nep-mic New Economics Papers
on Microeconomics
Issue of 2007‒12‒15
fifteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Transparency and Product Variety By Christian Schultz
  2. Vertically Integrated Firms' Investments in Electricity Generating Capacities By Anette Boom
  3. Insurance Markets When Firms Are Asymmetrically Informed: A Note By Jason Strauss; Aidan Michael Hollis
  4. Opt In versus Opt Out: A Free-Entry Analysis of Privacy Policies By Bouckaert J.; Degryse H.
  5. The role of R/D expenditure: a critical comparison of the two (R&S and CIS) sources of data By Poti' Bianca; Reale Emanuela; Di Fiore Monica
  6. Innovation and Market Concentration in Europe's Mobile Phone Industries. Evidence from the Transition from 2G to 3G By Klaus S. Friesenbichler
  7. Arbitrage in Energy Markets: Competing in the Incumbent’s Shadow By Kupper Gerd; Willems Bert
  9. Competition in Soccer Leagues By Bodil Olai Hansen; Mich Tvede
  10. Review of the Literature on the Impact of Mergers on Innovation By Schulz, Norbert
  11. Tacit Collusion. The Neglected Experimental Evidence By Christoph Engel
  12. Testing the "Waterbed" Effect in Mobile Telephony By Christos Genakos; Tommaso Valletti
  13. International Cooperation on Innovation: Empirical Evidence for German and Portuguese Firms By Faria, Pedro; Schmidt, Tobias
  14. Market structure, productivity and scale in European business services By Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der
  15. Competition in TV-Distribution - A framework and applications to Sweden By Bergman, Mats; Stennek, Johan

  1. By: Christian Schultz (Department of Economics, University of Copenhagen)
    Abstract: We study the long run e¤ects of transparency in a circular town model of a differentiated market. The market is not fully transparent on the consumer side: A fraction of consumers are uninformed about prices. Increasing transparency reduces the equilibrium price, profit and entry of firms. This improves welfare. If consumers' transportation cost is high, it also improves the average utility of consumers. When transportation costs are very small, the fully transparent market features cut throat competition if there are several firms in the market, and if firms choose pure entry strategies only one firm enters and acts like a monopolist. Consumers therefore prefer that market transparency is as high as possible under the restriction that the market should allow entry for two firms. If firms choose mixed entry strategies, consumers prefer full transparency.
    Keywords: market transparency; product differentiation; product variety; competition policy
    JEL: L13 L15 L40
    Date: 2007–11
  2. By: Anette Boom (Copenhagen Business School)
    Abstract: We compare investments in generating capacities of an integrated monopolist with the aggregate investments of two vertically integrated competing firms. The firms invest in their capacity and fix the retail price while electricity demand is uncertain. The wholesale price is determined in a unit price auction where the firms know the level of demand when they bid their capacities. Total capacities can be larger or smaller with a duopoly than with a monopoly. If the two firms select the Pareto dominant equilibrium, then the retail price is always higher and the social welfare lower in the duopoly case.
    Date: 2007–10
  3. By: Jason Strauss; Aidan Michael Hollis
    Abstract: We examine welfare effects of the entry of a single well-informed insurance firm into a competitive insurance market. We show that the effect depends on the structure of the market. If competitive insurers rely on the standard self-selection mechanism of a menu of contracts, then the entry of a single well-informed firm which can discriminate costlessly between consumer risk types will increase welfare. In contrast, if consumers do not know their own risk type, then the introduction of a well-informed insurer may reduce welfare.
    JEL: G22 L15
    Date: 2007–11–30
  4. By: Bouckaert J.; Degryse H.
    Abstract: There is much debate on how the how of information between firms should be organized, and whether existing privacy laws should be amended. We offer a welfare comparison of the three main current policies towards consumer privacy - anonymity, opt in, and opt out - within a two-period model of localized competition. We show that when consumers find it too costly to opt in or opt out - such that the default is the policy that rules, privacy policies shape firms’ ability to collect and use customer information, and affect their pricing strategy and entry decision differently. The free-entry analysis reveals that social welfare is non-monotonic in the degree of privacy protection. Opt out is the socially preferred privacy policy while opt in socially underperforms anonymity. Consumers never opt out and choose to opt in only when its cost is sufficiently low. Only when opting in is cost-free do the opt-in and opt-out privacy policies coincide.
