nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒08‒08
seventeen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Complementary Platforms By Jo Reynaerts; Patrick Van Cayseele
  2. Bilateral Information Sharing in Oligopoly By Sergio Currarini; Francesco Feri
  3. Spillovers, disclosure lags, and incentives to innovate. Do oligopolies over-invest in R&D? By Gianluca Femminis; Gianmaria Martini
  4. Cournot competition among multiproduct firms:specialization through licensing By Luigi Filippini
  5. Does Competitive Pricing Cause Market Breakdown under Extreme Adverse Selection? By George J. Mailath; Georg Noldeke
  6. Dynamic price competition with capacity constraints and strategic buyers By Gary Biglaiser; Nikolaos Vettas
  7. Complementary research strategies, first-mover advantage and the inefficiency of patents By Luigi Bonatti
  8. Mixed oligopoly with consumer-friendly public firms By Roy Chowdhury, Prabal
  9. Product Differentiation when Competing with the Suppliers of Bottleneck Inputs By Duarte Brito; Pedro Pereira
  10. Market Leaders and Industrial Policy By Federico Etro
  11. The Impact of Cost-Reducing R&D Spillovers on the Ergodic Distribution of Market Structures By Christopher A. Laincz; Ana Rodrigues
  12. When Pricing Below Marginal Cost Pays Off: Optimal Price Choice in a Media Market with Upfront Pricing By Ulrich Kaiser
  13. Innovation Networks of High Tech SMES: Creation of Knowledge but no Creation of Value By Rob Winters; Erik Stam
  14. On Mergers in Consumer Search Markets By Maarten C.W. Janssen; José Luis Moraga-González
  15. The Consumer Loss of the Minimum Duration for Mobile Telephone Calls By Lukasz Grzybowski; Pedro Pereira
  16. An Analysis on Market Structure of Broadcast Service – Issues on Optimal Level of Channel Variety – By Shishikura, Manabu; Kasuga, Norihiro
  17. The Complementarity between Calls and Messages in Mobile Telephony By Lukasz Grzybowski; Pedro Pereira

  1. By: Jo Reynaerts; Patrick Van Cayseele
    Abstract: We introduce an analytical framework close to the canonical model of platform competition investigated by Rochet and Tirole (2006) to study pricing decisions in two-sided markets when two or more platforms are needed simultaneously for the successful completion of a transaction. The model developed is a natural extension of the Cournot-Ellet theory of complementary monopoly featuring clear cut asymmetric single- and multihoming patterns across the market. The results indicate that the so-called anticommons problem generalizes to two-sided markets because individual platforms do not take into account the negative pricing externality they exert on the other platforms. As a result, mergers between such platforms may be welfare enhancing, but involve redistribution of surplus from one side of the market to the other. Moreover, the limit of an atomistic allocation of property rights however is not monopoly pricing, indicating that there also exist differences with the received theory of complementarity.
    Keywords: Two-Sided Markets, Complements, The Anticommons Problem
    JEL: D43 D62 K11 L13 L4 L5
    Date: 2007
  2. By: Sergio Currarini; Francesco Feri
    Abstract: We study the problem of information sharing in oligopoly, when sharing decisions are taken before the realization of private signals. Using the general model developed by Raith (1996), we show that if firms are allowed to make bilateral exclusive sharing agreements, then some degree of information sharing is consistent with equilibrium, and is a constant feature of equilibrium when the number of firms is not too small. Our result is to be contrasted with the traditional conclusion that no information is shared in common values situations with strategic substitutes - such as Cournot competition with demand shocks - when firms can only make industry-wide sharing contracts (e.g., a trade association).
    Keywords: Information sharing, oligopoly, networks, Bayesian equilibrium
    JEL: D43 D82 D85 L13
    Date: 2007–07
  3. By: Gianluca Femminis (DISCE, Università Cattolica); Gianmaria Martini (Università di Bergamo)
    Abstract: We develop a dynamic duopoly, where firms have to take into account a technological externality, that reduces over time their innovation costs, and an inter-firm spillover, that lowers only the second comer's R&D cost. This spillover exerts its effect after a disclosure lag. We identify three possible equilibria, which are classified, according to the timing of R&D investments, as early, intermediate, and late. The intermediate equilibrium is subgame perfect for a wide parameters range. When the innovation size is large, it implies that the duopolistic market equilibrium involves underinvestment. Hence, even in presence of a moderate degree of inter-firms spillover, the competitive equilibrium calls for public policies aimed at increasing the research activity. When we focus on minor innovations -- the case in which, according to the earlier literature, the market equilibrium underinvests -- our results imply that the policies aimed at stimulating R&D have to be less sizeable than suggested before, despite the presence of an inter-firm spillover.
