nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒03‒15
twenty-two papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Dynamic Price Competition with Network Effects By Luis Cabral
  2. Bertrand and Price-Taking Equilibria in Markets with Product Differentiation By Germán Coloma
  3. Monopoly, Diversification through Adjacent Technologies, and Market Structure By Karaaslan, Mehmet E.
  4. Knowledge Spillovers, Competition, and R&D Incentive Contracts By N. Lacetera; L. Zirulia
  5. A model of Cooperative Investments with Three Players By David BARTOLINI
  6. Efficiency gains and mergres By Giuseppe, DE FEO
  7. Innovation Cooperation and Innovation Activity of Slovenian Enterprises By Andreja Jaklic; Joze P. Damijan; Matija Rojec
  8. Income Distribution, Market Structure, and Individual Welfare By Tarasov, Alexander
  9. Giving the German Cartel Office the Power of Divestiture. The Conformity of the Reform with Constitutional Law By Christoph Engel
  10. Price Setting in a Decentralized Market and the Competitive Outcome By Stephan Lauermann
  11. Evaluating innovation policy: a structural treatment effect model of R&D subsidies By Takalo, Tuomas; Tanayama, Tanja; Toivanen, Otto
  12. Real Business Cycles with Cournot Competition and Endogenous Entry By Andrea Colciago; Federico Etro
  13. Product variety and price strategy in the ski manufacturing industry By Nicoletta Corrocher; Marco Guerzoni
  14. Does product market competition improve the labour market performance ? By Gabriele, CARDULLO
  15. Political Entry, Public Policies, and the Economy By Casey B. Mulligan; Kevin K. Tsui
  16. Industry Size and the Distribution of R&D Investment By John Asker; Mariagiovanna Baccara
  17. Privatization and policy competition for FDI By Oscar, AMERIGHI; Giuseppe, DE FEO
  18. Innovation and Diffusion of Environmental Technology: Industrial NOx Abatement in Sweden under Refunded Emission Payments By Last Name, First Name
  19. Trade Policy and Innovation By Huasheng Song; Hylke Vandenbussche
  20. Endogenous information in committees and aggregation of information in large elections By Oliveros, Santiago
  21. Coopération et gouvernance dans deux districts en transition By Mendez Ariel; Ragazzi Elena
  22. Interconnection among Academic Journal Platforms: Multilateral versus Bilateral Interconnection By Doh-Shin Jeon; Domenico Menicucci

  1. By: Luis Cabral
    Date: 2008
  2. By: Germán Coloma
    Abstract: In this paper we show that a homogeneous-product market with multiple Bertrand equilibria becomes a market with a single Bertrand equilibrium when we introduce a small degree of product differentiation. When differentiation tends to zero, that Bertrand equilibrium converges to the unique price-taking equilibrium of the homogeneous-product market, which is in turn one of the multiple Bertrand equilibria for that market.
    Keywords: Bertrand equilibrium, price-taking equilibrium, product differentiation
    JEL: D43 L13
    Date: 2008–02
  3. By: Karaaslan, Mehmet E.
    Abstract: The theoretical literature on technological competition has been mostly concerned with various aspects of innovative activity in a single market. By contrast, this paper studies the adoption of a sequence of product innovations in two markets characterized by a common technology base, and illustrates the effects of technological rivalry and preemption. Under a perfect information scenario, it is shown in a two incumbent model that if the innovation is drastic (total replacement of the old product), under certain conditions the fear of being preempted by the entrant forces the firms to diversify their product lines by adopting the innovations across each other's markets. On the other hand, with non-drastic innovation (partial replacement of the old product), it is more likely for the firms to diversify in their own product lines. Out of a class of equilibria characterized under non-drastic innovation, one is optimal in which innovations are adopted in the firms' own markets. In the Pareto inferior equilibria, the firms either adopt innovations in each other's market so that incumbency changes hands or jointly adopt both innovations in two separate product lines. Perfect Bayesian equilibria are characterized under an asymmetric information scenario where one of the firms is assumed to have complete information about the relevant costs of adopting an innovation in a separate product line. If the priors are based on pessimism, it is more often subject to exploitation by the informed firm leading to pooling equilibrium, while optimistism more often leads to diversification and to a competitive market structure in both product lines under a separating equilibrium. In all the cases considered, both innovations are adopted, and in most cases they are adopted by the high cost entrant. The former is socially desirable, but the latter is not. More competitiveness necessarily implies wasteful expenditure by the high cost firm. Lack of competitiveness and technological rivalry, on the other hand, imply that maximum product diversity may not be achieved.
