nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒09‒30
fifteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Informative Advertising and Consumer Search in a Differentiated-Products Duopoly By Levent Celik
  2. Environmental innovation under Cournot competition By Maria Eugenia, SANIN; Skerdilajda, ZANAJ
  3. Persistence of Monopoly, Innovation, and R&D Spillovers: Static versus Dynamic Analysis By Eugen Kovac; Viatcheslav Vinogradov; Kresimir Zigic
  4. Price Stackelberg game with quantity precommitment By Pedro Jara-Moroni
  5. Multilateral Subsidy Games By Leahy, Dermot; Neary, J Peter
  6. The Control of Porting in Two-Sided Markets By Pollock, Rufus
  7. R&D Outsourcing Contract with Information Leakage By Shirley J. , HO
  8. Government’s (In)ability to Precommit, and Strategic Trade Policy: The “Third Market” versus the “Home Market” Setup By Kresimir Zigic
  9. Vertical Product Differentiation, Minimum Quality Standards and International Trade By Dimitra Petropoulou
  10. Are Public Banks pro-Competitive? Evidence from Concentrated Local Markets in Brazil By Christiano A. Coelho; João Manoel Pinho de Mello; Leonardo Rezende
  11. Research, Knowledge Spillovers and Innovation By Piergiuseppe Morone; Carmelo Petraglia; Giuseppina Testa
  12. Recursive Global Games By Giannitsarou, Chryssi; Toxvaerd, Flavio
  13. The market value of patents and R&D: Evidence from European firms By Bronwyn H. Hall; Grid Thoma; Salvatore Torrisi
  14. Innovation and Imitation with and without Intellectual Property Rights By Pollock, Rufus
  15. Auctions with Anticipated Emotions: Overbidding, Underbidding, and Optimal Reserve Prices By Roider, Andreas; Schmitz, Patrick W.

  1. By: Levent Celik
    Abstract: This paper analyzes informative advertising in a duopoly market with differentiated products when consumer search is costless. If consumers are fully rational, exposure to a single advertisement is sufficient for them to obtain complete market information. In this case, firms undersupply advertising compared to the social optimum because of free-riding. If consumers are not fully rational, they may ignore the existence of another firm when the only advertisement they receive quotes the monopoly price. In this case, both firms advertise the monopoly price, and the market may produce too much or too little advertising compared to the social optimum.
    Keywords: Search, Duopoly, Informative Advertising, Product Differentiation.
    JEL: L13 M37
    Date: 2007–07
  2. By: Maria Eugenia, SANIN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Skerdilajda, ZANAJ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) and Universita di Siena)
    Abstract: In this paper, we address the incentives to invest in environmental innovation of enterprises that exercise market power in the output market and also buy and sell pollution permits. Differently from the existing literature, using a market approach we explicitly model the interaction between the output market, where firms play ˆ la Cournot, and the permits market. We find that, in the new equilibrium firms behave symmetrically, that is, they either both innovate to protect their market share in the output market or they both choose not to innovate. Whether the innovation equilibrium arises or not depends on the output demand and on the productivity enhancement and not on the distribution of permits among firms. Finally, we show that, under this market configuration, collusion can be welfare enhancing.
    Keywords: environmental innovation, tradable permits, interaction ˆ la Cournot
    JEL: D43 L13 Q55
    Date: 2007–09–17
  3. By: Eugen Kovac; Viatcheslav Vinogradov; Kresimir Zigic
    Abstract: We build a dynamic duopoly model that accounts for the empirical observation of monopoly persistence in the long run. More specifically, we analyze the conditions under which it is optimal for the market leader in an initially duopoly setup to undertake pre-emptive R&D investment ("strategic preda- tion") that eventually leads to the exit of the follower firm. The follower is assumed to benefit from the innovative activities of the leader through R&D spillovers. The novel feature of our approach is that we introduce an explicit dynamic model and contrast it with its static counterpart. Contrary to the predictions of the static model, strategic predation that leads to the persis- tence of monopoly is in general the optimal strategy to pursue in a dynamic framework when spillovers are not large.
    Keywords: Dynamic duopoly, R&D spillovers, persistence of monopoly, strate- gic predation, accommodation.
    JEL: L12 L13 L41
    Date: 2007–01
  4. By: Pedro Jara-Moroni
    Abstract: In a homogeneous product duopoly with concave demand and convex costs we study a two stage game in which, first, firms engage simultaneously in capacity (production) and, after production levels are made public, there is price Stackelberg competition in the second stage. We justify the special demand rationing on tied prices. Randomizing price leadership in the second stage game, we can find a pure strategy subgame perfect Nash equilibrium (SPNE) of the whole game, in which firms produce strictly more than in the Cournot outcome, which is as well a SPNE.