    Date: 2007–11
  5. By: Poti' Bianca (Ceris - Institute for Economic Research on Firms and Growth, Rome, Italy); Reale Emanuela (Ceris - Institute for Economic Research on Firms and Growth, Rome, Italy); Di Fiore Monica (Ceris - Institute for Economic Research on Firms and Growth, Rome, Italy)
    Abstract: The paper explores the relation between two data sources (R&D and CIS surveys) in the aim of better representing the roles of R/D activity in relation with innovation processes. This paper starts with controlling the relation between the R/D expenditure in the two surveys (R&D and CIS) for a same group of firms and for the same year (2000) and deals with the question of how much we know at present of the different components of the industrial R/D activity and how we can use the frame of the two surveys for arriving to gain this knowledge. The final aim is that of getting finest grained indicators for studies on the impact of industrial investment on R/D.
    Keywords: Industrial R/D, R/D survey, CIS survey
    JEL: O30 C81 C42
    Date: 2007–07
  6. By: Klaus S. Friesenbichler (WIFO)
    Abstract: Aiming at both low prices and innovation, policy makers and economists have long argued about the optimal intensity of competition. While the current discussion in telecommunication regulation points out that competition can be detrimental to innovation due to the low appropriability of rents established economic approaches advocate competition to be conducive to innovation. This reflects the dispute in economics between Schumpeterian and neoclassical theories. Aghion et al. (2005) offered reconciliation by modelling an inverted U relationship, which in this paper I test for European mobile phone providers. Innovation is measured by a service launch indicator and R&D investments, and competition is approximated by market concentration. As markets are clearly defined, problems of market definition which usually blur concentration indices are avoided. I find robust and statistically significant support for the tested quadratic relationship for both innovation indicators. The innovation optimising Herfindahl-Hirschman laid around 5,500 between 2001 and 2003, but may however vary over time. This finding points at a conflict in the realisation of the regulatory objectives of low prices and innovation at the same time.
    Keywords: Innovation, R&D, market concentration, inverted U, mobile telecommunication research and Development
    Date: 2007–11–20
  7. By: Kupper Gerd (K.U.Leuven-Center for Economic Studies); Willems Bert (Tilburg University, TILEC and K.U.Leuven-Center for Economic Studies)
    Abstract: This paper studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It questions whether access to this essential facility should be traded on a market, or whether the incumbent should retain exclusive usage rights. We show that granting exclusive use to the incumbent might be optimal, if the capacity of the essential facility is small and the incumbent can reduce production costs by taking advantage of interregional production-cost di?erences. This result counters the intuition that arbitrage will improve the social surplus when there is no output contraction. The reason is that when competition is imperfect, arbitrage might reduce production e?ciency. We advise policymakers to introduce market mechanisms for the allocation of transmission capacity only if su?cient investment in the network is ensured or if the market power of the incumbent is broken in at least one of the markets in which it is active.
    Keywords: Arbitrage, electricity sector, price discrimination
    JEL: D40 L10 L50 Q48
    Date: 2007–11
  8. By: Gantumur, Tseveen (European University Viadrina); Stephan, Andreas (JIBS and CESIS)
    Abstract: The telecommunications in the 1990s witnessed an enormous worldwide round of Mergers & Acquisitions (M&A). This paper examines the innovation determinants of M&A activity and the consequences of M&A transactions on the technological potential and the innovation performance. We examine the telecommunications equipment industry over the period 1988-2002 using a newly constructed data set with firm-level data describing M&A and innovation activity as well as financial characteristics. Based on a matching propensity score procedure, the study provides evidence that M&A realize significantly positive changes to the firm’s postmerger innovation performance.
    Keywords: Mergers & Acquisitions; Innovation Performance; Telecommunications Equipment Industry
    JEL: L10 L63 O30
    Date: 2007–12–11
  9. By: Bodil Olai Hansen (Copenhagen Business School); Mich Tvede (Department of Economics, University of Copenhagen)
    Abstract: In the present paper a model of competition between sports clubs in a sports league is presented. Clubs are endowed with initial players but at a cost clubs are able to sell their initial players and buy new players. The results are that: if the quality of players is one-dimensional, then equilibria in pure strategies exist, and; if the quality of players is multi-dimensional, then there need not exist equilibria in pure strategies, but equilibria in mixed strategies exist. Equilibria in mixed strategies resemblance signings on deadline day in european soccer.
    Keywords: competition between sports clubs; dimension of quality of players; equilibrium in pure strategies; equilibrium in mixed strategies
    JEL: C72 D21 L83
    Date: 2007–11
  10. By: Schulz, Norbert
    Abstract: Both M&A and innovation are instruments for growth and competitive advantage. Therefore they are fundamental to each firm’s competitive strategy. Usually, both instruments have been studied separately, but much less in conjunction. This is unfortunate as both processes - the process of innovation and the process of mergers and acquisitions - are intimately connected. The impact of mergers on innovation can only be rigorously assessed, if the converse direction of influence - mergers caused by innovation - is accounted for. Therefore this review tries to take a balanced view on both processes and to point out links between them. Nevertheless, the focus is on the impact of mergers on innovation. This discussion paper is identical with an older version with the title ‘Review on the Literature of Mergers on Innovation’.