    Keywords: tehnological rivalry; preemption; adoption of innovations; upgrading
    JEL: L10 O31
    Date: 2007–10–01
  4. By: N. Lacetera; L. Zirulia
    Date: 2008–01
  5. By: David BARTOLINI ([n.a.])
    Abstract: We consider a model with three players in which one of them has the possibility to make a relationship-specific investment which produces an innovation. The innovation affects only the payoff of the other two players - hence, a cooperative innovation. We show that, in some cases, the presence of a third player reduces the hold-up problem, but when the competition becomes too fierce it may lead to overinvestment. In contrast to the prevailing literature on contract theory, we show that, even with a cooperative innovation, the possibility to sign a simple (incomplete) contract can still influence the ex-ante incentive to invest. The model is then applied to investigate the separation of regulatory powers where a monopolistic firm can be regulated either by one or two regulators.
    Keywords: hold-up, innovation, multilateral bargaining
    JEL: C70 L22 L51
    Date: 2008–02
  6. By: Giuseppe, DE FEO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrel and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson’s results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrel and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more “consumers-priented”. In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger : in a two firm merger, efficiency gains must be larger than the pre-merger average markup.
    Keywords: mergers, efficiency gains, Cournot oligopoly
    JEL: D43 L11 L22
    Date: 2008–02–15
  7. By: Andreja Jaklic; Joze P. Damijan; Matija Rojec
    Abstract: Innovation cooperation has been recognised as an important determinant of enterprises’ innovation activity, productivity, and growth, and has recently become the subject of intensive research. We explore the importance of innovation cooperation for the innovation activity of Slovenian enterprises, what kind of innovation cooperation is the most “productive” for innovation activities, and whether the location and foreign ownership of innovation cooperation matters. Probit estimations confirmed external innovation cooperation as one of the most important incentives for innovation activity, after R&D spending. However, a significant influence was only confirmed for domestic and not for international innovation cooperation in general. The efficiency varies also by type of partners; while inter-firm innovation cooperation significantly increases the probability of innovation, this was not found regarding cooperation with universities and R&D institutes. The impact of innovation cooperation differs by distance; the contribution of EU partners to innovation activity was the highest (higher then that of domestic partners), while partners from other locations may even decrease the probability of innovation.
    Keywords: innovation cooperation, innovation activity, foreign ownership, innovation partner, R&D, Slovenia
    JEL: D2 L2 O3
    Date: 2008
  8. By: Tarasov, Alexander
    Abstract: This paper explores how income distribution influences market structure and affects the economic well-being of different groups. It shows that inequality may be good for the poor via a trickle-down effect operating through entry. I consider a general equilibrium model of monopolistic competition with free entry, heterogenous firms and consumers that share identical but non-homothetic preferences. The general model is solved. The case of two types of consumers, rich and poor, is considered in detail. I show that higher income inequality in the economy can benefit the poor. An increase in the personal income of the rich raises welfare of the poor, while an increase in the fraction of the rich has an ambiguous impact on the poor: welfare of the poor has an inverted U shape as a function of the fraction of the rich. At the same time, an increase in the personal income of the rich together with a decrease in the fraction of the rich keeping the aggregate income in the economy fixed raises the well-being of the poor. I also analyze the effect of changes in market size and entry cost. I show that the rich gain more from an increase in market size and lose more from an increase in the cost of entry than the poor.
    JEL: L11 D31 L13 D43
    Date: 2007–03
  9. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Triggered by the concentration process in the electricity and gas markets, the land of Hesse proposes to give the German cartel office power to divest dominant firms or oligopolies if this is necessary to restore competition. The paper shows that the reform would be in line with constitutional law, and with freedom of property in particular. Depending on how divestiture is brought about, it would interfere with this basic freedom. It would however not amount to taking. In practice, the main effect would be through bargaining between the divested company and the cartel office. This poses problems under rule of law, but these problems are not insurmountable. The main justification for the reform is the almost total failure of interventions to combat the abuse of dominant positions. In the US, divestiture has not always been successful. But close scrutiny of the American experiences demonstrates that the tool is sufficiently effective to meet the constitutional standard. If divestiture is brought about by forcing the firm to sell entities or assets, the necessary compensation comes from the price it receives from the buyer.
    Keywords: divestiture, freedom of property
    JEL: D42 D43 K21 L12 L13 L41 L44
    Date: 2007–12
  10. By: Stephan Lauermann (University of Bonn)
    Abstract: This paper studies a decentralized, dynamic matching and bargaining market: buyers and sellers are matched into pairs. Traders exit the market at a constant rate, inducing search costs (frictions). All price offers are made by sellers. Despite the fact that sellers have all the bargaining power we show that they set competitive prices in the limit when frictions become small. Previous literature has restricted the sellers' bargaining power. We dispense with this restriction and show that the convergence result does not depend on the distribution of bargaining power. Our model allows us to isolate basic market clearing forces that ensure the competitive outcome in the frictionless limit. For the particular case of homogeneous sellers we characterize the equilibrium price by the familiar Lerner formula. We use this formula to provide comparative static results of the decentralized trading outcome with respect to the level of the search frictions.
