nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒03‒08
twelve papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Durable Goods, Innovation and Network Externalities By Cerquera Dussán, Daniel
  2. A Model of Vertical Oligopolistic Competition By Markus Reisinger; Monika Schnitzer
  3. Regulation and the Option to Delay By Fernando T. Camacho; Flavio Menezes
  4. Endogenous Mergers under Multi-Market Competition By Tina Kao; Flavio Menezes
  5. Cournot Duopoly with Capacity Limit Plants By Fabio TRAMONTANA; Laura GARDINI; Puu TONU
  6. ‘Make-or-Buy’ in International Oligopoly and the Role of Competitive Pressure By Dermot, Leahy; Catia , Montagna
  7. Gains and Pains from Contract Research: A Transaction and Firm-level Perspective By Grimpe, Christoph; Kaiser, Ulrich
  8. Entry Deterrence in Postal Service Markets By Beschorner, Patrick Frank Ernst
  9. Collusion in a One-Period Insurance Market with Adverse Selection By Alexander Alegria; Manuel Willington
  10. Financial Constraints: Routine Versus Cutting Edge R&D Investment By Binz, Hanna L.; Czarnitzki, Dirk
  11. Operationalizing and Measuring Competition: Determinants of Competition in Private Banking Industry in India By KV, BHANU MURTHY; Deb, Ashis Taru
  12. Competition and Cooperation in a dynamical model of natural resources By Marta Biancardi

  1. By: Cerquera Dussán, Daniel
    Abstract: We develop a model of R&D competition between an incumbent and a potential entrant with network externalities and durable goods. We show that the threat of entry eliminates the commitment problem that an incumbent may face in its R&D decision due to the goods’ durability. Moreover, a potential entrant over-invests in R&D and an established incumbent might exhibit higher, equal or lower R&D investments in comparison with the social optimum. In our model, the incumbent’s commitment problem and the efficiency of its R&D level are determined by the extent of the network externalities.
    Keywords: Network externalities, Durable Goods, Innovation, Imperfect Competition
    JEL: D21 D85 L13 O31
    Date: 2007
  2. By: Markus Reisinger (Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Germany, e-mail:; Monika Schnitzer (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, e-mail:
    Abstract: This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall proï¬tability of the two-tier structure while the upstream conditions mainly affect the distribution of proï¬ts. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.
    Keywords: Deregulation, Free Entry, Price Competition, Product Differentiation, Successive Oligopolies, Two-Part Tariffs, Vertical Restraints
    JEL: L13 D43 L40 L50
    Date: 2008–02
  3. By: Fernando T. Camacho; Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: This paper examines a simple two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the minimum price that an unregulated monopolist demands to bear the demand uncertainty and invest early, that is, the price that incorporates the value of the option to delay. In a regulated environment, we show that in the absence of downstream competition and when the regulator cannot commit to ex-post demand contingent prices, a regulated price that incorporates the option to delay is the minimum price that ensures early investment. Furthermore, when the regulator has a preference for early investment, the option to delay price generates higher welfare than other forms of price regulation. We also show that when the vertically integrated network provider is required to provide access to downstream competitors, and the potential entrant is less efficient than the incumbent, an access price that incorporates the option to delay generates the same investment level output as and higher overall welfare than an unregulated industry that is not required to provide access. By contrast, under the same market conditions an ECPR-based access price generates the same overall welfare than an unregulated industry. Moreover, when the potential entrant is more efficient than the incumbent, an Option to Delay Pricing Rule generates the same investment level output as and (weakly) higher overall welfare than the Efficient Component Pricing Rule (ECPR). In addition, the option-to-delay-based access price is (weakly) lower than the ECPR-based access price.
    Date: 2008
  4. By: Tina Kao (Australian National University); Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play themselves out. The first is the selection effect, which works towards increasing welfare as shutting down the more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works towards increasing prices and, therefore, decreasing consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.
    Date: 2008
  5. By: Fabio TRAMONTANA (Universita' Politecnica delle Marche, Dipartimento di Economia); Laura GARDINI (Universit… degli Studi di Urbino, Istituto di Scienze Economiche); Puu TONU (CERUM, Umea University, Sweden)
    Abstract: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each firm is assumed to operate multiple plants, which can be run alone or in combination. Each firm has two plants with different capacity limits, so it has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal cost functions come in three disjoint pieces, so the reaction functions, derived on basis of global profit maximization, as well can consist of disjoint pieces. We first analyze the case in which the firms are taken as identical, and then the generic case. It is shown that stable Cournot equilibria may coexist with several other stable cycles. Then we compare the coexistent periodic attractors in terms of the resulting profits. The main property is the non-existence of unstable cycles. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin frontiers, related to the discontinuities.
    Keywords: Border Collision Bifurcations, Capacity Limits, Cournot, Discontinuous Reaction Functions, Duopoly, Nonlinear Dynamics
    JEL: C61 C62 C72 C73 D21 D24 L13
    Date: 2008–02
  6. By: Dermot, Leahy; Catia , Montagna
    Abstract: We study how competitive pressure influences the make-or-buy decision that oligopolistic firms face between producing an intermediate component in-house or purchasing it from a domestic supplier. We model outsourcing as a bilateral relationship in which the supplier undertakes relationship specific investments. A home and foreign firm compete in the home market. Firms’ mode of operation decision depends on cost and strategic considerations. Competitive pressure increases firms’ incentive to outsource. Consumer gains from trade liberalisation are enhanced when it leads to less outsourcing.
