nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒03‒25
twenty-one papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. The welfare effects of third-degree price discrimination with non-linear demand functions By Simon Cowan
  2. Multi-product Firms and Product Variety By Ramon Caminal; Lluís M. Granero
  3. Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly By Dimitra Petropoulou
  4. Prominence and Consumer Search By Mark Armstrong; John Vickers; Jidong Zhou
  5. R&D and market structure in a horizontal differentiation framework By Davide Fantino
  6. Search Pathways to Innovation By Tommy Clausen
  7. Social Housing under Oligopoly. By José M. Usategui
  8. Competition and quality in regulated markets: a differential-game approach By Kurt R. Brekke; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
  9. Learning about compliance under asymmetric information By Arguedas, Carmen; Rousseau, Sandra
  10. Efficiency Gain from Ownership Deregulation: Estimates for the Radio Industry By Howard Smith; Catherine O'Gorman
  11. Corruption and Innovation: A Grease or Sand relationship? By Prashanth Mahagaonkar
  12. Learning about compliance under asymmetric information By Carmen Arguedas; Sandra Rousseau
  13. Competition for Scarce Resources By Peter Eso; Volker Nocke; Lucy White
  14. Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions By Thomas J. Holmes; David K. Levine; James A. Schmitz, Jr.
  15. Media bias and electoral competition By Ascensión Andina-Díaz
  16. How do people play against Nash opponents in games which have a mixed strategy equilibrium? By Jason Shachat; J. Todd Swarthout
  17. Competition in Bureaucracy and Corruption By Mikhail Drugov
  18. Transport Infrastructure Investment and Demand Uncertainty By Stef Proost; Saskia van der Loo
  19. Weitzman revisited: Emission standards vs. taxes with uncertain control costs and market power of polluting firms By Clemens Heuson
  20. From Pigou to Extended Liability: On the Optimal Taxation of Externalities under Imperfect Financial Markets By TIROLE, Jean
  21. Patent, Inequality and Innovation-Driven Growth By Hatipoglu, Ozan

  1. By: Simon Cowan
    Abstract: The welfare effects of third-degree price discrimination are analyzed when demand in one market is an additively shifted version of demand in the other market and both markets are served with uniform pricing. Social welfare is lower with discrimination if the slope of demand is log-concave or the convexity of demand is non-decreasing in the price. The demand functions commonly used in models of imperfect competition satisfy at least one of these sufficient conditions.
    Keywords: Price Discrimination, Monopoly
    JEL: D42 L12 L13
    Date: 2007
  2. By: Ramon Caminal; Lluís M. Granero
    Abstract: The goal of this paper is to study the role of multi-product firms in the market provision of product variety. The analysis is conducted using the spokes model of non-localized competition proposed by Chen and Riordan (2007). Firstly, we show that multi-product firms are at a competitive disadvantage vis-a-vis single-product firms and can only emerge if economies of scope are sufficiently strong. Secondly, under duopoly product variety may be higher or lower with respect to both the first best and the monopolistically competitive equilibrium. However, within a relevant range of parameter values duopolists drastically restrict their product range in order to relax price competition, and as a result product variety is far below the efficient level.
    Keywords: product variety, multiproduct firms, monopolistic
    JEL: D43 L12 L13
    Date: 2008–03–10
  3. By: Dimitra Petropoulou
    Abstract: A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolist service providers to some contacts but duopolists over contacts they share in their network overlap. The intermediaries` inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.
    Keywords: International Trade, Pairwise Matching, Information Cost, Intermediation, Networks
    JEL: F10 C78 D43 D82 D83 L10
    Date: 2007
  4. By: Mark Armstrong; John Vickers; Jidong Zhou
    Abstract: This paper examines the implications of "prominence" in search markets. We model prominence by supposing that the prominent firm will be sampled first by all consumers. If there are no systematic quality differences among firms, we find that the prominent firm will charge a lower price than its non-prominent rivals. The impact of making a firm prominent is that it will typically lead to higher industry profit but lower consumer surplus and welfare. The model is extended by introducing heterogeneous product qualities, in which case the firm with the highest-quality product has the greatest incentive to become prominent, and making it prominent will boost industry profit, consumer surplus and welfare.