    Keywords: knowledge spillover, dynamic oligopoly
    JEL: L13 L41 O33
    Date: 2007–06
  4. By: Luigi Filippini (DISCE, Università Cattolica)
    Abstract: In a duopoly where each firm produces substitute goods, we show that under process innovation, specialization is the equilibrium attained with cross-licensing. Each firm produces only the good for which it has an advantage. Patent pool extension confirms the results.
    Keywords: cross-licensing, patent pool, specialization, process innovation
    JEL: D45 O31
    Date: 2006–12
  5. By: George J. Mailath (Department of Economics, University of Pennsylvania); Georg Noldeke (Center for Economic Sciences (WWZ), University of Basel)
    Abstract: We study market breakdown in a finance context under extreme adverse selection with and without competitive pricing. Adverse selection is extreme if for any price there are informed agent types with whom uninformed agents prefer not to trade. Market breakdown occurs when no trade is the only equilibrium outcome. We present a necessary and sufficient condition for market breakdown. If the condition holds, then trade is not viable. If the condition fails, then trade can occur under competitive pricing. There are environments in which the condition holds and others in which it fails.
    Keywords: Adverse selection, market breakdown, separation, competitive pricing
    JEL: D40 D82 D83 G12 G14
    Date: 2007–07–30
  6. By: Gary Biglaiser (University of North Carolina); Nikolaos Vettas (Athens University of Economics and Business)
    Abstract: We analyze a dynamic durable good oligopoly model where sellers are capacity constrained over the length of the game. Buyers act strategically in the market, knowing that their purchases may affect future prices. The model is examined when there is one and multiple buyers. Sellers choose their capacities at the start of the game. We find that there are only mixed strategy equilibria. Buyers may split orders, preferring to buy a unit from both high and low price sellers to buying all units from the low price seller. Sellers enjoy a rent above the amount needed to satisfy the market demand that the other seller cannot meet. Buyers would like to commit not to buy in the future or hire agents with instructions to always buy from the lowest priced seller. Further, sellers’ market shares tend to be asymmetric with high probability, even though they are ex ante identical.
    Keywords: Strategic buyers, capacity constraints, bilateral oligopoly, dynamic competition
    JEL: D4 L1
    Date: 2007–06
  7. By: Luigi Bonatti
    Abstract: In a realistic framework where the potential innovators’ research lines are imperfectly correlated and imitation takes some time, this paper studies an industry regulated by an authority which can tax (subsidize) the firms’ pure profits (R&D expenditures). By comparing the market equilibrium emerging when there is patent protection with the market equilibrium emerging without patents, the paper finds that social welfare is higher in the absence of patents. This result is driven by the fact that—without patents--more than one successful inventor may implement its discovery and enter the market, thus reducing the deadweight loss due to imperfect competition.
    Keywords: Innovation, temporary monopoly, lead time, market regulation, patents.
    JEL: H21 H25 L10 L51 O31
    Date: 2007
  8. By: Roy Chowdhury, Prabal
    Abstract: We consider a mixed oligopoly with a public firm that maximizes the sum of its own profits and consumers' surplus. We characterize the unique pure strategy equilibrium and show that as long as the cost function is not ``too concave'', privatization reduces welfare. We find that while the first best cannot be implemented using a tax/subsidy policy that is the same for all firms, a budget-balancing policy that involves a tax on the public firm, coupled with subsidies to the private firms, can do so. Further, the optimal tax/subsidy policy is critically dependent on whether there is privatization or not.
    Keywords: Mixed oligopoly; public firms; subsidy; tax; irrelevance principle; privatization.
