nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒02‒09
twenty papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Access Price Cap Mechanisms and Industry Structure with Information Acquisition By Francesca Stroffolini
  2. Vertical foreclosure, a policy framework By Michiel Bijlsma; Viktoria Kocsis; Victoria Shestalova; Gijsbert Zwart
  3. Bilateral Information Sharing in Oligopoly By Sergio Currarini; Francesco Feri
  4. How (not) to measure competition By Jan Boone; Jan van Ours; Henry van der Wiel
  5. Price Discrimination and Audience Composition in Advertising-Based Broadcasting By Roberto Roson
  6. Competing for shelf space By Martinez de Albeniz, Victor; Roels, Guillaume
  7. Pricing in a duopoly with a lead time advantage By Martinez de Albeniz, Victor
  8. Does Licensing Resolve Hold Up in the Patent Thicket? By Siebert, Ralph; von Graevenitz, Georg
  9. Globalization and Innovation in Emerging Markets By Gorodnichenko, Yuriy; Svejnar, Jan; Terrell, Katherine
  10. Existence and uniqueness of Nash Equilibrium in electoral competition games: The hybrid case By Alejandro Saporiti
  11. Trust and Reciprocity in 2-node and 3-node Networks By Alessandra Cassar, ac; Mary Rigdon, mr
  12. Le système d’innovation de Benetton et ses limites By Giovanni Favero
  13. Delegation and R&D Incentives: Theory and Evidence from Italy By Jakub Kastl; David Martimort; Salvatore Piccolo
  14. Performance of the Dutch non-life insurance industry: competition, efficiency and focus By Jacob A. Bikker; Janko Gorter
  15. The impact of quick response in inventory-based competition By Caro, Felipe; Martinez de Albeniz, Victor
  16. Generic Determinacy of Nash Equilibrium in Network Formation Games By Carlos Pimienta
  17. Markets for information : of inefficient firewalls and efficient monopolies By Antonio Cabrales; Piero Gottardi
  18. Oligopoly on a Salop circle with centre By Paul Madden; Mario Pezzino
  19. Climate Change, Energy Demand and Market Power in a General Equilibrium Model of the World Economy By Roberto Roson; Francesco Bosello; Enrica De Cian
  20. Do Tobacco Bans Harm the Advertising Industry? By Tom Coupe; Olena Gnezdilova

  1. By: Francesca Stroffolini (University of Napoli “Federico II” and CSEF)
    Abstract: This paper considers a network industry characterized by an upstream natural monopoly with cost uncertainty, regulated through an access price mechanism, and an unregulated downstream market with Cournot competition. The upstream monopolist can acquire information on the upstream cost while the information acquisition is prohibitively costly for the regulator and downstream firms. The information acquisition is also unobservable. I investigate how the presence of costly and socially valuable information on the upstream cost affects the desirability of allowing the upstream monopolist to produce in the downstream market (integration) rather than excluding it (separation). I show that when the upstream monopolist is regulated only through an access price cap, the information acquisition problem provides an argument in favour of vertical integration. However, when the regulator also obliges the upstream monopolist to share her access profits with consumers, a bias emerges in favour of separation via the impact of the access-profit sharing plan on the upstream monopolist's incentives to transmit information to her rival in the downstream market. Classification-JEL, D82, D83, L5
    Keywords: access price cap mechanisms, integration, separation, information acquisition.
    Date: 2008–01–01
  2. By: Michiel Bijlsma; Viktoria Kocsis; Victoria Shestalova; Gijsbert Zwart
    Abstract: Whenever you phone your mother, switch on the light, or buy health insurance you purchase a service or product from a chain of vertically related industries. Providers of these products or services need access to a telecommunications network, an electricity network or to health care services. In such industries, integration and exclusive contracts between vertically related firms may have important welfare enhancing effects, but can also deny or limit rivals’ access to input or customers, leading to foreclosure. Foreclosure can harm welfare if it reduces competition. This document provides policymakers with a framework to assess the potential for welfare reducing foreclosure of vertical integration and vertical restraints and describes possible remedies. The framework consists of four steps. Each step requires its own detailed analysis. First, market power should exist either upstream or downstream. Second, a theory of foreclosure should be formulated that explains why foreclosure is a profitable equilibrium strategy. Third, the existence and magnitude of potential welfare enhancing effects of the vertical restrains or vertical integration should be assessed. Fourth, suitable policies to address foreclosure should be found.
