nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒04‒15
twenty-two papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Bertrand-Edgeworth Equilibrium in Oligopoly By Hirata, Daisuke
  2. Understanding Perpetual R&D Races By Yves Breitmoser; Jonathan H.W. Tan; Daniel John Zizzo
  3. A Note on the Excess Entry Theorem in Spatial Models with Elastic Demand By Yiquan Gu; Tobias Wenzel
  4. Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis By Tom-Reiel Heggedal and Karl Jacobsen
  5. Price Discrimination with Partial Information: Does it pay off? By Rosa Branca Esteves
  6. Mergers in Two-Sided Markets: An Application to the Canadian Newspaper Industry By Chandra, Ambarish; Collard-Wexler, Allan
  7. Switching Costs and the foreign Firm's Entry By Kikuchi, Toru
  8. Nearly Optimal Pricing for Multiproduct Firms By Chenghuan Sean Chu; Phillip Leslie; Alan Sorensen
  10. Why Are Companies Offshoring Innovation? The Emerging Global Race for Talent By Arie Y. Lewin; Silvia Massini; Carine Peeters
  11. What Drives the Productive Efficiency of a Firm? - the importance of industry, location, R&D, and size By Badunenko, Oleg; Fritsch, Michael; Stephan, Andreas
  12. Gain or Pain: Does Consumer Activity Reflect Utility Maximisation? By Yoonhee Tina Chang; Catherine Waddams Price
  13. A Policy Insight into the R&D-Patent Relationship By Gaétan de Rassenfosse; Bruno van Pottelsberghe
  14. Does Product Market Competition Decrease Employers’ Training Investments? – Evidence from German Establishment Panel Data By Katja Görlitz; Joel Stiebale
  15. Targeted Advertising: The Role of Subscriber Characteristics in Media Markets By Chandra, Ambarish
  16. Welfare and Competition Effects of Electricity Interconnection between Great Britain and Ireland By Laura Malaguzzi Valeri
  17. How can we Study Innovation Systems? - introducing an actor-centralised perspective By Broström, Anders
  18. Competition, Takeovers and Gender Discrimination By Heyman, Fredrik; Svaleryd, Helena; Vlachos, Jonas
  19. Consumer Information in a Market for Expert Services By Kyle Hyndman; Saltuk Ozerturk
  20. Outward Foreign Direct Investment in Unionized Oligopoly: Welfare and Policy Implications By Junichiro Ishida; Noriaki Matsushima
  21. The economics of networks - A survey of the empirical literature By Daniel Birke
  22. Auctions with Resale Market and Asymmetric Information By Rodrigo Harrison; Roberto Muñoz;; Felipe Varas

  1. By: Hirata, Daisuke
    Abstract: This paper investigates simultaneous move capacity constrained price competition game among three firms. I find that equilibria in an asymmetric oligopoly are substantially different from those in the duopoly and symmetric oligopoly. I characterize mixed strategy equilibria and show there exist possibilities of i) the existence of a continuum of equilibria ii) the smallest firm earning the largest profit per capacity and iii) non-identical supports of equilibrium mixed strategies, all of which never arise either in the duopoly or symmetric oligopoly. In particular, the second finding sheds light on a completely new pricing incentive in Bertrand competitions.
    Keywords: Price Competition, Oligopoly, Capacity Constraint, Homogeneous Goods
    JEL: L13 C72
    Date: 2008–03
  2. By: Yves Breitmoser (Institute of Microeconomics, European University Viadrina); Jonathan H.W. Tan (Nottingham University Business School, University of Nottingham); Daniel John Zizzo (School of Economics, University of East Anglia)
    Abstract: This paper presents an experimental study of dynamic indefinite horizon R&D races with uncertainty and multiple prizes. The theoretical predictions are highly sensitive: small parameter changes determine whether technological competition is sustained, or converges into a market structure with an entrenched leadership and lower aggregate R&D. The subjects’ strategies are far less sensitive. In most treatments, the R&D races tend to converge to entrenched leadership. Investment is highest when rivals are close. This stylized fact, and so the usefulness of neck-to-neck competition in general, is largely unrelated to rivalry concerns but can be explained using a quantal response extension of Markov perfection.
    Keywords: R&D race; innovation; dynamics; experiment.
