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on Microeconomics |
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Issue of 2007‒11‒24
twenty-two papers chosen by Joao Carlos Correia Leitao University of the Beira Interior |
| By: | Ramon Casadesus-Masanell (Harvard Business School); Barry Nalebuff (Yale School of Management); David B. Yoffie (Harvard Business School) |
| Abstract: | In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A+B bundle is valuable only when purchased together. Good A is supplied by a monopolist(e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly Firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B. |
| Keywords: | AMD, complementors, complements, co-opetition, equilibrium non-existence, installed base, Intel, Microsoft, pricing. |
| JEL: | C72 D43 K21 L13 L15 M21 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0744&r=mic |
| By: | Gehrig, Thomas; Shy, Oz; Stenbacka, Rune |
| Abstract: | We evaluate behaviour-based price discrimination from an antitrust perspective by focusing on an industry with inherited market dominance. Under horizontal differentiation behaviour-based pricing does not by itself lead to persistence of dominance unless the dominant firm is protected by significantly higher switching costs than its small rival. This result continues to hold even if the dominant firm can use behaviour-based pricing to compete against an entrant with no access to consumers' purchase histories. Under vertical differentiation behaviour-based pricing enhances the dominance of the high-quality seller and, hence, consumer welfare. |
| Keywords: | behavior-based pricing; consumer loyalty; horizontal and vertical differentiation; market dominance; poaching; price discrimination |
| JEL: | D4 L1 L41 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6571&r=mic |
| By: | Kerem Cakirer (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) |
| Abstract: | This paper studies endogenous integration decisions of firms and its competitive effects in a complementary market setting where downstream firms sell a product which must have a compatible variety of products that are supplied by upstream firms. I present the conditions under which a downstream firm will prefer integrating with an upstream firm, and conditions under a counter merger of firms occur. The analysis shows that a vertical merger is more likely to occur whenever one of the upstream firm is significantly productive than the other. Competitive effect of a integration of two firms can lead to a counter integration of rivals post integration. Counter integration is likely whenever both upstream firms are highly productive. In addition to a vertical merger and two vertical mergers, contracting under independent ownership can also be the method of procuring. As a result, no integration activity can be observed. The results are obtained in a general two downstream firms and two upstream firms market setting that allows efficient compatibility contracts between upstream and downstream producers. |
| Keywords: | Endogenous Vertical Integration, Positive Externality, Complementary Products, Product Variety |
| JEL: | D21 L22 L4 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2007-18&r=mic |
| By: | Mattias Ganslandt (Research Institute of Industrial Economics (IFN)); Lars Persson (Research Institute of Industrial Economics (IFN) and CEPR); Helder Vasconcelos (Universidade Católica Portuguesa and CEPR) |
| Abstract: | In their merger control, EU and the US have considered symmetric size distribution (cost structure) of firms to be a factor potentially leading to collusion. We show that forbidding mergers leading to symmetric market structures can induce mergers leading to asymmetric market structures with higher risk of collusion, when firms face indivisible costs of collusion. In particular, we show that if the rule determining the collusive outcome has the property that the large (efficient) firm benefits sufficiently more from collusion when industry asymmetries increase, collusion can become more likely when firms are moderately asymmetric. |
| Keywords: | Collusion; Cost Asymmetries; Merger Policy |
| JEL: | D43 L41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:pca:wpaper:28&r=mic |
| By: | Scarpa, Carlo; Polo, Michele |
| Abstract: | This paper examines competition in the liberalized natural gas market. Each .firm has zero marginal cost core capacity, due to long term contracts with take or pay obligations, and additional capacity at higher marginal costs. The market is decentralized and the firms decide which customers to serve, competing then in prices. In equilibrium each .firm approaches a different segment of the market and sets the monopoly price, i.e. market segmentation. Antitrust ceilings do not prevent such an outcome while the separation of wholesale and retail activities and the creation of a wholesale market induces generalized competition and low margins in the retail segment. |
| Keywords: | Entry; Segmentation; Decentralized market |
| JEL: | L11 L13 L95 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5861&r=mic |
| By: | Chernyavs’ka, Liliya; Gullì, Francesco |
