, and the resulting outcome is extremely inefficient. In the second equilibrium, the monopolist's expected profit can be made close to the static monopoly profit, if the goods perish very slowly. By focusing on the reservation price equilibria, we rigorously eliminate any source of reputational effect. In fact, by using the first kind of reservation price equilibrium as a credible threat against the seller, we can construct many other reputational equilibria [2] to obtain the Folk theorem. Various extensions and applications are discussed.
    Date: 2007–07
  3. By: Long, Ngo Van; Raff, Horst; Stähler, Frank
    Abstract: This paper develops an oligopolistic model of international trade with heterogeneous firms and endogenous R&D to examine how trade liberalization affects firm and industry productivity, as well as social welfare. We identify four effects of trade liberalization on productivity: (i) a direct effect through changes in R&D investment; (ii) a scale effect due to changes in firm size; (iii) a selection effect due to inefficient firms leaving the market; and (iv) a market-share reallocation effect as efficient firms expand and inefficient firms reduce their output. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected firm size if trade costs are high; and (iii) raises expected social welfare if trade costs are low.
    Keywords: international trade, firm heterogeneity, R&D, productivity, market structure
    JEL: F12 F15
    Date: 2007

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