    Keywords: Consumer Search, Marketing, Prominent Display, Product Differentiation
    JEL: D43 D83 L13
    Date: 2008
  5. By: Davide Fantino (Bank of Italy, branch of Turin)
    Abstract: This paper examines the dynamic interaction between R&D and market structure in a horizontally differentiated market framework. Firms invest in R&D to modify the level of differentiation of their products, increasing their specialization and their market power. The invested resources in research are declining over time because of decreasing returns from further specialization. Prices, output and short-run profits of the firms producing differentiated products increase and move towards the higher steady state values, while production of the non-differentiated good falls; the number of firms is constant in all periods. The increasing specialization of varieties improves the overall utility of consumers. The comparison with the socially optimal solution shows that firms underinvest in R&D. Firms do not internalize the effects of their research effort on the overall level of substitutability of the other varieties and on the profits of the other firms.
    Keywords: R&D, market power, horizontal differentiation
    JEL: O3
    Date: 2008–01
  6. By: Tommy Clausen (Centre for Technology, Innovation and Culture, University of Oslo)
    Abstract: Organizational search processes is an important source of firm level heterogeneity in evolutionary - behavioural theory. Combining insights from established and recent evolutionary-behavioural theory we propose that R&D and managerial perceptions constitute two distinct search pathways to innovation. R&D is in this context a measure of institutionalized routine based search, while managerial perception of problems captures situational and cognitive search. Using a new survey of industrial enterprises we find that these search pathways are related to product, process, organizational and market innovation at the firm level, although in a diverse way.
    Date: 2008–03
  7. By: José M. Usategui (The University of the Basque Country)
    Abstract: In this paper it is shown that the setting up of a social housing system may decrease the total number of houses built in the market, induce a price of non-social houses greater than the price of houses without that system and increase the profits of housing developers even in situations where they have to sell social houses at a price below production cost. The analysis considers a situation with imperfect competition in the housing market and with a social housing system where housing developers must provide some social houses when they obtain a permit to build non-social houses.
    Keywords: Social housing, imperfect competition, housing stock.
    JEL: L L R
    Date: 2008–03–14
  8. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics and Business Administration, and Health Economics Bergen); Roberto Cellini (Department of Economics, University of Catania); Luigi Siciliani (Department of Economics and Related Studies, and Centre for Health Economics, University of York); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a differential game approach, in which quality is a stock variable. Using a Hotelling framework, we derive the open-loop solution (providers commit to an optimal investment plan at the initial period) and the closed-loop solution (providers move investments in response to the dynamics of the states). If the marginal provision cost is constant, the open-loop and closed-loop solutions coincide, implying that static models are robust to a dynamic specification. If the marginal provision cost is increasing, investment and quality are lower in the closed-loop solution: in fact, quality drops to the minimum level in steady state, implying that quality competition is effectively eliminated. In this case, static models tend to exaggerate the positive effect of competition on quality. Our results can explain the mixed empirical evidence on competition and quality for regulated markets.
    Keywords: Regulated markets; Competition; Quality.
    JEL: H42 I11 I18 L13
    Date: 2008
  9. By: Arguedas, Carmen (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.); Rousseau, Sandra (Center of Economic Studies, K.U.Leuven, Naamsestraat 69, B-3000 Leuven, Belgium,)
    Abstract: Over time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms’ past performance relative to other competitors in the market. If a firm is less successful than its peers in reducing the externality, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked. We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving.
    Keywords: Monitoring and enforcement; externalities; learning; mimicking
    JEL: D82 H83 K42
    Date: 2008–02
  10. By: Howard Smith; Catherine O'Gorman
    Abstract: Reducing fixed cost duplication - a common justification for concentrated market structure - motivated the US government to relax the number of radio stations a firm could operate in any local market. After deregulation the number of firms per market decreased. The implied cost saving depends on the per market fixed costs incurred by each firm. Using data from 140 markets we estimate upper and lower bounds to fixed costs using (i) an empirical model of gross profit and (ii) the assumption that the observed post-deregulation market structure is a Nash equilibrium. The estimates suggest that the efficiency savings were significant.