| Abstract: | In line with economic theory, carbon ETS determines a rise in marginal cost equal to the carbon opportunity cost regardless of whether carbon allowances are allocated free of charge or not. Hence, common sense would suggest that .rms in imperfectly competitive markets will pass-through into electricity prices only a part of the increase in cost. Instead, by using the load duration curve approach and the dominant .rm with competitive fringe model, the analysis proposed in this paper shows that the result is ambiguous. The increase in price can be either lower or higher than the marginal CO2 cost depending on several structural factors: the degree of market concentration, the available capacity (whether there is excess capacity or not) and the power plant mix in the market; the allowance price and the power demand level (peak vs. off-peak hours). The empirical analysis of the Italian context (an emblematic case of imperfectly competitive market), which can be split in four sub-markets with different structural features, confirms the model predictions. Market power, therefore, can determine a significant deviation from the "full pass-through" rule but we can not know which is the sign of this deviation, a priori, i.e. without before carefully accounting for the structural features of the power market. |
| Keywords: | Emission trading; power pricing; imperfect competition |
| JEL: | Q41 L13 Q21 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5866&r=mic |
| By: | Agustí Segarra-Blasco (Grup de Recerca en Indústria i Territori(GRIT), Departament d'Economia, Universitat Rovira i Virgili.) |
| Abstract: | This paper analyses the performance of companies’ R&D and innovation and the effects of intra- and inter-industry R&D spillover on firms’ productivity in Catalonia. The paper deals simultaneously with the performance of manufacturing and service firms, with the aim of highlighting the growing role of knowledge-intensive services in promoting innovation and productivity gains. We find that intra-industry R&D spillovers have an important effect on the productivity level of manufacturing firms, and the inter-industrial R&D spillovers related to computer and software services also play an important role, especially in high-tech manufacturing industries. The main conclusion is that the traditional classification of manufactured goods and services no longer makes sense in the ‘knowledge economy’ and in Catalonia the regional policy makers will have to design policies that favour inter-industrial R&D flows, especially from high-tech services. |
| Keywords: | Innovation, R&D spillovers, KIS services, Productivity |
| JEL: | L10 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2007-12&r=mic |
| By: | T. Ciarli; R. Leoncini; S. Montresor; M. Valente |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:609&r=mic |
| By: | René N. Nielsen |
| Abstract: | This paper contributes with two new findings to the literature on how universities contribute to industrial development. First, it argues and substantiates quantitatively through logistic regression models that introduction of academically skilled graduates in small, know-how-based firms can be instrumental in spurring innovation and upgrading changes in the firms. Second, it argues and substantiates quantitatively that it is not just graduates with technical and natural scientific qualifications that can contribute positively. Graduates with other academic qualifications also hold potential for innovation and upgrading changes in the firms, especially when it comes to major organisational changes. Qua these findings the paper contributes to the literature in two ways. It is a contribution to and substantiation of the ‘broader’ view arguing that universities contribute to industrial development with more than directly applicable information and technologies. And, academically skilled graduates are not only relevant in technological R&D departments of science-based firms. |
| Keywords: | Science; Academic research; Skilled graduates; Innovation; Technological change; Organisational change |
| JEL: | D83 I23 J24 O31 O33 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:aal:abbswp:07-21&r=mic |
| By: | Lutz, Clemens; Kemp, Ron; Dijkstra, S. Gerhard (Groningen University) |
| Abstract: | Abstract Extant literature discusses a large number of different entry barriers that may hamper market efficiency or entrepreneurial activity. In practice several of these barriers cohere and stem from the same root. Factor analysis is used to identify the underlying dimensions of these barriers. 7 generic factors have been found that drive the system. In the literature a debate exists between scholars that stress the importance of structural and/or strategic barriers. This paper shows that in the perception of firms both types of barriers are important and argues that the effectiveness of strategic barriers depends on attributes of the market structure. Based on the seven generic factors, a conjoint analysis is carried out to identify the most important factors perceived by firms. The conjoint analysis shows that in particular the barriers rooted in three underlying dimensions require attention of market authorities as they may refrain new entrants from entry: finance, access to distribution channels and strategic action. Remarkably, government rules and regulations, product differentiation, R&D and advertising constitute a minor entry problem according to the firms. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:07009&r=mic |
| By: | Arghya Ghosh (University of New South Wales); Takao Kato (Colgate University, Columbia Business School, University of Tokyo, Aarhus School of Business and IZA); Hodaka Morita (University of New South Wales) |
