nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒12‒01
eighteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Net Neutrality on the Internet: A Two-sided Market Analysis By Nicholas Economides; Joacim Tåg
  2. Pricing with Customer Recognition By Rosa Branca Esteves
  3. When is Seller Price Setting with Linear Fees Optimal for Intermediaries? By Simon Loertscher; Andras Niedermayer
  4. Firm Growth and R&D Expenditure By Alexander Coad; Rekha Rao
  5. Knowledge disclosure as intellectual property rights By Carlos J. Ponce
  6. Do Multinationals' R&D Activities Stimulate Indigenous Entrepreneurship? Evidence from China's "Silicon Valley" By Hongbin Cai; Yasuyuki Todo; Li-An Zhou
  7. Resale and Bundling in Auctions By Marco Pagnozzi
  8. Buyer Power in International Markets By Horst Raff; Nicolas Schmitt
  9. Shareholder-efficient production plans in a multi-period economy. By Jacques H. Drèze; Oussama Lachiri; Enrico Minelli
  10. Dynamic Optimal Insurance and Lack of Commitment By Alexander K. Karaivanov; Fernando M. Martin
  11. Tenancy Default, Excess Demand and the Rental Market By Katherine Cuff and Nicolas Marceau
  12. Securing Their Future? Entry And Survival In The Information Security Industry By Ashish Arora; Anand Nandkumar
  13. Public Policies and Changing Boundaries of Firms in a "History Friendly" Model of the Co-evolution of the Computer and Semiconductor Industries. By Franco Malerba; Richard Nelson; Luigi Orsenigo; Sidney Winter
  14. Optimal Monitoring to Implement Clean Technologies when Pollution is Random By Ines Macho-Stadler; David Perez-Castrillo
  15. Location Decisions and Minimum Wages By Isabelle Mejean; Lise Patureau
  16. Patents, Thickets, and the Financing of Early-Stage Firms: Evidence from the Software Industry By Iain M. Cockburn; Megan MacGarvie
  17. Subsidies and distorted markets: Do telecom subsidies affect competition? By Eric Chiang; Janice Hauge; Mark Jamison
  18. Determinants of alliance portfolio complexity and its effect on innovative performance of companies By Duysters, Geert; Lokshin, Boris

  1. By: Nicholas Economides (Stern School of Business, New York University); Joacim Tåg (Swedish School of Economics and Business Administration, FDPE, and HECER)
    Abstract: We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers “on the other side” of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees “on the other side” of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees “on the other side” of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.
    Keywords: net neutrality, two-sided markets, Internet, monopoly, duopoly, regulation, discrimination
    JEL: L1 D4 L12 L13 C63 D42 D43
    Date: 2007–09
  2. By: Rosa Branca Esteves (Universidade do Minho - NIPE)
    Abstract: This article studies the dynamic effects of behaviour-base price discrimination and customer recognition in a duopolistic market where the distribution of consumers' preferences is discrete. In the static and firs-period equilibrium firms choose prices with mixed strategies. When price discrimination is allowed, forward-looking firms have an incentive to avoid customer recognition, thus the probability that both will have positive first-period sales decreases as they become more patient. Furthermore, an asymmetric equilibrium sometimes exists, yielding a 100-0 division of the first-period sales. As a whole, price discrimination is bad for profits but good for consumer surplus and welfare.
    Date: 2007
  3. By: Simon Loertscher; Andras Niedermayer
    Abstract: Mechanisms where sellers set the price and are charged a linear commission fee are widely used by real world intermediaries, e.g. by real estate brokers. Empiri- cally these commission fees exhibit very little variance, both across heterogeneous regional markets and over time. So far, there is no theoretical explanation why such seller price setting mechanisms are used and why the linear fees vary so little. In this paper, we first show that in a Bayesian setup seller price setting with linear fees is revenue equivalent to the intermediary optimal direct mechanism derived by Myerson and Satterthwaite (1983) if and only if the seller’s cost is drawn from a generalized power distribution. Whenever such a mechanism is optimal, the fee structure is independent of the distribution from which the buyer’s valuation is drawn. Second, we derive the intermediary optimal direct mechanism when there are many buyers and possibly many sellers and we show that with one seller any standard auction with linear fees and reserve price setting by the seller (which are used e.g. by eBay) implements this mechanism if the seller’s cost is drawn from a power distribution and if buyers’ valuations are identically distributed. Third, we show that when the number of buyers approaches infinity while there is still one seller, seller price setting and price setting by the intermediary are equivalent, intermediary optimal mechanisms.