    JEL: L2 L3 L1
    Date: 2007–07
  9. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article, we analyze the product differentiation decision of a downstream entrant that purchases access to a bottleneck input from one of two vertically integrated incumbents, who will compete with him in the downstream market. We develop a three-stage model, where first an entrant chooses his product, then the entrant negotiates the access price with two incumbents, and finally the firms compete on retail prices. Contrary to what one might expect, both the entrant and the access provider prefer that the entrant chooses a product that is a closer substitute of the product of the access provider than of the product of the other incumbent. This occurs because the access provider interacts with the entrant both in the retail market and the wholesale market. We also consider the cases where both parties, rather than only the incumbents, make the access price offers, where the bargaining stage precedes the location stage, and where there is open access regulation.
    Keywords: Horizontal differentiation, Location, Access price
    JEL: L25 L51 L96
    Date: 2007–07
  10. By: Federico Etro (Department of Economics, University of Milan-Bicocca)
    Abstract: This article provides an overview of recent progress in the theory of market structure, of the role of market leaders and the scope of industrial policy, presents new results through simple examples of quantity competition, price competition and competition for the market and develops new applications to the theory of competition in presence of network externalities and learning by doing, of strategic debt financing in the optimal financial structure, of bundling as a strategic device, of vertical restraints through interbrand competition, of price discrimination and to the theory of innovation. Finally, it draws policy implications for antitrust issues with particular reference to the approach to abuse of dominance and to the protection of IPRs to promote innovation.
    Keywords: Leadership, Free, Competition Policy, Financial Structure, Bundling, Innovation, Strategic Trade Policy
    JEL: L1
    Date: 2006–11
  11. By: Christopher A. Laincz (Drexel University); Ana Rodrigues (Autoridade da Concorrência)
    Abstract: We extend the literature on knowledge spillovers between firms by studying a dynamic duopoly model of R&D. Our analysis highlights the previously ignored welfare effects of spillovers through dynamic changes in industry concentration. In addition, we find that the impact of imperfect appropriability of R&D on concentration and welfare depends crucially on the manner in which spillovers are obtained. To date, the analysis of the impact of knowledge spillovers between firms has been largely restricted to static two-stage models (R&D decisions followed by product market decisions). These models generally predict suboptimal R&D expenditures and lower welfare. Such models are silent on the evolution of the market structure, and the resulting welfare implications, because they need to assume initial conditions (symmetry or asymmetry). We find that when spillovers require absorptive capacity investment in own R&D, larger spillovers lead to declines in concentration while rates of innovation increase and welfare rises. In contrast, when spillovers are costlessly obtained increases in the extent of spillovers rates of innovation fall leading to losses in welfare through both reduced consumer surplus and firm values, while the effect on concentration is ambiguous.
    Date: 2007–06
  12. By: Ulrich Kaiser (University of Southern Denmark)
    Abstract: I derive a model of profit maximization for a print media firm with upfront advertising pricing. The model is estimated using detailed quarterly data on German women's magazines observed between I/1994 and IV/2004. Main empirical results are that (i) cover price increases lead to substantial reductions in advertising revenue, thereby offsetting possible corresponding gains in magazine sales revenue, (ii) magazines with particularly large advertising revenues per copy set cover prices well below marginal cost and (iii) marginal production cost are decreasing in a magazine's own circulation but are unaffected by the own publishers' total printing volume which does not provide evidence for an efficiency defense in print media mergers.
    Keywords: magazines; cost estimation; twosided markets
    JEL: L11 C33
    Date: 2007–04
  13. By: Rob Winters (Netherlands Ministry of the Interior and Kingdom Relations); Erik Stam (University of Cambridge, Utrecht University; Max Planck Institute of Economics)
    Abstract: This paper analyses the effects of innovation networks on product and process innovation and sales growth of high technology SMEs. Innovation net- works are positively related to both product and process innovation, i.e. knowledge creation. One exception is the negative effect of innovation networks with suppliers on product innovation. Older SMEs are more product innovative than young SMEs. The positive relation between firm size and (process) innovation, disappears when networks are introduced into the analyses. The general conclusion is that vertical innovation networks remove the effect of firm size on process innovation. In other words, high-tech SMEs can ‘borrow’ size if they co-operate with customers, but especially with suppliers for process innovation. So smallness is not necessarily a disadvantage for innovation, as long as firms cooperate with other organisations. Innovation and networks do not seem to effect value creation, measured as sales growth.