| Abstract: | Does competitive pressure foster innovation? In addressing this important question, prior studies ignored a distinction between discrete innovation aiming at entirely new technology and continuous improvement consisting of numerous incremental improvements and modifications made upon the existing technology. This paper shows that distinguishing between these two types of innovation will lead to a much richer understanding of the interplay between firms’ incentives to innovate and competitive pressure. In particular, our model predicts that, in contrast to previous theoretical findings, an increase in competitive pressure measured by product substitutability may decrease firms’ incentives to conduct continuous improvement, and that an increase in the size of discrete innovation may decrease firms’ incentives to conduct continuous improvement. A unique feature of this paper is its exploration of the model’s real-world relevance and usefulness through field research. Motivated by recent declines in levels of continuous improvement in Japanese manufacturing, we conducted extensive field research at two Japanese manufacturing firms. After presenting our findings, we demonstrate that our model guides us to focus on several key changes taking place at these two firms; discover their interconnectedness; and finally ascertain powerful underlying forces behind each firm’s decision to weaken its investment in traditional continuous improvement activities. |
| Keywords: | competitive pressure, continuous improvement, discrete innovation, field research, location model, product substitutability, small group activities, technical progress |
| JEL: | L10 L60 M50 O30 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3132&r=mic |
| By: | Igor Bykadorov (Sobolev Institute of Mathematics, Novosibirsk); Andrea Ellero (Department of Applied Mathematics, University of Venice); Stefania Funari (Department of Applied Mathematics, University of Venice); Elena Moretti (Department of Applied Mathematics, University of Venice) |
| Abstract: | We propose an optimal control problem to model the dynamics of the communication activity of a firm with the aim of maximizing its efficiency. We assume that the advertising effort undertaken by the firm contributes to increase the firm's goodwill and that the goodwill affects the firm's sales. The aim is to find the advertising policies in order to maximize the firm's efficiency index which is computed as the ratio between "outputs" and "inputs" properly weighted; the outputs are represented by the final level of goodwill and by the sales achieved by the firm during the period considered, whereas the inputs are represented by the costs undertaken by the firm, fixed costs and advertising costs. The problem considered is formulated as a fractional optimal control problem. In order to find the optimal advertising policies we use the Dinkelbach's algorithm for fractional programming. |
| JEL: | C61 M37 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpaper:158&r=mic |
| By: | Kenneth S. Corts (Rotman School of Management, University of Toronto); Mara Lederman (Rotman School of Management, University of Toronto); |
| Abstract: | This paper investigates the scope of indirect network effects in the home video game industry. We argue that the increasing prevalence of non-exclusive software gives rise to indirect network effects that exist between users of competing and incompatible hardware platforms. This is because software non-exclusivity, like hardware compatibility, allows a software firm to sell to a market broader than a single platform’s installed base, leading to a dependence of any particular platform’s software on all firms’ installed bases. We look for evidence of these market-wide network effects by estimating a model of hardware demand and software supply. Our software supply equation allows the supply of games for a particular platform to depend not only on the installed base of that platform, but also on the installed base of competing platforms. Our results indicate the presence of both a platform-specific network effect and – in recent years – a cross-platform (or generation-wide) network effect. Our finding that the scope of indirect network effects in this industry has widened suggests one reason that this market, which is often cited as a canonical example of one with strong indirect network effects, is no longer dominated by a single platform. |
| Keywords: | network effects, software exclusivity, video games |
| JEL: | L11 L15 L82 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0743&r=mic |
| By: | Michele Moretto (Università di Padova) |
| Abstract: | We examine the effect of competition on investment decisions in an industry in which each firm has a completely irreversible investment opportunity and the product market has positive externalities for a small market size and negative externalities for a large market size. In the latter case, which corresponds to the traditional competitive industries, firms invest sequentially as market profitability develops. In the former case, which corresponds to industries in which investment is mutually beneficial, firms invest simultaneously after the market's profitability has developed sufficiently to gain all network benefits and to recover the option value of waiting. These extensions of a real options analysis may help explain rapid and sudden developments such as recent Internet investment, or explain the late take-off phenomenon of prolonged start-up problems, such as the case of fax machine production. |