    Keywords: Brokers; linear commission fees; optimal indirect mechanisms
    JEL: C72 C78 L13
    Date: 2007
  4. By: Alexander Coad; Rekha Rao
    Abstract: We apply a panel vector autoregression model to a firm-level longitudinal database to observe the co-evolution of sales growth, employment growth, profits growth and growth of R&D expenditure. Contrary to expectations, profit growth seems to have little detectable effect on R&D investment. Instead, firms appear to increase their total R&D expenditure following growth in sales and growth of employment. In a sense, firms behave ‘as if’ they aim for a roughly constant ratio of R&D to employment (or sales). We observe heterogeneous effects for growing or shrinking firms however, suggesting that firms are less willing to reduce their R&D levels following a negative growth shock than they are willing to increase R&D after a positive shock.
    Keywords: Firm Growth, Panel VAR, R&D expenditure, Industrial Dynamics Length 32 pages
    JEL: L10 L20 O32
    Date: 2007–11
  5. By: Carlos J. Ponce
    Abstract: We study a model in which an inventor discloses knowledge about its innovation and then a rival chooses the probability of attaining a competing invention. Disclosures, by creating prior art, diminish the probability that the rival has of receiving a patent for its invention (legal externality), but, by revealing knowledge, they decrease the marginal cost of R&D (knowledge externality). We stress the following result. If the knowledge externality is large compared to the legal externality, decreasing the patentability standards leads to fewer disclosures and may hinder R&D. We also determine the impact of changes in market payoffs on the equilibrium level of disclosures and R&D.
    Date: 2007–10
  6. By: Hongbin Cai; Yasuyuki Todo; Li-An Zhou
    Abstract: Using a unique firm-level dataset from China's "Silicon Valley," we investigate how multinational enterprises (MNEs) affect local entrepreneurship and R&D activities upon entry. We find that R&D activities of MNEs in an industry stimulate entry of domestic firms into the same industry and enhance R&D activities of newly entering domestic firms. By contrast, MNEs' production activities or domestic firms' R&D activities do not have such effect. Since MNEs are technologically more advanced than domestic firms, our findings suggest that diffusion of MNEs' advanced knowledge to potential indigenous entrepreneurs through MNEs' R&D stimulates entry of domestic firms.
    JEL: F23 L26 O33
    Date: 2007–11
  7. By: Marco Pagnozzi (University of Napoli "Federico II" and CSEF)
    Abstract: Allowing resale in multi-object auctions increases bidders. incentives to jointly reduce demand, because resale increases low-value bidders’ willingness to pay and reduces high-value bidders’ willingness to pay. Therefore (unlike in single-object auctions), resale may reduce the seller’s revenue in multi-object auctions. However, we show that, under reasonable conditions, allowing resale and bundling the objects on sale are “complement strategies” for the seller – by bundling and allowing resale the seller earns a higher revenue than by selling the objects separately and/or not allowing resale. We also analyze how resale affects a bidder’s incentive to unilaterally reduce demand, and we show why allowing resale may reduce efficiency.
    Keywords: multi-object auctions, resale, bundling, demand reduction
    JEL: D44
    Date: 2007–11–01
  8. By: Horst Raff (Christian-Albrechts-Universität zu Kiel); Nicolas Schmitt (Simon Fraser University)
    Abstract: This paper investigates the implications for international markets of the existence of retailers/wholesalers with market power. Two main results are shown. First, in the presence of buyer power trade liberalization may lead to retail market concentration. Due to this concentration retail prices may be higher and welfare may be lower in free trade than in autarky, thus reversing the standard e¤ects of trade liberalization. Second, the pro-competitive effects of trade liberalization are weaker under buyer power than under seller power.
    Keywords: buyer power, retailing, international trade.
    JEL: F12 F15 L13
    Date: 2007–10
  9. By: Jacques H. Drèze (CORE, Université Catholique de Louvain - Belgium); Oussama Lachiri (Centre d'Economie de la Sorbonne); Enrico Minelli (Dipartimento di Scienze Economiche, Università di Brescia - Italia)
    Abstract: We propose an objective for the firm in a general model of production economies extending over time under uncertainty and with incomplete markets. Trading in commodities and shares of stock occurs sequentially on spot markets at all date-events. We derive the objective of the firm from the assumption of initial-shareholders efficiency. Each shareholder is assumed to communicate to the firm her marginal valuation of profits all date events (expressed in terms of initial resources). In defining her own marginal valuation of the firm's profits, a shareholder will take two elements into consideration. To evaluate the direct impact of a change in dividends the shareholder uses her own vector of marginal rates of substitution for revenue across date-events. In addition, the shareholder will take into account the impact of future dividends on the firm's stock price when she trades shares. To predict the effect on the stock price, she uses a (possibly different) state price process, her price theory. The only restriction that we impose on consumers' price theories is that they should be compatible with the observed equilibrium : given the equilibrium prices and production plans, a price theory must satisfy a no-arbitrage condition. The firm computes its own shadow prices for profits at all date-events by simply adding up the marginal valuations of all its initial shareholders. We prove existence of an equilibrium.