    Keywords: innovation incentives, market structure, merger incentives
    JEL: L10 L25 O31
    Date: 2007
  11. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Both in the US and in Europe, antitrust authorities prohibit merger not only if the merged entity, in and of itself, is no longer sufficiently controlled by competition. The authorities also intervene if, post merger, the market structure has changed such that "tacit collusion" becomes disturbingly more likely. It seems that antitrust neglects the fact that, for more than 50 years, economists have been doing experiments on this very question. Almost any conceivable determinant of higher or lower collusion has been tested. This paper standardises the evidence by way of a meta-study, and relates experimental findings as closely as possible to antitrust doctrine.
    Keywords: Oligopoly, Coordinated Effects, Tacit Collusion, Merger Guidelines, Airtours, Experimental Markets
    JEL: D21 D43 K21 L13 L41
    Date: 2007–09
  12. By: Christos Genakos; Tommaso Valletti
    Abstract: This paper examines the impact of regulatory intervention to cut termination rates of callsfrom fixed lines to mobile phones. Under quite general conditions of competition, theorysuggests that lower termination charges will result in higher prices for mobile subscribers, aphenomenon known as the "waterbed" effect. The waterbed effect has long beenhypothesized as a feature of many two-sided markets and especially the mobile networkindustry. Using a uniquely constructed panel of mobile operators' prices and profit marginsacross more than twenty countries over six years, we document empirically the existence andmagnitude of this effect. Our results suggest that the waterbed effect is strong, but not full.We also provide evidence that both competition and market saturation, but most importantlytheir interaction, affect the overall impact of the waterbed effect on prices.
    Keywords: telecommunications, regulation, "Waterbed" effect, two-sided markets
    JEL: D21 L51 L96
    Date: 2007–10
  13. By: Faria, Pedro; Schmidt, Tobias
    Abstract: In this paper we investigate the factors that lead firms to cooperate with partners from foreign countries on innovation activities. Portuguese and German data from the harmonised Community Innovation Survey (CIS III) allow us to compare innovation cooperation behaviour of private firms in the two countries. Using a bivariate probit model, we show that the characteristics of firms cooperating with foreigners in both countries are quite similar. International activities other than cooperation, firm size and the importance of protection methods for knowledge have a positive influence in both countries on the decision to cooperate with foreign partners. Some differences remain, however: In Germany, exporters are more likely to cooperate with foreign partners than non-exporters, whereas in Portugal this is not the case.
    Keywords: International cooperation, Innovation, CIS III, Germany, Portugal
    Date: 2007
  14. By: Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der
    Abstract: Using data from 11 EU countries, the paper investigates the impact of scale economies on labour productivity in European business services. Moreover, it analyses whether the incidence of scale sub-optimality is related to characteristics of the market or to national regulation characteristics. The econometric analysis is based on a production function model in combination with a distance-to-the-frontier model. We find evidence for the existence of increasing returns to scale in business services firms. A result is that throughout the EU, business-services firms with less than 20 employed persons have a significantly lower level of labour productivity than the rest of the business-services industry. Two factors explain the scale inefficiencies. The first is the level of policy-caused firm-entry costs; higher start-up costs for new firms go along with more scale inefficiency. Secondly, business-services markets tend to be segmented by firm size: firms tend to compete predominantly with firms in their own size segment of the markets. Scale-related inefficiencies are to some extent compensated by more competition within a firm's own size segment. If a firm operates in a more “crowded” segment this has a significant and positive impact on its labour productivity. We derive some policy implications from our findings.
    Keywords: EU; business services; scale efficiency; labour productivity; regulation; entry costs
    JEL: L5 L11 D2 L8
    Date: 2007–11
  15. By: Bergman, Mats (Uppsala University); Stennek, Johan (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The purpose of this report is to investigate how well competition in the TV-industry works, primarily focusing on distribution. For this purpose we suggest a framework of analysis and, at the same time, we apply this framework to the Swedish market. Even if our focus will be distribution services, we will need to paint a broader picture, including contents providers, channels, pay-TV operators, advertisers, viewers and other market participants. While our assessment is primarily based on economic analysis of the market, we also aim to integrate the economic analysis with the traditional methodology of competition law. We will therefore go into some details of how the relevant markets should be defined. The report concludes with an in-depth investigation of three current issues in the Swedish market.<p>
    Keywords: television; distribution; cable; satellite; IPTV; terrestrial; telecommunications; competition; oligopoly; competition policy; regulation
    JEL: L00 L40
    Date: 2007–12–11

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