| Keywords: | Irreversible Investments, Real Options, Network Effects |
| JEL: | C61 D81 G31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0058&r=mic |
| By: | Michele Moretto (Università di Padova); Paolo M. Panteghini (Università di Brescia); Carlo Scarpa (Università di Brescia) |
| Abstract: | We analyse the effects of different regulatory schemes (price cap and profit sharing) on a firm’s investment of endogenous size. Using a real option approach in continuous time, we show that profit sharing does not delay a firm’s start-up investment relative to a pure price cap scheme. Profit sharing does not necessarily affect total investment either, if the threshold for profit sharing is high enough. Only a profit sharing intervening for low profit levels may delay further investments. We also evaluate the effects of profit sharing on social welfare, determining the level of profit that should optimally trigger tighter regulation: profit sharing should be less stringent in sectors where there are bigger investment opportunities. |
| Keywords: | regulation, investment, profit sharing, real options, RPI-x |
| JEL: | L51 D81 D92 G31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0059&r=mic |
| By: | Frédéric Deroïan; Christian Milelli; Zouhaïer M’Chirgui |
| Abstract: | This paper describes inter-firm partnerships in three major high-tech industries over the 1985-2005 period. We found that the architecture of the respective networks had evolved toward a 'small world' in the early 1990s. We also found that the number of alliances collapsed in the late 1990s. This result roughly follows the number of patents granted in the respective industries and is correlated to an increase in market concentration, and to some extent to the rising number of mergers and acquisitions. |
| Keywords: | Innovation, R&D Partnerships, High-Tech Industries, Network Architecture |
| JEL: | L24 L6 O31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2007-24&r=mic |
| By: | Franco Malerba (Department of Economics and CESPRI, Bocconi University, Milan, Italy..); Maria Luisa Mancusi (Department of Economics and CESPRI, Bocconi University, Milan, Italy.); Fabio Montobbio (Department of Economics, Insubria University, Varese and CESPRI, Bocconi University, Milan, Italy.) |
| Abstract: | This paper analyses the relative effects of national and international, intra-sectoral and intersectoral spillovers on innovative activity in six large, industrialized countries (France, Germany, Italy, Japan, UK and US) over the period 1981-1995. We use patent applications at the European Patent Office to measure innovation and their citations to trace knowledge flows within and across 135 narrowly defined technological fields. We find that, in addition to international ones, intra-sectoral spillovers are an important determinant of innovation. |
| Keywords: | R&D spillovers, Knowledge flows, Patent citations. |
| JEL: | F0 O3 R1 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cri:cespri:wp204&r=mic |
| By: | Alessandra Catozzella (University of Pavia); Marco Vivarelli (IPTS Seville, Catholic University of Milan, CSGR Warwick and IZA) |
| Abstract: | The aim of this study is to test the possible catalysing role of in-house R&D in fostering the complementarity of innovative inputs on a sample of 3045 manufacturing firms drawn from the third Italian Community Innovation Survey (1998-2000). The interactions between four different sources of innovation - internal and external R&D, embodied and disembodied technological acquisitions - have been simultaneously explored through the two (direct and indirect) testing frameworks for complementarity. Results from both the approaches show that the innovative process is a phenomenon combining within itself both complementarity and substitutability relationships, depending both on the typology of the targeted innovation output and on the particular combination of innovative inputs we focus on. In particular, it is in-house R&D that seems to create the precondition allowing firms to enjoy complementarity effects. Indeed, the possibility of exploiting synergies between different innovative inputs turns out to be subordinated to having undertaken a minimum amount of internal R&D. The implication of this result is that a role for in-house R&D emerges, beyond its direct effect in generating an innovative output: even if internal research is not a necessary precondition for a firm to be innovative, it should still be carried out because of its important role in the generation of synergies that amplify the impacts of the other innovative inputs it interacts with. |
| Keywords: | R&D, innovation, complementarity, supermodularity, substitutability |
| JEL: | O31 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3126&r=mic |
| By: | Fernando T. Camacho; Flavio M. Menenzes (School of Economics, The University of Queensland) |