    Keywords: Vertical foreclosure; Competition policy; Network industries
    JEL: L13 L42 L51
    Date: 2008–01
  3. By: Sergio Currarini (Department of Economics, University Of Venice Cà Foscari and School for Advanced Studies in Venice); Francesco Feri (University of Innsbruck)
    Abstract: We study the problem of information sharing in oligopoly, when sharing decisions are taken before the realization of private signals. Using the general model developed by Raith (1996), we show that if firms are allowed to make bilateral exclusive sharing agreements, then some degree of information sharing is consistent with equilibrium, and is a constant feature of equilibrium when the number of firms is not too small. Our result is to be contrasted with the traditional conclusion that no information is shared in common values situations with strategic substitutes - such as Cournot competition with demand shocks - when firms can only make industry-wide sharing contracts (e.g., a trade association).
    Keywords: Networks, Information sharing, oligopoly, networks, Bayesian equilibrium
    JEL: D43 D82 D85 L13
    Date: 2007
  4. By: Jan Boone; Jan van Ours; Henry van der Wiel
    Abstract: We discuss and apply a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competition. Using firm level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high relevance for competition policy and regulation. So, just when it is needed the most PCM fails whereas PE does not. From this, we conclude that PE is a more reliable measure of competition.
    Keywords: competition; profit elasticity; measures of competition; concentration; price cost margin; profits
    JEL: D43 L13
    Date: 2007–12
  5. By: Roberto Roson (Department of Economics, University Of Venice Cà Foscari)
    Abstract: Traditionally, media like TV and radio, but also the Internet, have been characterized by free access (by consumers having the necessary hardware), with services supported through advertising revenues. Profitability in these markets depends on the capability of attracting audience. Strategic choices, however, also depend on the relationship with the dual market for advertising services. In this paper, a model is introduced, which has two distinguishing features. First, the multidimensional nature of competition in media markets is acknowledged, through explicit modeling of vertical and horizontal differentiation. Second, the price of advertising depends on the expected audience composition, not simply on its magnitude. It also depends on the broadcasters' capability of effectively price-discriminate among advertising customers. It is found that market equilibria depend on a number of critical factors: the amount and type of price discrimination in advertising, the correlation between formats and audience composition, the relative profitability of the different market segments, and diseconomies of scale in program quality.
    Keywords: Advertising, Media Industries, Broadcasting, Price Discrimination, Television, Radio, Differentiation..
    JEL: L82 M37
    Date: 2007
  6. By: Martinez de Albeniz, Victor (IESE Business School); Roels, Guillaume (UCLA Anderson School of Management)
    Abstract: This paper studies competition for shelf space in a multi-supplier retail point. We consider a retailer that seeks to allocate her shelf space to maximize her profit. Because products associated with larger profit margin are granted more shelf space, suppliers can offer the retailer financial incentives to obtain larger space allocations. We analyze the competitive dynamics arising from the scarcity of space, and show existence and uniqueness of equilibrium. We then demonstrate that the inefficiencies from decentralizing decision-making are limited to 6% with wholesale-price contracts, and that full coordination can be achieved with pay-to-stay fee contracts. We finally investigate how competition is distorted under the practice of category management.
    Keywords: Game theory; Supply chain competition; Price of Anarchy; Pricing; Supply contracts;
    Date: 2007–11–15
  7. By: Martinez de Albeniz, Victor (IESE Business School)
    Abstract: We analyze the price competition between two suppliers offering two different lead times and two different prices to a buyer. The buyer chooses its inventory replenishment policy in order to minimize its infinite-horizon average cost. In essence, the fast and expensive supplier is used only in emergencies, while the slow and cheap supplier receives the bulk of the orders. Thus, despite a higher price, the fast supplier is able to capture a part of the buyer's orders. We analyze the price competition between the asymmetric suppliers, where the market share of each supplier is derived from the buyer's inventory problem. We find equilibria that differ significantly from the Bertrand price-only competition. In particular, for some cost parameters, the fast supplier is able to charge a premium for faster delivery, and stay in business even with a higher production cost. We obtain in some cases closed-form formulas for the price difference in equilibrium. Hence, our results show that high cost suppliers may not be driven out of business if they can offer fast delivery.
    Keywords: offshoring; dual sourcing;
    Date: 2007–11–19
  8. By: Siebert, Ralph; von Graevenitz, Georg
    Abstract: In a patent thicket licensing provides a mechanism to either avoid or resolve hold up. We study the choice between ex ante licensing to avoid hold up and ex post licensing to resolve it. Firms’ choice of licensing contract is studied in the context of a patent portfolio race. We show that high expected blocking leads to ex ante licensing while ex post licensing arises if expected blocking is low but realized blocking is high. Also, ex ante licensing reduces firms’ R&D incentives. A sample selection model of licensing is derived from the theoretical model. In this framework theoretical predictions on effects of blocking are tested with data from the semiconductor industry. We show that licensing helps firms to resolve blocking. However, licensing is not a cure all: it decreases as fragmentation of property rights increases and arises mainly between large firms with similar market shares. Using a treatment effects model we also confirm the prediction that ex ante licensing reduces the level of R&D investment.