    Keywords: innovation, innovation networks, high tech SMEs, firm growth
    JEL: D21 D83 D85 L25 O31 O32
    Date: 2007–07–31
  14. By: Maarten C.W. Janssen (Erasmus Universiteit Rotterdam); José Luis Moraga-González (University of Groningen, and CESifo)
    Abstract: We study mergers in a market where <I>N</I> firms sell a homogeneous good and consumers search sequentially to discover prices. The main motivation for such an analysis is that mergers generally affect market prices and thereby, in a search environment, the search behavior of consumers. Endogenous changes in consumer search may strengthen, or alternatively, offset the primary effects of a merger. Our main result is that the level of search costs are crucial in determining the incentives of firms to merge and the welfare implications of mergers. When search costs are relatively small, mergers turn out not to be profitable for the merging firms. If search costs are relatively high instead, a merger causes a fall in average price and this triggers search. As a result, non-shoppers who didn’t find it worthwhile to search in the pre-merger situation, start searching post-merger. We show that this change in the search composition of demand makes mergers incentive-compatible for the firms and, in some cases, socially desirable.
    Keywords: consnmer search; mergers; price dispersion
    JEL: D40 D83 L13
    Date: 2007–07–16
  15. By: Lukasz Grzybowski (University of Alicante); Pedro Pereira (Autoridade da Concorrência)
    Abstract: We estimate, for Portugal, the monetary loss per consumer of the existence of a minimum duration for mobile telephone calls. First, we estimate the demand for durations of calls, using individual level data and a Tobit model for panel data with individual random effects. The demand for duration is inelastic, and the elasticity varies across firms. At current prices, the average uncensored duration of calls ranges between 63-66 seconds, while with a minimum duration, the average duration is 101-109 seconds. The existence of a minimum duration for calls leads to a monetary loss for consumers of 35-40% of the average bill.
    Keywords: Mobile Telephony, Price Elasticities, Call Duration, Tobit model
    JEL: L13 L43 L93
    Date: 2007–07
  16. By: Shishikura, Manabu; Kasuga, Norihiro
    Abstract: Unlike general goods, broadcasting service is financed not only by consumer’s direct payment but also by advertisement revenue. In other words, broadcasting service is supported by direct and indirect financial sources. However, rate of dependence on those financial sources are different by each media type; Terrestrial broadcasting carrier primarily depends on advertisement revenue while cable TV carrier and satellite carrier, which is called as pay-TV primarily depend on payment from audience in addition to small amount of advertisement revenue. In this paper, we examine broadcast market, where carriers with different financial sources compete in the market, and analyze market performance as a result of competition. Especially, we focus on the effect of competition in the mixed market which includes advertising supported media and subscription fee supported media. We made economic model and analyze the difference on several types of market. Our principle results of Case III, the market that an advertisement supported carrier and a subscription supported carrier compete in the market, are as follows;. (1) The greater the substitutability is, the number of channels supplied by advertisement supported media increases while those supplied by subscription fee supported carrier decreases. (2) Total number of channels supplied by advertisement supported carrier and subscription fee supported carrier is equal to the number of channels supplied by an advertisement supported carrier (Case II). (3) Total TV watching time of Case III is equal to Case II. (4) Because the amount of payment by consumer increases compared to Case II, consumer surplus decreases. General economic model predicts that the increase of the number of entrants brings the increase of consumer surplus. However, in our model, we show here that the increase of the number of entrants does not necessarily bring the increase of consumer surplus.
    Keywords: broadcast service; market performance; consumer welfare; advertisement supported /subscription fee supported media.
    JEL: D40 L50 L82 D60
    Date: 2007–08–02
  17. By: Lukasz Grzybowski (University of Alicante); Pedro Pereira (Autoridade da Concorrência)
    Abstract: This article estimates the price elasticities of the demand for mobile telephone calls and the demand for messages for Portugal. We use a panel of individual level data. In order to account for the unobserved individual heterogeneity and for the data censoring, we estimate a Tobit model for panel data with individual random effects. The demand for calls and the demand for messages are inelastic. Calls and messages are complements.
    Keywords: Mobile Telephony, Price Elasticities, SMS, Complementarity
    JEL: L13 L43 L93
    Date: 2007–07

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