| Abstract: | This paper formally examines the implications of a utility’s diversification into an unregulated industry. In our framework, the utility is the most efficient provider in the unregulated industry (up to a particular capacity) and, as such, there is no question about the desirability of allowing it to operate in that market. Nevertheless, the risk faced by a diversified utility is greater than the risk faced by a utility that operates only in a regulated market. This additional risk can potentially affect the diversified utility’s credit rating and, therefore, increase the cost of capital for the regulated business that will be recovered from ratepayers. We show that by allowing a regulated firm to diversify into an unregulated market, the regulator faces a trade-off: a lower cost in the unregulated market versus a higher cost in the regulated market. If the regulator only cares about welfare in the regulated market, then a ringfencing requirement is optimal subject to implementation costs not being substantial. Of course, the ring-fencing requirement effectively prevents the firm from achieving a lower cost in the unregulated market. Therefore, if the regulator cares about welfare in both regulated and unregulated markets, ring-fencing may no longer be optimal. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:352&r=mic |
| By: | Alessandra Catozzella (Universita degli Studi di Pavia); Marco Vivarelli (Max Planck Institute of Economics, Jena; Institute for Prospective Technological Studies-European Commission, Seville; Universita Cattolica del Sacro Cuore, Milan; and Institute for the Study of Labour (IZA), Bonn) |
| Abstract: | The purpose of this paper is to test the possible catalysing role of in-house R+D in fostering the complementarity of innovative inputs on a sample of 3045 manufacturing firms drawn from the third Italian Community Innovation Survey (1998-2000). The interactions between four different sources of innovation - internal and external R+D, embodied and disembodied technological acquisitions - have been simultaneously explored through the two (direct and indirect) testing frameworks for complementarity. Results from both the approaches show that the innovative process is a phenomenon combining within itself both complementarity and substitutability relationships, depending both on the typology of the targeted innovation output and on the particular combination of innovative inputs we focus on. In particular, it is in-house R+D that seems to create the precondition allowing firms to enjoy complementarity effects. Indeed, the possibility of exploiting synergies between different innovative inputs turns out to be subordinated to having undertaken a minimum amount of internal R+D. The implication of this result is that a role for in-house R+D emerges, beyond its direct effect in generating an innovative output: even if internal research is not a necessary precondition for a firm to be innovative, it should still be carried out because of its important role in the generation of synergies that amplify the impacts of the other innovative inputs it interacts with. |
| Keywords: | R+D, innovation, complementarity, supermodularity, substitutability |
| JEL: | O31 |
| Date: | 2007–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2007-087&r=mic |
| By: | Pauna, Catalin; De Ro sa, Donato; Fay, Marianne |
| Abstract: | Less restrictive product market policies are crucial in promoting convergence to higher levels of GDP per capita. This paper benchmarks product market policies in Romania to those of OECD countries by estimating OECD indicators of Product Market Regulation (PMR). The PMR indicators allow a comprehensive mapping of policies affecting competition in product markets. Comparison with OECD countries reveals that Romania ' s product market policies are less restrictive of competition than most direct comparators from the region and not far from the OECD average. Nonetheless, this achievement should be interpreted in light of the fact that PMR approach measures officially adopted policies. It does not capture implementation and enforcement, the area where future reform efforts should be directed if less restrictive policies are to have an effective impact on long-term growth prospects. |
| Keywords: | Public Sector Regulation,Transport Economics Policy & Planning,E-Business,Emerging Markets,Markets and Market Access |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4402&r=mic |
| By: | Betty Agnani (Universidad de Granada); María-José Gutiérrez (The University of the Basque Country); Amaia Iza (The University of the Basque Country) |
| Abstract: | The aim of this paper is to analyze how active R&D policies affect the growth rate of an economy with endogenous growth and non-renewable resources. We know from Scholz and Ziemens (1999) and Groth (2006) that in infinitely lived agents (ILA) economies, any active R&D policy increases the growth rate of the economy. To see if this result also appears in economies with finite lifetime agents, we developed an endogenous growth overlapping generations (OLG) economy à la Diamond which uses non-renewable resources as essential inputs in final good’s production. We show analytically that any R&D policy that reduces the use of natural resources implies a raise in the growth rate of the economy. Numerically we show that in economies with low intertemporal elasticity of substitution (IES), active R&D policies lead the economy to increase the depletion of non-renewable resources. Nevertheless, we find that active R&D policies always imply increases in the endogenous growth rate, in both scenarios. Furthermore, when the IES coefficient is lower (greater) than one, active R&D policies affect the growth rate of the economy in the ILA more (less) than in OLG economies. |
| Keywords: | Endogenous growth, R&D, non-renewable resources, overlapping generations. |
| JEL: | O13 O40 Q32 |
| Date: | 2007–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:200705&r=mic |