    JEL: C72 C91 O31
    Date: 2008–03
  3. By: Yiquan Gu; Tobias Wenzel
    Abstract: This paper revisits the excess entry theorem in spatial models à la Vickrey (1964) and Salop (1979) while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity.We find that the excess entry theorem does only hold when demand is sufficiently inelastic. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We point out when and how a public policy can be desirable and broaden our results with a more general transportation cost function.
    Keywords: Elastic demand, spatial models, excess entry theorem
    JEL: L11 L13
    Date: 2007–12
  4. By: Tom-Reiel Heggedal and Karl Jacobsen (Statistics Norway)
    Abstract: This paper studies the timing of subsidies for environmental research and development (R&D) and how innovation policy is influenced by the costs of emissions. We use a dynamic computable general equilibrium (CGE) model with both general R&D and specific environmental R&D. We find two results that are important when subsidizing environmental R&D in order to target inefficiencies in the research markets. Firstly, the welfare gain from subsidies is larger when the costs of emissions are higher. This is because a high carbon tax increases the social (efficient) investment in environmental R&D, in excess of the private investment in R&D. Secondly, the welfare gain is greater when there is a falling time profile of the rate of subsidies for environmental R&D, rather than a constant or increasing profile. The reason is that the innovation externalities are larger in early periods.
    Keywords: Applied general equilibrium; endogenous growth; research and development; carbon emissions.
    JEL: E62 H31 O38 Q55
    Date: 2008–04
  5. By: Rosa Branca Esteves (Universidade do Minho - NIPE)
    Abstract: This paper investigates the profit effects of price discrimination when firms have partial information about consumer preferences. Using a two-dimensional model of product differentiation it shows that price discrimination can boost industriy profit if firms have acess to the right kind of information about consumer preferences while remaining ignorant of othet relevant information.
    Date: 2008
  6. By: Chandra, Ambarish; Collard-Wexler, Allan
    Abstract: In this paper we study mergers in two-sided industries. While mergers have been studied extensively in traditional industries, and there is a large and rapidly evolving literature on two-sided markets, there has been little work empirically examining mergers in these markets. We present a model that shows that mergers in two-sided markets may not necessarily lead to higher prices for either side of the market. We test our conclusions by examining a spate of mergers in the Canadian newspaper industry in the late 1990s. Specifically, we analyze prices for both circulation and advertising to try to understand the impact that these mergers had on consumer welfare. We find that greater concentration did not lead to higher prices for either newspaper subscribers or advertisers.
    Keywords: Mergers; Two-Sided Markets; Newspapers
    JEL: D43 L4
    Date: 2008–03
  7. By: Kikuchi, Toru
    Abstract: This paper considers a two-period model of market entry with homogeneous products and switching costs. It is shown that the pro-competitive effect of a foreign firm's entry (i.e., unilateral trade liberalization) emerges before the entry. Also, conditions that are conducive to a competitive environment in the second-period are shown to yield a less competitive outcome in the first-period. That is, when the marginal cost of the foreign entrant is relatively low, the first-period output of a domestic monopolist is relatively low as well.
    Keywords: Switching Costs; Foreign Firm's Entry
    JEL: F12
    Date: 2008
  8. By: Chenghuan Sean Chu; Phillip Leslie; Alan Sorensen
    Abstract: In principle, a multiproduct firm can set separate prices for all possible bundled combinations of its products (i.e., "mixed bundling"). However, this is impractical for firms with more than a few products, because the number of prices increases exponentially with the number of products. In this study we show that simple pricing strategies are often nearly optimal -- i.e., with surprisingly few prices a firm can obtain 99% of the profit that would be earned by mixed bundling. Specifically, we show that bundle-size pricing -- setting prices that depend only on the size of bundle purchased -- tends to be more profitable than offering the individual products priced separately, and tends to closely approximate the profits from mixed bundling. These findings are based on an array of numerical experiments covering a broad range of demand and cost scenarios, as well as an empirical analysis of the pricing problem for an 8-product firm (a theater company).