    Date: 2007
  5. By: Leahy, Dermot; Neary, J Peter
    Abstract: This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are "friendly", raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.
    Keywords: Industrial policy; Investment subsidies; Oligopoly; R&D spillovers; Strategic trade policy; Subsidy wars
    JEL: F12 L13
    Date: 2007–09
  6. By: Pollock, Rufus
    Abstract: A sizable literature has grown up in recent years focusing on two-sided markets in which economies of scale combined with complementarities between a platform and its associated `software' or `services' can generate indirect network effects (that is positive feedback between the number of consumers using that platform and the utility of an individual consumer). In this paper we introduce a model of `porting' in such markets where porting denotes the conversion of `software' or `services' developed for one platform to run on another. Focusing on the case where a dominant platform exists we investigate the impact on equilibrium and the consequences for welfare of the ability to control porting. Specifically, we show that the welfare costs associated with the `control of porting' may be more significant than those arising from pricing alone. This model and its associated results are of particular relevance because of the light they shed on debates about the motivations and effects of actions by a dominant platform owner. Recent examples of such debates include those about Microsoft's behaviour both in relation to its operating system and its media player, Apple's behaviour in relation to its DRM and iTunes platform, and Ebay's use of the cyber-trespass doctrine to prevent access to its site.
    Keywords: Network Effects; Two-Sided Markets; Porting; Antitrust; Competition
    JEL: L13 L15 L12
    Date: 2005–07
  7. By: Shirley J. , HO (National Chengchi University, Taiwan)
    Abstract: This paper studies an R&D outsourcing contract between a firm and a contractor, considereing the possibility that in the interim stage, the contractor might sell the innovation to the rival firm. Our result points out that due to the competition in the interim stage, the reward needed to prevent leakage will be pushed up to the extent that a profitable leakage free contract does not exist. This result will also apply to cases considering revenue-sharing schemes and a disclosure punishment for commercial theft. Then, we demonstrate that in a competitive mechanism where the R&D firm hires two contractors together with a relative performance scheme, the disclosure punishment might help and there exists a perfect Bayesian Nash equilibrium where the probability of information leakage is lower and the equilibrium reward is also cheaper than hiring one contractor.
    Keywords: R&D outsourcing, Contract, Information leakage, Collusion, Multiple agents
    JEL: D82 Z
    Date: 2007–09–17
  8. By: Kresimir Zigic
    Abstract: We shift the usual perspective of strategic trade policy – the “third market setup” – to the “home market” framework in order to reconsider the consequences of government (in)ability to precommit to its policy and compare these findings with those analogous from the “third market setup”. In addition, we also analyze how robust the sign is of particular policy instruments (R&D subsidies) within the home market setup, as opposed to the third market setup, when there is a shift from “second–best” to the “first–best” policy. For that purpose, we apply a standard dynamic Cournot duopoly where the firm’s strategic variable is investment in cost reduction whereas policy instruments are import tariffs and R&D subsidies.
    Keywords: Government commitment, optimal tariffs and R&D subsides, first–best versus second–best strategic policy.
    JEL: F13 L11 L13 O31
    Date: 2007–03
  9. By: Dimitra Petropoulou
    Abstract: This paper extends a well-established vertical product differentiation model to an international duopoly with two segmented countries, where firms compete in quality and price. The framework is used to analyse governments` incentives for unilateral minimum standard-setting as well as the scope and effects of cooperative agreements in minimum standards. Endogenous national standards result from a standard-setting game between governments whose objective function is to maximise national welfare. Cross-country externalities can be are either positive or negative, depending on the quality of traded goods. Four unregulated Nash equilibria in minimum standards are shown to exist, two symmetric and two asymmetric, which correspond to the four different combinations of externalities that may arise between the two countries: symmetric positive externalities, symmetric negative externalities, or asymmetric positive and negative externalities. Unilateral minimum standards can be inefficiently high or low relative to world optimum symmetric standards and operate as non-tariff barriers to trade. Harmonisation of minimum quality standards through cooperation is both feasible and mutually beneficial in the symmetric case, but the scope for mutually beneficial cooperation is significantly restricted when countries are asymmetric and lump-sum transfers are not possible. The resulting cooperative standards are asymmetric and do not maximise world welfare.
    Keywords: Vertical Product Differentiation, Quality Reversal, International Trade, Minimum Quality Standards
    JEL: F13 L13 L52
    Date: 2007
  10. By: Christiano A. Coelho (Central Bank of Brasil); João Manoel Pinho de Mello (Department of Economics, PUC-Rio); Leonardo Rezende (Department of Economics, PUC-Rio)
    Abstract: We measure the competitive effect of public ownership of banks in concentrated local banking markets in Brazil by extending Bresnahan and Reiss’s [1991] framework to measure the effects of entry in concentrated markets. We use variation in market size, the number of competitors and their identity to infer how conduct is affected by the entry of a private vis-à-vis a public bank. We find that, while local markets whose structure is private bank duopoly are 100% larger than private monopolies, duopolies with one public and one private bank and private monopolies are no different with respect to market size. These results suggest that, while the presence of private banks toughens competition, public banks do not affect conduct.
