nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒02‒02
twelve papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Advertising Intensity and Welfare in an Equilibrium Search Model By Ian McCarthy
  2. Price Variation Antagonism and Firm Pricing Policies By Courty, Pascal; Pagliero, Mario
  3. Extending the Frontier: A Structural Model of Investment and Technological Competition in the Supercomputer Industry By Joao Macieira
  4. Measuring the Welfare Effect of Entry in Differentiated Product Markets: The Case of Medicare HMOs By Shiko Maruyama
  5. Existence and uniqueness of Nash equilibrium in electoral competition games: The hybrid case By Alejandro Saporiti
  6. The Intensity of Competition in the Hotelling Model: A New Generalization and Applications By Kim, Jaesoo
  7. Product Innovation and Survival in a High-Tech Industry. By Roberto Fontana; Lionel Nesta
  8. Financial Constraints and Other Obstacles: Are they a Threat to Innovation Activity? By Mohnen, Pierre; Palm, Franz; Schim van der Loeff, Sybrand; Tiwari, Amaresh
  9. Complex Incremental Product Innovation in Established Service Firms: A Micro Institutional Perspective By Vermeulen, P.A.M.; Bosch, F.A.J. van den; Volberda, H.W.
  10. Competition and Resource Sensitivity in Marriage and Roommate Markets By Klaus Bettina
  11. Modelling Electricity Prices with Forward Looking Capacity Constraints By Alvaro Cartea; Marcelo G. Figueroa; Helyette Geman
  12. Spillovers of Innovation Activities and Their Profitability By Czarnitzki, Dirk; Kraft, Kornelius

  1. By: Ian McCarthy (Indiana University Bloomington)
    Abstract: We analyze an equilibrium search model in a duopoly setting with bilateral heterogeneities in production and search costs in which firms can advertise by announcing price and location. We study existence, stability, and comparative statics in such a setting, compare the market advertising level to the socially optimal level, and find conditions in which firms advertise more or less than the social optimum.
    Keywords: Search, Advertising, Welfare
    JEL: D21 D43 D83 M37
    Date: 2008–01
  2. By: Courty, Pascal; Pagliero, Mario
    Abstract: Pricing schemes that vary prices in response to demand shocks may antagonize consumers and reduce demand. At the same time, consumers may take advantage of the opportunities offered by price changes. Overall, the net impact of varying price on demand is ambiguous. We investigate the issue empirically, exploiting a unique dataset from a firm that has experimented with different pricing schemes. Each scheme is characterized by how much prices respond to demand variations. Holding average price and other variables constant, we find that demand is higher when prices vary more. The evidence suggests that the antagonism effect cannot be first order.
    Keywords: Consumer demand; Fairness; Responsive pricing
    JEL: D01 D12 L86
    Date: 2007–01
  3. By: Joao Macieira
    Abstract: This paper proposes and estimates a dynamic structural model of innovation in the super- computer industry to evaluate the dependence of technological innovation on market structure. The model has two key features. First, it allows for technological leapfrogging while controlling for multiproduct ?rm pro?ts. Second, it uses the inclusive value of Nevo and Rossi (2007) to de- ?ne quality adjustment, which controls for ?rm entry, exit, product introduction and scrappage without modeling these decisions explicitly. Model estimates facilitate counterfactual compar- isons of how the maximal computing speed evolution di?ers under di?erent market structures. Consistent with the importance of a "selection e?ect" (Aghion et al, 2001, 2005), increased levels of competition are associated with a higher rates of innovation and increased welfare. However, the marginal increase in welfare is decreasing in the number of competitors.
    Keywords: Dynamic oligopoly, innovation, technological frontier, product quality, simulation estimation, supercomputers.
    Date: 2007
  4. By: Shiko Maruyama (School of Economics, The University of New South Wales)
    Abstract: Should governments subsidize entry to promote competition? In general, theory models cannot determine whether entry under the free-entry condition is socially excessive, optimal, or insufficient. In this paper I propose an empirical framework to evaluate welfare consequences of policy intervention through entry in differentiated product markets, with a case study of the US Medicare HMO market. In endogenizing firms' entry-exit decision, a technical breakthrough is to explicitly incorporate firm heterogeneity by employing a sequential move game. This enables us to exploit detailed firm level data and makes policy simulations relevant. I find no evidence of socially excessive entry. The government may achieve higher social welfare by expanding the program.
    Date: 2008–01
  5. By: Alejandro Saporiti (Economics, University of Manchester)
    Abstract: This paper analyzes the traditional unidimensional, two-party electoral competition game when parties have mixed motivations, in the sense that they are interested in winning the election, but also in the policy implemented after the contest. In spite of having discontinuous payoffs, this game, refer to as the hybrid election game, is shown to be payoff secure and reciprocally upper semi-continuous. Conditional payoffs, however, are not quasi-concave. Hence, the existence of a pure strategy Nash equilibrium (PSNE) is ensured only if parties have homogenous interests in power. In that case, an equilibrium not only exists, but it is also unique. Instead, if parties have heterogeneous motivations, depending upon the relationship between the electoral uncertainty, the aggregate opportunism and its distribution across parties, a psne may or may not exist. The mixed extension, however, is always better reply secure. Therefore, a mixed strategy Nash equilibrium do indeed exist. These results generalize previous existence results in unidimensional electoral competition.
    Keywords: Electoral competition; mixed motivations; discontinuous games; Nash equilibrium.