    Keywords: Moment Inequalities, Deregulation
    JEL: L10 L40 L82
    Date: 2008
  11. By: Prashanth Mahagaonkar (Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group)
    Abstract: This paper provides a firm-level empirical analysis on the ways in which corruption affects innovative activity. Particularly with respect to the African continent that is striving to reconcile with instability and poverty, this issue seems to be of utmost importance. Using a newly available dataset on African firms, it is shown that corruption has a negative effect on product innovation and organisational innovation. Corruption does not affect process innovation while it facilitates marketing innovation.
    Keywords: Corruption, Developing Economies, Product Innovation, Process Innovation, Organisational Innovation, marketing Innovation, Taxation
    JEL: D73 O14 O31 H11 H25
    Date: 2008–03–14
  12. By: Carmen Arguedas; Sandra Rousseau
    Abstract: Over time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms' past performance relative to other competitors in the market. If a firm is less successful than it peers in reducing the externality, if faces the risk of being targeted for increased inspections in the next period This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving.
    Keywords: monitoring and enforcement, externalities, learning, mimicking
    JEL: D82 H83 K42
    Date: 2008–03
  13. By: Peter Eso; Volker Nocke; Lucy White
    Abstract: We show that the efficient allocation of production capacity can turn a competitive industry and downstream market into an imperfectly competitive one. Even though downstream firms have symmetric production technologies, the downstream industry structure will be symmmetric only if capacity is sufficiently scarce. Otherwise it will be asymmetric, with one large "fat" capacity-hoarding firm and a fringe of smaller "lean and fit" firms, so that Tobin`s Q varies inversely with firm size. This is so even if the number of firms is infinitely large. As demand or input quantity varies, the industry may switch between symmetric and asymmetric phases, generating predictions for firm size and costs across the business cycle. Surprisingly, an increase in available capacity resulting in such a switch can cause a reduction in total output and consumer surplus.
    Keywords: Multiproduct Firms, Firm Size Distribution, Trade Liberalization, Size Discount, Firm heterogeneity, Productivity
    JEL: F12 F15 L11 L25
    Date: 2007
  14. By: Thomas J. Holmes; David K. Levine; James A. Schmitz, Jr.
    Abstract: When considering the incentive of a monopolist to adopt an innovation, the textbook model assumes that it can instantaneously and seamlessly introduce the new technology. In fact, firms often face major problems in integrating new technologies. In some cases, firms have to (temporarily) produce at levels substantially below capacity upon adoption. We call such phenomena switchover disruptions, and present extensive evidence on them. If firms face switchover disruptions, then they may temporarily lose some unit sales upon adoption. If the firm loses unit sales, then a cost of adoption is the foregone rents on the sales of those units. Hence, greater market power will mean higher prices on those lost units of output, and hence a reduced incentive to innovate. We introduce switchover disruptions into some standard models in the literature, show they can overturn some famous results, and then show they can help explain evidence that firms in more competitive environments are more likely to adopt technologies and increase productivity.
    JEL: L10 L12
    Date: 2008–03
  15. By: Ascensión Andina-Díaz (Department of Economic Theory, Universidad de Málaga)
    Abstract: This paper examines the incentives of ideological media outlets to acquire costly information in a context of asymmetric information between political parties and voters. We consider two market structures: a monopoly media market and a duopoly one. We show that if each party has the support of a media, either party has the same probability of winning the election. However, if just one of the parties has the support of the media, the results might well change, as this party will get into office with a higher probability than the other party. We also analyze voters' welfare in this context and show that the important aspect is whether a media industry exists, and not the number of media outlets.