    Keywords: Incomplete markets, shareholders, price theories, firm's objective.
    JEL: D21 D52 D81
    Date: 2007–08
  10. By: Alexander K. Karaivanov (Simon Fraser University); Fernando M. Martin (Simon Fraser University)
    Abstract: We analyze the role of commitment in a dynamic principal-agent model of optimal insurance with hidden effort and observable but non-contractible savings. We argue that the optimal contract under full commitment is time-inconsistent. Consequently, we analyze the optimal time-consistent Markov-perfect insurance contract when both the agent and the principal cannot commit for longer than one period and contrast our results with the full commitment case from the existing literature. We find that the optimal contract under lack of commitment provides additional insurance relative to the autarky allocation and features non-degenerate long-run asset and consumption distributions. Furthermore, the no-commitment contract differs significantly from the commitment contract in the time profiles of consumption, savings, and welfare. We solve for the optimal insurance contracts in several environments featuring different degrees of market incompleteness and find that the welfare loss due to lack of commitment can be very high relative to the welfare costs of moral hazard or savings non-contractibility.
    Keywords: optimal insurance, time consistency, moral hazard
    JEL: D11 E21
    Date: 2007–10
  11. By: Katherine Cuff and Nicolas Marceau
    Abstract: We develop a model of a competitive rental housing market with an endogenous rate of tenancy default arising from income uncertainty. Potential tenants must choose to engage in a costly search for rental housing, and must commit to a rental agreement before the uncertainty is resolved. We show that there are two possible equilibria in this market: a market-clearing equilibrium and an equilibrium with excess demand. Therefore, individuals might not have access to rental housing because they are unable to afford to look for housing, they are unable to pay their rent, or with excess demand in the market they are simply unable to find a rental unit. We show that government regulations affecting the cost of default to the housing suppliers and the quality of rental units can have different effects on the equilibrium variables of interest — rental rate, quantity demanded and supplied, and access to rental housing — depending on the type of equilibria in the market. A numerical example illustrates these results.
    Keywords: Tenancy Default, Excess Demand, Rental Housing Policies
    JEL: R21 R31 R38 D41
    Date: 2007–11
  12. By: Ashish Arora; Anand Nandkumar
    Abstract: In this paper we study how the existence of a functioning market for technology differentially conditions the entry strategy and survival of different types of entrants, and the role of scale, marketing ability and technical assets. Markets for technology facilitate entry of firms that lack proprietary technology and increase vertical specialization. However, they also increase the relative advantage of downstream capabilities, which is reflected in the relatively improved performance of incumbent Information and Communication Technologies (ICT) firms compared to startups. We find that diversifying entrants perform better relative to startups. Contrary to earlier studies, we find that spin-offs do not perform any better than other startups. Moreover, firms founded by serious hobbyists and tinkerers, whom we call hackers, perform markedly better than other startups. These findings reflect the non-manufacturing setting of this study, as well as the distinctive nature of software technology.
    JEL: L24 L25 L26
    Date: 2007–11
  13. By: Franco Malerba (Cespri - Bocconi University, Milano, Italy.); Richard Nelson (Columbia University, New York, USA.); Luigi Orsenigo (University of Brescia, Brescia and CESPRI - Bocconi University, Milan, Italy.); Sidney Winter (The Wharton School, University of Pennsylvania, Philadelphia, USA.)
    Abstract: In this paper, we explore the effects of alternative policies, ranging from antitrust to public procurement, open standards, information diffusion and basic research support on the dynamics of two vertically related industries in changing and uncertain technological and market environments. The two industries are a system industry and a component industry, and the evolution of these industries is characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. We have been inspired by the co-evolution of the computer and component industries from their inceptions to the 1980s. On the basis of that evolution, we have developed a history friendly-model this co-evolution. In sum, this paper has stressed that various types of policies may sometimes have contrasting effects on the industry, mainly on concentration and technical change and innovation. It has also shown that the consequences of policies may spillover from one industry to another, and from one type of firms to another. Policies that aim at a specific industry may provoke major changes in a related industry through the product market, the changing boundaries of firms or knowledge and technological interdependencies. The policy maker has to be aware of that. Finally, a major point of the paper regards the unintended consequences of policies.
    Keywords: Industrial dynamics, Public Policy, Technology, Innovation.
    JEL: O30 L10 L60
    Date: 2007–06
  14. By: Ines Macho-Stadler (Universitat Autonoma de Barcelona); David Perez-Castrillo (Universitat Autonoma de Barcelona)
    Abstract: We analyze environments where firms chose a production technology which, together with random events, determines the final emission level. We consider the coexistence of two alternative technologies. The cost of the adoption of the clean technology and the actual emissions are firms' private information. The environmental regulation is based on taxes over reported emissions, and on monitoring and penalties over unreported emissions. We show that the optimal monitoring is a cut-off policy, where all reports below a threshold are inspected with the same probability, while reports above the threshold are not monitored. We show that if the adoption of the technology is firms' private information, too few firms will adopt the clean technology under the optimal monitoring policy. However, when the EA can check the technology adopted by the firms, the optimal policy may induce overswitching or underswitching to the clean technology.