    Keywords: Outsourcing; Vertical Integration; Trade Liberalisation; Oligopoly
    JEL: L2 F2 F1 L1
    Date: 2007
  7. By: Grimpe, Christoph; Kaiser, Ulrich
    Abstract: Determining the research and development (R&D) boundaries of the firm as the choice between internal, collaborative and external technology acquisition has since long been a major challenge for firms to secure a continuous stream of innovative products or processes. While research on R&D cooperation or strategic alliances is abundant, little is known about the outsourcing of R&D activities to contract research organizations and its implications for innovation performance. This paper investigates the driving forces of external technology sourcing through contract research based on arguments from transaction cost theory and the resource-based view of the firm. Using a large and comprehensive data set of innovating firms from Germany our findings suggest that technological uncertainty, contractual experience and openness to external knowledge sources motivate the choice for engaging in contract research activities. Moreover, we show that internal and external R&D sourcing are complements: the marginal contribution of internal (external) R&D is the larger the more firms spend on external (internal) R&D.
    Keywords: Contract research, innovation, transaction cost theory, firm capabilities
    JEL: C24 O32
    Date: 2008
  8. By: Beschorner, Patrick Frank Ernst
    Abstract: In this paper we analyze the incentive of the German postal service (Deutsche Post AG, DPAG) to increase quality in the light of the upcoming liberalization of the postal services market. Currently, there would be no incentive for DPAG to increase its quality if the market were not to be liberalized in six months. Therefore, we suggest that the current changes in market regulation have motivated this quality improvement. In particular we show that this rise in quality is only protable to DPAG because it renders entry less profitable or even impossible. However, consumers benefit from higher quality, whether entry is deterred or accommodated.
    Keywords: regulation, liberalization, postal services
    JEL: L12 L41 L51
    Date: 2007
  9. By: Alexander Alegria (Facultad de Ciencias Económicas y Administrativas, Ponti?cia Universidad Javeriana de Cali, Colombia); Manuel Willington (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: We show how collusive outcomes may arise as equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on Inderst and Wambach (2001) model ?they show that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints? and assume that insurees must pay a minimum premium; which is a common feature on many health systems. In this setup, we show that there is a range of equilibria from the zero profit one in which low-risks implicitly subsidize high risks to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while low risks’ coverage decrease as the firms profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they reduced the coverage offered to their customers and significantly raised their profits. Our model is consistent with this accusation.
    Keywords: adverse selection, collusion, insurance, capacity constraints
    JEL: L41 I11
    Date: 2007–12
  10. By: Binz, Hanna L.; Czarnitzki, Dirk
    Abstract: We analyze financial constraints for R&D, where we account for heterogeneity among investments which has been neglected in previous literature. According to economic theory, investments should be distinguished by their degree of uncertainty, e.g. routine R&D versus cutting-edge R&D. Financial constraints should be more binding for cutting-edge R&D than for routine R&D. Using panel data we find that R&D spending of firms devoting a significant fraction of R&D to cutting-edge projects is curtailed by credit constraints while routine R&D investments are not. This has important policy implications with respect to the distribution of R&D subsidies in the economy.
    Keywords: R&D, Financial Constraints, Panel Data
    JEL: O31 O32
    Date: 2008
  11. By: KV, BHANU MURTHY; Deb, Ashis Taru
    Abstract: Using an appropriate theoretical framework and econometric methodology, the study has sought to measure and model competition in private banking industry in India in an attempt to analyse the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation provided the motivation behind the study. It used the concept of competition proposed by Stigler (1961) and measured it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure-Conduct-Performance paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price cost margin, One basic contention of the study is that competition goes beyond “conduct” and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.
    Keywords: Competition;Structure-Conduct-Performance;Banking reform;Tobit model.
    JEL: D21 E58 D41 D40 C25 D49
    Date: 2008–01
  12. By: Marta Biancardi
    Abstract: In this paper we propose a model describing the commercial exploitation of a common property renewable resource by a population of agents. Players can cooperate or compete; cooperators maximize the utility of their group while defectors maximize their own profit. The model provides for one utility function which can be used for every kind of player. Agents aren’t assumed to be divided into the two groups from the beginning; by solving the static game we obtained the best response function of i-th player without making other agents positions. Then, the Nash equilibria we calculated point out how different strategies - all players cooperate, all players compete or players can be divided into cooperators and defectors - can coexist. In any case the total harvest depend on renewable resource stock, and it influences agents’ positions. According to the Nash equilibria, harvested is arranged to fishing population dynamics and a complete analysis for the equilibria obtained and for their stability is proposed. The effects of the different Nash equilibria on the fish stock are compared showing the more stability in the cooperative case.
    Keywords: Nash Equilibria, Resource Exploitation, Population Dynamics.
    Date: 2007–10

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