    JEL: D4 L0 L11
    Date: 2008–04
  9. By: Rod Tyers; Lucy Rees
    Abstract: The retreat from public ownership of service firms and industries has left behind numerous private monopolies and oligopolies supervised by regulatory agencies. Services industries in government and private ownership generate two-thirds of Australia’s value added and employ three quarters of its workforce. This study offers an economy-wide approach that represents monopoly and oligopoly behaviour explicitly. It examines the implications of oligopoly rents for factor markets and the real exchange rate, the extent of sectoral interactions and the potential economy wide gains from tighter price cap regulation, with the results confirming the merit of an economy-wide approach. External shocks, like the present “China boom”, are also simulated. Such positive shocks are shown to expand the potential for oligopoly rents and therefore to raise the bar for regulatory agencies. Moreover, less than tight price caps are shown to exacerbate entry-exit hysteresis in boom and bust cycles.
    JEL: C68 D43 D58 L13 L43 L51 L80
    Date: 2008–03
  10. By: Arie Y. Lewin (Duke University – The Fuqua School of Business, US.); Silvia Massini (Manchester Business School, University of Manchester, UK.); Carine Peeters (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and ECARES, Université Libre de Bruxelles.)
    Abstract: This paper empirically studies the determinants of firms’ decision to offshore product development activities (i.e. R&D, product design and engineering services). A logit model is estimated using survey data from the Offshoring Research Network on offshore implementations initiated by US firms between 1990 and 2006. It relates the probability of offshoring product development to differences in companies’ strategic objectives (managerial intentionality), past experience (path dependence), and in environmental factors. The results show that offshoring of product development is partially explained by the emerging shortage of high skilled technical talent in the US, which drives the need to access talent globally. The data also suggest that firms use offshore cost savings opportunities to improve the efficiency of the innovation process, although not through labor arbitrages. Finally, increasing speed to market is another major reason underlying product development offshoring decisions.
    Keywords: offshoring, innovation, product development, global talent.
    JEL: O32
    Date: 2008–03
  11. By: Badunenko, Oleg (DIW Berlin); Fritsch, Michael (Friedrich Schiller University Jena, Max Planck Institute of Economics Jena and DIW); Stephan, Andreas (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper investigates the factors that explain the level and dynamics of manufacturing firm productive efficiency. In our empirical analysis, we use a unique sample of about 39,000 firms in 256 industries from the German Cost Structure Census over the years 1992-2005. We estimate the efficiencies of the firms and relate them to firm-specific and environmental factors. We find that (1) about half the model’s explanatory power is due to industry effects, (2) firm size accounts for another 20 percent, and (3) location of headquarters explains approximately 15 percent. Interestingly, most other firm characteristics, such as R&D intensity, outsourcing activities, or the number of owners, have extremely little explanatory power. Surprisingly, our findings suggest that higher R&D intensity is associated with being less efficient, though higher R&D spending increases a firm’s efficiency over time.
    Keywords: Frontier analysis; determinants of efficiency; firm performance; industry effects; regional effects; firm size
    JEL: D24 L10 L25
    Date: 2008–04–02
  12. By: Yoonhee Tina Chang (School of Management, University of Bath); Catherine Waddams Price (Centre for Competition Policy, University of East Anglia)
    Abstract: Competition Authorities are introducing new informational remedies to help consumers search and switch more actively. Using a specially commissioned data set, and unique direct estimates of the gains, search and switching time which consumers anticipate, we examine the determinants of consumer activity in eight markets. We find that expected costs (and to some extent gains) do influence consumers as a utility maximising model would predict; but that their role is small, and other factors, particularly experience of switching in other markets, are also influential. We conclude that consumers’ confidence in their own estimates is crucial in encouraging market activity.
    Keywords: consumer behaviour, search and switching, informational remedies
    JEL: D12 D83 L51 L88 L98
    Date: 2008–02
  13. By: Gaétan de Rassenfosse (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and ECARES, Université Libre de Bruxelles, Brussels and ECARES, Université Libre de Bruxelles.); Bruno van Pottelsberghe (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles and ECARES, Université Libre de Bruxelles.)
    Abstract: This paper investigates whether patent counts can be taken as indicators of macroeconomic innovation performance. The empirical model explicitly accounts for the two components of patenting output: research productivity and patent propensity. The empirical analysis aims at explaining the `correct' number of priority filings in 34 countries. It confirms that the two components play a substantial role as witnessed by the impact of the design of several policies, namely education, intellectual property and science and technology policies. A major policy implication relates to the design of patent systems, which ultimately induces, or allows for, aggressive patenting strategies.