    Keywords: Election, Accountability, Media, Bias
    JEL: D72 D82
    Date: 2008–03
  16. By: Jason Shachat; J. Todd Swarthout
    Abstract: We examine experimentally how humans behave when they, unbeknownst to them, play against a computer which implements its part of a mixed strategy Nash equilibrium. We consider two games, one zero-sum and another unprofitable with a pure minimax strategy. A minority of subjects' play was consistent with their Nash equilibrium strategy. But a larger percentage of subjects' play was more consistent with different models of play: equal-probable play for the zero-sum game, and the minimax strategy in the non-profitable game.
    Date: 2008–03
  17. By: Mikhail Drugov
    Abstract: This paper studies the consequences of introducing competition between bureaucrats. Bureaucrats are supposed to grant licences to firms that satisfy certain requirements. Firms have to invest into satisfying these requirements. Some bureaucrats are corrupt, that is, they give the licence to any firm in exchange for a bribe. Some firms prefer to buy the licence rather than to invest and satisfy the requirements imposing negative externalities on the society. The competition regime is found to create more ex ante incentives for firms to invest while the monopoly regime is better at implementing ex post allocation, that is, distributing the licences given the firms` investment decisions. Additional results on the effects of intermediaries, staff rotation, punishments and endogenous entry to the bureaucracy are provided.
    Keywords: Corruption, Competition, Bureaucracy
    JEL: D73 K42
    Date: 2007
  18. By: Stef Proost; Saskia van der Loo
    Abstract: In transportation planning there can be long lead times to adapt capacity. This paper addresses two questions. First, in a one mode world (say rail or road), what is the optimal capacity choice when faced with uncertain demand, long lead times and congestion. Using a simple analytical model it is shown that when demand is inelastic, it is socially optimal to invest more than if only the expected level of demand is taken into account. In this case it may be beneficial to overinvest in capacity because congestion costs are a convex function of relative use. This result holds with or without optimal tolling. The second question deals with two competing modes and where only one mode has long lead times for capacity while the other has flexible capacity. This is typical for the competition between High Speed Rail and air for the medium distance trips (500 to 1000 km), or for the competition between inland waterways and trucks for freight. We find that overinvestment is less justified because the substitute mode can more easily absorb the high demand outcomes.
    Keywords: transport infrastructure, uncertainty, investments
    JEL: R41 R42
    Date: 2008–03
  19. By: Clemens Heuson (University of Augsburg, Department of Economics)
    Abstract: It is well known that uncertainty concerning firms’ costs as well as market power of the latter have to be taken into account in order to design and choose environmental policy instruments in an optimal way. As a matter of fact, in most actual regulation settings the policy maker has to face both of these complications simultaneously. However, hitherto environmental economic theory has restricted to either of them when submitting conventional policy instruments to a comparative analysis. The article at hand takes a first step in closing this gap. It investigates the welfare effects of emission standards and taxes against the background of uncertain emission control costs and various degrees of the polluting firms’ market power.
    Keywords: Cournot oligopoly, external diseconomies of pollution, cost uncertainty, emission standard, emission tax
    JEL: D62 D89 L13 Q58
    Date: 2008–03
  20. By: TIROLE, Jean
    JEL: D62 D82 H23 J65
    Date: 2008–02
  21. By: Hatipoglu, Ozan
    Abstract: When people have hierarchic preferences inequality affects innovation-driven growth through the implied demand distribution over new goods. The paper examines the demand path of the firm through its life-cycle and analyzes the efficiency of dynamic resource allocation under different inequality scenarios. Unlike previous models of inequality and demand induced innovation, the innovators are protected by patents of finite length. Longer patents increase the profitability of an innovation because they reduce the effect of inequality by increasing the likelihood that the firms benefit from a future demand jump in sales to the poor. This result does not hold, however, when initial inequality is low or the purchasing power of the poor is high. Moreover, reducing inequality does not increase growth as long as the amount of redistribution is below a threshold level.
    Keywords: innovation dynamics; finite patents; hierarchic preferences; wealth inequality.
    JEL: O15 O31 O14
    Date: 2008–03–20

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