    JEL: C72 D72 D78
    Date: 2007–12
  6. By: Kim, Jaesoo
    Abstract: I develop a simple Hotelling model which relates the distribution of consumer preferences to the intensity of competition. I impose two properties, mean preserving spread (MPS) and monotone likelihood ratio property (MLRP), on distribution functions. These properties provide a way to represent the intensity of competition in the Hotelling model. Market competition is less intense as the distribution is dispersed in that the MPS raises firms' equilibrium prices. This approach can describe how the intensity of competition influences the effects of firm's various strategies, which has been largely neglected in most papers. Non-uniform distributions can reverse some well-known results derived under the uniform distribution dramatically. They also allow us to discover new results that the uniform distribution could not demonstrate. As examples, I study three issues such as incentives for innovation, preference based price discrimination, and incentives for information sharing.
    Keywords: Hotelling model, intensity of competition, mean-preserving spread (contraction), monotone likelihood ratio property, innovation, preference-based price discrimination, information sharing
    JEL: L10 D82 D43
    Date: 2007–04
  7. By: Roberto Fontana (Department of Economics, University of Pavia and CESPRI - Bocconi University, Milan, Italy.); Lionel Nesta (Observatoire Fran»cais des Conjonctures Economiques, D¶epartement de Recherche sur l'Innovation et la Concurrence, Valbonne, France.)
    Abstract: We investigate the relationship between product innovation and firm survival for a sample of 121 firms in a high-tech industry. We find that location near the technological frontier is an important determinant of fim survival. Firms located near the frontier are also more likely to be acquired than to exit by failure if they cannot survive. This suggests that product location in the technology space acts as a signal of firm quality. Possessing a substantial stock of intangible capital, on the other hand, determines neither exit via failure nor exit via acquisition, although it increases the probability of surviving.
    Keywords: Product innovation, survival, high-tech industry
    JEL: L25 L63 O32
    Date: 2007–12
  8. By: Mohnen, Pierre (UNU-MERIT and University of Maastricht); Palm, Franz (University of Maastricht); Schim van der Loeff, Sybrand (University of Maastricht); Tiwari, Amaresh (University of Maastricht)
    Abstract: In this paper we examine the importance of financial and other obstacles to innovation in the Netherlands using statistical information from the CIS 3.5 innovation survey. We report results on the effect of these obstacles on the firms' decision to abandon, prematurely stop, seriously slow down, or not to start an innovative project. These results are compared with those from other studies in the Netherlands and other countries. We end with a discussion of policy measures that have been taken to overcome, or at least attenuate these obstacles, such as R&D tax incentives, venture capital financing and policy mix pakages.
    Keywords: Financial Constraints, Innovation, Innovation Policy
    JEL: O38
    Date: 2008
  9. By: Vermeulen, P.A.M.; Bosch, F.A.J. van den; Volberda, H.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Many product innovation studies have described key determinants that should lead to successful incremental product innovation. Despite numerous studies suggesting how incremental product innovation should be successfully undertaken, many firms still struggle with this type of innovation. In this paper, we use an institutional perspective to investigate why established firms in the financial services industry struggle with their complex incremental product innovation efforts. We argue that although the impact of micro institutional forces is often overlooked in innovation studies, these forces matter for innovation success. Our study complements the existing innovation literature and provides an additional explanation why incremental product innovation is highly complex and suffers from several liabilities in established firms. Using qualitative data from the Dutch financial services sector collected over the period 1997-2002, the paper illustrates how micro institutional forces at the business unit level affect complex incremental product innovation and how the interaction of these forces delivers their impact.
    Keywords: complex incremental product innovation;neo-institutional theory;micro institutional forces;financial services sector
    Date: 2007–11–02
  10. By: Klaus Bettina (METEOR)
    Abstract: We consider one-to-one matching markets in which agents can either be matched as pairs or remain single. In these so-called roommate markets agents are consumers and resources at the same time. We investigate two new properties that capture the effect a newcomer has on incumbent agents. Competition sensitivity focuses on the newcomer as additional consumer and requires that some incumbents will suffer if competition is caused by a newcomer. Resource sensitivity focuses on the newcomer as additional resource and requires that this is beneficial for some incumbents. For solvable roommate markets, we provide the first characterizations of the core using either competition or resource sensitivity. On the class of all roommate markets, we obtain two associated impossibility results.
    Keywords: microeconomics ;
    Date: 2007
  11. By: Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck); Marcelo G. Figueroa; Helyette Geman (School of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: We present a spot price model for wholesale electricity prices which incorporates forward looking information that is available to all market players. We focus on information that measures the extent to which the capacity of the England and Wales generation park will be constrained over the next 52 weeks. We propose a measure of ‘tight market conditions’, based on capacity constraints, which identifies the weeks of the year when price spikes are more likely to occur. We show that the incorporation of this type of forward looking information, not uncommon in the electricity markets, improves the modeling of spikes (timing and magnitude) and the different speeds of mean reversion.
    Keywords: capacity constraints, mean reversion, electricity indicated demand, electricity indicated generation, regime switching model.
    Date: 2008–02
  12. By: Czarnitzki, Dirk; Kraft, Kornelius
    Abstract: Knowledge spillovers to competitors are regarded as an important aspect of the innovation process. While a company possibly benefits from incoming information on successful R&D conducted by other companies, a generally high probability of leakage of knowledge in an industry will negatively affect profitability. This paper presents the results of an empirical study on the effects of outgoing and incoming spillovers on firms’ profitability. It turns out that the expected asymmetry is actually at work. In contrast to spillovers from competitors, spillovers from suppliers, customers and research institutions exert no effect.
    Keywords: Innovation, Spillover, Profitability
    JEL: L12 O31 O32
    Date: 2007

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