    Keywords: Dynamic Matching and Bargaining Games, Decentralized Markets, Non-cooperative Foundations of Competitive Equilibrium, Search Frictions, Rationing
    Date: 2008–01
  11. By: Takalo, Tuomas (Bank of Finland Research); Tanayama, Tanja (HECER, University of Helsinki); Toivanen, Otto (HECER, University of Helsinki)
    Abstract: This paper studies the welfare effects of R&D subsidies. We develop a model of continuous optimal treatment with outcome heterogeneity where the treatment outcome depends on applicant investment. The model takes into account heterogeneous application costs and identifies the treatment effect on the public agency running the programme. Under the assumption of a welfare-maximizing agency, we identify general equilibrium treatment effects. Applyiing our model to R&D project-level data we find substantial treatment effect heterogeneity. Agency-specific treatment effects are smaller than private treatment effects. We find that the rate of return on subsidies for the agency is 30–50%.
    Keywords: applications; effort; investment; R&D; selection; subsidies; treatment programme; treatment effects; welfare
    JEL: C31 L53 O31 O38
    Date: 2008–03–11
  12. By: Andrea Colciago; Federico Etro
    Abstract: We introduce Cournot competition and endogenous entry in an oth- erwise neoclassical macroeconomic framework. First, we develop a model with exogenous savings à la Solow describing the dynamic path of busi- ness creation. Then, we develop a model à la Ramsey describing the dynamic interaction of consumption and business creation. Our models are able to explain why markups vary countercylically and pro?ts are procyclical. The analysis of permanent and temporary technology and preference shocks and of the second moments suggests that our model can outperform the Real Business Cycle framework in many dimensions.
    Date: 2007–09
  13. By: Nicoletta Corrocher (Cespri, Bocconi University and Department of Economics, NFH, University of Tromso); Marco Guerzoni (GSBC-EIC, Friedrich Schiller Universität, Jena, Germany)
    Abstract: The present paper aims at examining the role of variety in the ski manufacturing industry and its relevance in firms' price setting strategies. In particular, it intends to investigate and empirically test two hypotheses concerning the relation between variety and prices. The first concerns the relationship between product quality/complexity and prices. The second refers to the existence of two kinds of varieties having opposite effects on price formation: market-related variety and production-related variety. We are able to empirically disentangle these two effects, by using variety in service characteristics as a proxy for market-related variety and variety in technical characteristics for production-related variety. Our empirical investigation confirms that prices are positively affected by product complexity and quality and positively affected by variety at the level of service characteristics. This means that a high degree of product variety allows firms to charge a premium price on consumers, who are able to find the product that best meet their needs and are therefore willing to pay a higher price. On the contrary, variety at the level of technical characteristics negatively impact on prices, because in a context where a dominant design emerges and new varieties are not radically different, gains in economies of scale and scope outweigh the cost of the increased flexibility in the equipment required to produce variety. The resulting decrease in marginal costs negatively impinges upon prices.
    Keywords: variety, product and service characteristics, ski manufacturing sector
    JEL: L15 L23 O31
    Date: 2008–03–03
  14. By: Gabriele, CARDULLO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: In this paper, I construct a general equilibrium model in which the labour market exhibits search frictions, whereas Cournot competition is assumed in the goods market. The properties of the long run free-entry equiibrium show that a more competitive product market raises employment, but it has ambiguous effects both on the real wage and on the utility of the employees. Moreover, from a normative viewpoint, the level of employment and the degree of competition may be inefficiently high. Numerical results based on Belgian data are finally performed.
    Keywords: product market competition, search matching equilibrium, barriers to entry
    JEL: E24 J64 L16
    Date: 2008–02–20
  15. By: Casey B. Mulligan; Kevin K. Tsui
    Abstract: This paper presents a theory of competition for political leadership between incumbent leaders and their challengers in which the possible equilibrium political market structures range from pure monopoly (unchallenged dictatorship) to perfectly competitive (ideal democracy). Leaders are constrained by the threat of "entry" or their ability to tax (or both), so that regimes with no challengers may nonetheless implement policies in the public interest. We offer economic interpretations of why democratic countries are associated with higher wages, why resource abundant countries tend to be nondemocratic, and how technological change affects political development. By focusing on the incentives for political entry, we show how trade sanctions and other policies designed to promote democracy may actually have the unintended consequences of discouraging political competition.
    JEL: H11 L12 P16
    Date: 2008–03
  16. By: John Asker; Mariagiovanna Baccara
    Date: 2008
  17. By: Oscar, AMERIGHI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Giuseppe, DE FEO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit-maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.