    Keywords: Hold-Up Problem; Licensing; Innovation; Patent Race; Patent Thicket.
    JEL: L13 L49 L63
    Date: 2008–01–11
  9. By: Gorodnichenko, Yuriy (University of California, Berkeley); Svejnar, Jan (University of Michigan); Terrell, Katherine (University of Michigan)
    Abstract: Globalization brings opportunities and pressures for domestic firms in emerging market economies to innovate and improve their competitive position. Using recent data on firms in 27 transition economies, we test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms’ efforts to raise their capability (innovate) by upgrading their technology or their product/service (improving quality or developing a new one), taking into account firm heterogeneity. We find support for the prediction that competition has a negative effect on innovation, especially for firms further from the frontier, and that the supply chain of multinational enterprises and international trade are important channels for domestic firm innovation. We do not find support for the inverted U effect of competition on innovation. There is partial support for the hypothesis that firms in a more pro-business environment invest more in innovation and are more likely to display the inverted U relationship between competition and innovation.
    Keywords: competition, innovation, emerging markets, spillovers
    JEL: F23 O16
    Date: 2008–01
  10. By: Alejandro Saporiti
    Date: 2007
  11. By: Alessandra Cassar, ac; Mary Rigdon, mr
    Abstract: In this paper we focus on the interaction between exogenous network structure and bargaining behavior in a laboratory experiment. Our main question is how competition and cooperation interact in bargaining environments based on networked versions of the investment game. We focus on 3-node networked markets and vary the network structure to model competition upstream (multiple sellers paired with a monopsonistic buyer) and competition downstream (a monopolistic seller paired with multiple buyers). We describe two kinds of models of trust for such networked environments, absolute and relativized models, and use this structure to generate a general hypothesis about these environments: that information crowds in cooperation on the competitive side of the market. The experimental results support this hypothesis.
    Keywords: networks; trust; reciprocity; experiments; investment game
    JEL: L14 D00 C91
    Date: 2008–01–26
  12. By: Giovanni Favero
    Abstract: This paper focuses on the innovation system in the Benetton case: on the one hand, it puts in evidence the ability of the company in exploiting institutional conditions in order to develop a network organisation and a series of coordinated innovations; on the other hand, it investigates on the characteristics of the circulation of innovation among Benetton suppliers and distributors. The paper was presented at the conference Les systèmes d’innovations: multiplicité des échelles, diversité des espaces, Bordeaux, Maison de Sciences de l’Homme d’Aquitaine, November 16-17, 2006.
    Keywords: Innovation, network firm, industrial policies.
    JEL: N84 N44 N64
    Date: 2007
  13. By: Jakub Kastl (Stanford University); David Martimort (Toulouse School of Economics); Salvatore Piccolo (Toulouse School of Economics, University of Naples and CSEF)
    Abstract: We use data from the Italian manufacturing industry to document the positive relationship between delegation of decisions within organizations and innovation incentives. In order to obtain the causal effect, we build a contract theory model with asymmetric information and moral hazard which predicts that awarding autonomy to the manager spurs innovation incentives relative to arrangements based on vertical control. We use the model to guide our search for suitable instruments. Using several alternative instrumental variables and different specifications we find a strong positive effect of delegation on R&D spending.
    Keywords: Asymmetric Information, Delegation, Hold-up, R&D and Vertical Control
    Date: 2008–01–01
  14. By: Jacob A. Bikker; Janko Gorter
    Abstract: This paper investigates competition in the Dutch non-life insurance industry indirectly by measuring scale economies and X-inefficiency, assuming that strong competition would force insurance firms to exploit unused scale economies and to push down inefficiencies. We observe substantial economies of scale (on average 11%) that are larger for smaller firms. Despite considerable consolidation in the industry over the last decade, scale economies have increased, as the optimal scale has outgrown the actual one. Comparing estimates across aggregation levels, we find that scale economies are smaller for groups and lines of business than they are for firms. Besides scale, focus and organizational form are important cost determinants as well: generally, specialized insurers have lower costs and face greater economies of scale. Estimates of thick frontier efficiency point to huge cost differences across firms and within lines of business. Overall, our results suggest that there is a lack of competitive pressure in the Dutch non-life insurance industry.