    Keywords: Production technology, random emissions, environmental taxes, optimal monitoring policy.
    JEL: K32 K42 D82
    Date: 2007–11
  15. By: Isabelle Mejean; Lise Patureau
    Abstract: The paper contributes to the living debate on the controversial effects of minimum wage policy on economic performances, focusing on its impact on firms’ location choice. The question is investigated through a theoretical model, that incorporates features from the new trade literature (Krugman (1991)) and the labor-market literature. In a two-country framework, we model endogenous entry of firms under wage rigidity. In this setting, the impact of an unilateral increase in the home country’s minimum wage is analyzed. The policy shock is shown to have a twofold influence on the relative attractiveness of the home country, simultaneously affecting its relative cost competitiveness and the aggregate demand addressed to firms. The final effect on firms’ location decisions notably depends on the way skilled and unskilled labor markets adjust. Our overall results suggest that the impact of labor-market policies on firms’ location decisions have to be taken into account when evaluating their whole consequences in the national economy.
    Keywords: Minimum wage; home market effect, firms location decisions
    JEL: F12 F16 F21 J31 F41
    Date: 2007–11
  16. By: Iain M. Cockburn; Megan MacGarvie
    Abstract: The impact of stronger intellectual property rights in the software industry is controversial. One means by which patents can affect technical change, industry dynamics, and ultimately welfare, is through their role in stimulating or stifling entry by new ventures. Patents can block entry, or raise entrants' costs in variety of ways, while at the same time they may stimulate entry by improving the bargaining position of entrants vis-à-vis incumbents, and supporting a "market for technology" which enables new ventures to license their way into the market, or realize value through trade in their intangible assets. One important impact of patents may be their influence on capital markets, and here we find evidence that the extraordinary growth in patenting of software during the 1990s is associated with significant effects on the financing of software companies. Start-up software companies operating in markets characterized by denser patent thickets see their initial acquisition of VC funding delayed relative to firms in markets less affected by patents. The relationship between patents and the probability of IPO or acquisition is more complex, but there is some evidence that firms without patents are less likely to go public if they operate in a market characterized by patent thickets.
    JEL: L1 O34
    Date: 2007–11
  17. By: Eric Chiang (Department of Economics, College of Business, Florida Atlantic University); Janice Hauge (University of North Texas); Mark Jamison (University of Florida)
    Abstract: There is general concern that producer subsidies distort competition. We examine a telecommunications subsidy system that transfers money from low cost regions to high cost regions of the U.S. Even though the system is designed to be competitively neutral, we find evidence that the system, combined with carrier of last resort policies, promotes cream skimming by entrants in low cost areas and deters entry in high cost areas, where incumbents are more likely than entrants to receive subsidies. We are unable to rule out the possibility that state regulatory policies favor incumbents in states that are net beneficiaries of the subsidy system.
    Keywords: subsidies, Universal Service Fund, telecommunications, regulation
    JEL: L52 L96 O11
    Date: 2007–11
  18. By: Duysters, Geert (UNU-MERIT); Lokshin, Boris (UNU-MERIT)
    Abstract: Alliance formation is often described as a mechanism used by firms to increase voluntary knowledge transfers. Access to external knowledge has been increasingly recognized as a main source of a firm's innovativeness. In this paper we examine decisions to form alliance portfolios of foreign and domestic partners by three groups of firms: innovators (firms that are successful in introducing new products to the market), imitators (firms that are successful at introducing new products, which are not new to the market) and product non-innovators. We consider an alliance portfolio that includes different partnership types (competitor, customer, supplier, university/research center). We develop a measure of portfolio complexity which we define as the number and diversity of elements of the alliance portfolio with which a firm must interact. We then estimate models that explain portfolio complexity and its impact on firm's innovative performance. Using panel data on more than 1800 firms in the Netherlands we find that foremost innovators have a strong propensity to form portfolios consisting of international alliances. Being an innovator or imitator also increases the propensity to form a portfolio of domestic alliances, relative to non-innovators; but this propensity is not stronger for innovators. Innovators appear to derive benefit from both intensive (exploitative) and broad (explorative) use of external information sources. The former sourcing is more important for innovators, while the latter for imitators. Finally, alliance complexity is found to have an inverse U-shape relationship to innovative performance.
    Keywords: Innovation, R&D cooperation, Alliance portfolio
    JEL: O31 D74 P13 O32
    Date: 2007

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