    Keywords: foreign direct investment, tax competition, public firm, privatization
    JEL: F12 F23 H25 H73 L13 L33
    Date: 2008–02–15
  18. By: Last Name, First Name (Resources for the Future)
    Abstract: In this paper we study the process of technical change in the case of pollution abatement from large stationary sources that have been regulated by a very forceful refunded emission payment policy. Thanks to the high costs of emitting nitrogen oxides (NOx), considerable progress has been made in lowering aggregate emissions. This paper seeks to disaggregate average industry improvements to study how much of it is due to innovation (improvement of best practice through investments as well as learning by doing) and how much is due to the spread and adoption of technology. We find both factors very important. Innovation has been rapid: the best firms have cut emissions on the order of 70 percent. Nevertheless, reductions have been even more rapid for the majority of firms, such that the disparity in emission coefficients has also been reduced significantly as the median firms have caught up with best practice.
    Keywords: nitrogen oxides, NOx, R&D, innovation, technology diffusion, environmental policy instrument, technical change
    JEL: Q55 Q53 L51
    Date: 2008–02–27
  19. By: Huasheng Song; Hylke Vandenbussche
    Abstract: This paper develops a model where firms across countries differ in their capacity to innovate. Our main goal is to study firm level innovation under various trade policy shocks. We consider two countries where firms across countries are heterogeneous in their innovation efficiencies. We find that the benefits of trade liberalization and trade protection differ across firms. One of the main results we obtain is that trade protection hurts the productivity of highly efficient firms while it increases the productivity of lowly efficient firms. The predictions of our model are in line with recent empirical evidence that while trade protection fosters the productivity of lowly efficient firms, it reduces productivity of highly efficient firms.
    Keywords: Trade Policy, Innovation, Exports
    JEL: F12 F13 L13
    Date: 2008
  20. By: Oliveros, Santiago
    Abstract: We study aggregation of information when voters can collect information of different precision, with increased precision entailing an increasing marginal cost. In order to properly understand the incentives to collect information we introduce another dimension of heterogeneity: on top of the ideological dimension we allow for different levels of intensity in preferences. Contrary to traditional models of endogenous information, in equilibrium, there are voters that use signals of different qualities. Our strategy to show existence allows us to deal with 1) different voting rules, 2) asymmetric priors, and 3) asymmetric distribution of types. After characterizing all symmetric Bayesian equilibria in pure strategies, we show that information aggregation implies a very unique relation between the parameters of the electorate and the voting rule. In a sense, information aggregation is a knife edge result: it is not robust to small changes in the electorate. We also show that, under the same symmetric conditions in Martinelli's (2006) more specialized model, the Condorcet Jury Theorem holds under the same cost conditions.
    Keywords: Endogenous Information; Aggregation of Information; Heterogeneity.
    JEL: D71 D72 D82
    Date: 2077–10–11
  21. By: Mendez Ariel (Université de la Méditerranée); Ragazzi Elena (Ceris - Institute for Economic Research on Firms and Growth, Moncalieri (TO), Italy)
    Abstract: Industrial district are often described as systems of firms in static equilibrium, in which changes in the environment or in the power of stakeholders can break the cooperation mechanism and lead to the crisis and even death of the district. The authors analyse two industrial districts, Biella in Italy and Grasse in France, in which the worsening of competition has induced a deep evolution in the strategic behaviour of firms and in the asset of the district. Starting from this evidence they support the thesis that harder competition does not lead to a break in the district atmosphere, but to a change in its governance, in the mechanisms of interaction and level of commitment towards collective strategies.
    Keywords: industrial districts, cooperation, governance
    JEL: O18 R11
    Date: 2007–12
  22. By: Doh-Shin Jeon; Domenico Menicucci
    Abstract: Electronic academic journal platforms provide new services of text and/or data mining and linking, indispensable for efficient allocation of attention among over- abundant sources of scientific information. Fully realizing the bene.t of these ser- vices requires interconnection among the platforms. Motivated by CrossRef, a mul- tilateral citation linking backbone, this paper performs a comparison between a multilateral interconnection regime and a bilateral one and finds that publishers are fully interconnected in the former while they may partially break connectivity in the latter for exclusion or di¤erentiation motives. Surprisingly, if partial intercon- nection arises for di¤erentiation motive, exclusion of small publisher(s) occurs more often under the multilateral regime than under the bilateral one. In addition, we show that our main result is robust in the case of Internet Backbone interconnec- tion. Finally, when publishers can interconnect both in a multilateral way and in a bilateral way, a conflict between a private incentive and a social incentive may arise when large publishers prefer excluding small publishers by opting for a bilateral interconnection. In this case, a light-handed regulation imposing no discrimination among rivals would foster full interconnection.
    Keywords: Multilateral Interconnection, Bilateral Interconnection, Academic Journals, Internet, Platforms
    JEL: D4 K21 L41 L82
    Date: 2008–03

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