    Keywords: Non-life insurance, economies of scale, market structure, concentration, competition, X-efficiency, total cost function, aggregation: insurance groups, firms and lines of business
    JEL: D4 D61 G22 L1
    Date: 2008–01
  15. By: Caro, Felipe (UCLA Anderson School of Management); Martinez de Albeniz, Victor (IESE Business School)
    Abstract: We propose a multi-period extension of the competitive newsvendor model of Lippman and McCardle (1997) to investigate the impact of quick response under competition. For this purpose, we consider two retailers that compete in terms of inventory: customers that face a stockout at their first-choice store will look for the product at the other store. Consequently, the total demand that each retailer faces depends on the competitor's inventory level. We allow for asymmetric reordering capabilities, and we are particularly interested in the case when one of the firms has a lower ordering cost but can only produce at the beginning of the selling season, whereas the second firm has higher costs but can replenish stock in a quick response manner taking advantage of any incremental knowledge about demand (if it is available). We visualize this problem as the competition between a traditional make-to-stock retailer that builds up inventory before the season starts versus a retailer with a responsive supply chain that can react to early demand information. We provide conditions for this game to have a unique pure-strategy subgame-perfect equilibrium, which then allows us to perform numerical comparative statics. Our results confirm in a competitive setting the intuitive fact that quick response is more beneficial when demand uncertainty is higher, or exhibits a higher correlation over time. Finally, we find that part of the competitive advantage from quick response arises from the asymmetry in response capabilities.
    Keywords: quick response; fast fashion; inventory competition;
    Date: 2007–11–21
  16. By: Carlos Pimienta (School of Economics, The University of New South Wales)
    Abstract: This paper shows that the set of probability distributions over networks induced by Nash equilibria of the network formation game proposed by Myerson (1991) is finite for a generic assignment of payoffs to networks. The same result can be extended to several variations of the game found in the literature.
    Keywords: Networks; generic finiteness; Nash Equilibrium
    JEL: C62 C72 D85 L14
    Date: 2007–10
  17. By: Antonio Cabrales; Piero Gottardi
    Abstract: In this paper we build a formal model to study market environments where information is costly to acquire and is of use also to potential competitors. In such situations a market for information may form, where reports - of unverifiable quality - over the information acquired are sold. A complete characterization of the equilibria of the game is provided. We find that information is acquired when its costs are not too high and in that case it is also sold, though reports are typically noisy. Also, the market for information tends to be a monopoly, and there is typically inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to third parties, uninterested in trading the underlying object, only make the inefficiency worse. On the other hand, efficiency can be attained with a monopolist selling differentiated information, provided entry is blocked. The above findings hold when information has a prevalent horizontal differentiation component. When that is not the case, and the vertical differentiation element is more important, firewalls can in fact be beneficial.
    Keywords: Information sale, Cheap talk, Conflicts of interest, Information acquisition, Chinese walls, Market efficiency
    JEL: D83 C72 G14
    Date: 2008–01
  18. By: Paul Madden; Mario Pezzino
    Date: 2007
  19. By: Roberto Roson (Department of Economics, University Of Venice Cà Foscari); Francesco Bosello (Department of Economics, University of Milan); Enrica De Cian (Scuola di Studi Avanzati, University of Venice Ca'Foscari)
    Abstract: Future energy demand will be affected by changes in prices and income, but also by other factors, like temperature levels. This paper draws upon an econometric study, disentangling the contribution of temperature in the determination of the annual regional demand for energy goods. Combining estimates of temperature elasticities with scenarios of future climate change, it is possible to assess variations in energy demand induced (directly) by the global warming. We use this information to simulate a change in the demand structure of households in a CGE model of the world economy, in a set of assessment exercises. The changing demand structure triggers a structural adjustment process, influencing trade flows, regional competitiveness of industries and regions, and welfare. We also consider the possible existence of imperfect competition in the energy markets, analyzing the impact of changes in energy demand with an alternative model version, in which energy industries are modeled as Cournot oligopolies.
    Keywords: Climate Change, Damage Function, Integrated Assessment, General Equilibrium.
    JEL: C68 D58 F18 Q51 Q54
    Date: 2007
  20. By: Tom Coupe (Kyiv School of Economics and Kyiv Economics Institute); Olena Gnezdilova (Kyiv Economics Institute)
    Abstract: We use panel data on advertising expenditures to check the influence of tobacco advertising bans on the advertising industry. We find no clear evidence of a negative effect of tobacco bans on total per capita advertising expenditures.
    Keywords: Tobacco advertising ban
    JEL: H83
    Date: 2008–01

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