    Keywords: banking industry; public versus private ownership; effect of entry.
    JEL: L10 L13 L33
    Date: 2007–08
  11. By: Piergiuseppe Morone; Carmelo Petraglia; Giuseppina Testa (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: In order to assess the relationship between internal and external innovative inputs and innovative output at firm level, a knowledge production function is estimated for a representative sample of Italian manufacturing firms over the period 1998-2003. To account for endogeneity of R&D effort in the knowledge production function, we estimate a Heckman selection model on R&D decisions. Results support the view that R&D intensity is positively linked to firm size, age and human capital endowment as well as to higher exposure to international competitive pressure. Then, the knowledge production function is estimated using a standard probit, where the probability to innovate of each firm depends upon intramural R&D effort, regional and industrial spillovers and on a vector of interaction and control variables. Our measures of external knowledge, which circulates and potentially transfers across firms belonging to the same geographical or industrial spaces, are based on predicted values for R&D effort in the region and industry respectively. Our results suggest a positive relationship between sectoral spillovers and innovation; knowledge diffusion in the regional space positively impacts on the probability to innovate of the recipient firm only if the latter has an appropriate endowment of human capital.
    Keywords: Innovation, knowledge, spillovers
    JEL: O3 L6 C25
    Date: 2007–09
  12. By: Giannitsarou, Chryssi; Toxvaerd, Flavio
    Abstract: The present paper contributes to the literature on dynamic games with strategic complementarities, in two interrelated ways. First, we identify a class of dynamic complete information games in which intertemporal complementarities and multiple equilibria can be fruitfully analyzed. Second, we extend the analysis to an incomplete information framework, where results from the literature on global games can be applied to select a unique Markov perfect equilibrium in monotone strategies.
    Keywords: dynamic global games; Dynamic supermodular games; endogenous cycles
    JEL: C73 D43 E32
    Date: 2007–09
  13. By: Bronwyn H. Hall; Grid Thoma; Salvatore Torrisi
    Abstract: This paper provides novel empirical evidence on the private value of patents and R&D in European firms during the period 1991-2004. We explore the relationship between firm's stock market value, patents, and "quality"-weighted patents issued by the European Patent Office (EPO) and the US Patent and Trademark Office (USPTO). We find that Tobin's q is positively and significantly associated with R&D and patent stocks, but that only those patents taken out in both patent offices or at the USPTO alone seem to be valued. Either forward citations or a composite quality indicator based on forward citations, family size and the number of technical fields covered by the patent are modestly informative for value. Software patents account for a rising share of total patents in the USPTO and EPO. Moreover, some scholars of innovation and intellectual property rights argue that software and business methods patents on average are of poor quality and that these patents are applied for merely to build portfolios rather than for protection of real inventions. We found that such patents are considerably more valuable than ordinary patents, especially if they are taken out in the U.S. However their quality indicators are no more valuable than those of other patents, suggesting that their primary purpose may be to increase the size of the patent portfolio.
    JEL: D24 G32 L86 O31 O34
    Date: 2007–09
  14. By: Pollock, Rufus
    Abstract: An extensive empirical literature indicates that returns from innovation are appropriated primarily via mechanisms other than formal intellectual property rights -- and that `imitation' is itself a costly activity. However most theory assumes the pure nonrivalry of `ideas' with its implication that, in the absence of intellectual property, innovation (and welfare) is zero. This paper introduces a formal model of innovation based on imperfect competition in which imitation is costly and an innovator has a first-mover advantage. Without intellectual property, a significant amount of innovation still occurs and welfare may actually be higher than with intellectual property.
    Keywords: Innovation; Imperfect Competition; Intellectual Property; Imitation
    JEL: L5 O3 K3
    Date: 2006–09
  15. By: Roider, Andreas; Schmitz, Patrick W.
    Abstract: The experimental literature has documented that there is overbidding in second-price auctions, regardless of bidders' valuations. In contrast, in first-price auctions there tends to be overbidding for large valuations, but underbidding for small valuations. We show that the experimental evidence can be explained by a simple extension of the standard auction model, where bidders anticipate positive or negative emotions caused by the mere fact of winning or losing. Even if the "emotional" (dis-)utility is very small, the seller's optimal reserve price r* may be significantly different from the standard model. Moreover, r* is decreasing in the number of bidders.
    Keywords: auction theory; emotions; reserve prices
    JEL: D44 D81 D82
    Date: 2007–09

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