    Keywords: education policy; patent policy; propensity to patent; R&D productivity; S&T policy.
    JEL: O30 O38
    Date: 2008–03
  14. By: Katja Görlitz; Joel Stiebale
    Abstract: Using a large panel data set of German manufacturing establishments, this paper investigates the impact of competition on training incidence as well as on the number of trained workers. According to theory, one would expect a negative relationship between product market competition and firms’ incentives to invest in employees’ general skills (Gersbach and Schmutzler 2006). In our empirical analysis, product market competition is approximated by various measures of competition such as the Herfindahl Index, the number of firms at the 3-digit industry level and the price cost margin. After controlling for unobserved heterogeneity across industries and establishments, there is no significant effect of competition on training. This result is robust towards different samples, model specifications and estimation techniques.
    Keywords: Training, human capital, product market competition
    JEL: J24 L22 D43 C23
    Date: 2008–03
  15. By: Chandra, Ambarish
    Abstract: This paper seeks to establish the importance of targeted advertising in media markets. Using zip-code level circulation for US daily newspapers, I show that newspapers facing more competition have lower circulation prices but higher advertising prices than similar newspapers facing little or no competition. I explain this by showing that newspapers in more competitive markets are better able to segment readers according to their location and demographics. This leads to greater homogeneity in the characteristics of subscribers and raises advertisers' willingness to pay for such readers. The results imply a substantial benefit to advertisers and media firms from targeted advertising.
    Keywords: Targeted Advertising; Media Markets; Newspapers; Media Segmentation
    JEL: D4 L1
    Date: 2008–03
  16. By: Laura Malaguzzi Valeri (Economic and Social Research Institute (ESRI))
    Abstract: This study analyzes the effects of additional interconnection on welfare and competition in the Irish electricity market. I simulate the wholesale electricity markets of Great Britain and the island of Ireland for 2005. I find that in order for the two markets to be integrated in 2005, additional interconnection would have to be large. However, the amount of interconnection decreases for high costs of carbon, since this causes the markets to become more similar. Irish consumers obtain most of the welfare gains of interconnection. As the amount of interconnection increases, there are also positive effects on competition in Ireland, the less competitive of the two markets. Finally, it is unlikely that private investors will pay for the construction of the interconnector since they are unable to extract all its welfare benefits.
    Keywords: interconnection, electricity, Ireland
    JEL: L94 Q40
    Date: 2008–03
  17. By: Broström, Anders (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The systems of innovation approach has helped advocating a view on innovation as dependent on the interaction over time between different actors and brought the role of institutions to the center of interest. However, the approach has remained a general framework rather than evolved into an analytical tool for the study of the dynamics of innovation activities. In this discussion paper, we introduce the concept of innovation system services, defined as the set of factors that have a significant potential influence on the opportunities of a certain groups of actors to perform a certain type of activities efficiently. We suggest that the relevant innovation system for the actors-activities nexus at hand can be defined as this set of system services. We examine this analytical framework in a case study on R&D investments of multinational enterprises in Sweden. In this context, innovation system services are defined as the set of external factors that the case study suggests to have significant impact on the decisions of MNEs to invest in R&D in Sweden. The focus on services allows us to analyse the influence of an innovation system on the long-term development of R&D in Sweden in a structured and coherent manner and to identify critical dynamics.
    Keywords: innovation systems; R&D collaboration; multinational enterprises; innovation in services
    JEL: D29 O31 O32
    Date: 2008–04–02
  18. By: Heyman, Fredrik (Research Institute of Industrial Economics (IFN)); Svaleryd, Helena (Research Institute of Industrial Economics (IFN)); Vlachos, Jonas (Stockholm University)
    Abstract: Theories of taste-based discrimination predict that competitive pressures will drive discriminatory behavior out of the market. Using detailed matched employer-employee data, we analyze how firm takeovers and product market competition are related to the gender composition of the firm’s workforce and the gender wage gap. Using a difference-in-difference framework and dealing with several endogeneity concerns, we find that the share of female employees increases as a result of an ownership change, in particular when product market competition is weak. Further, increased competition reduces the gender wage gap, especially among highly educated employees. While the estimated wage effect is quite small, the results support the main theoretical predictions.
    Keywords: Discrimination; Competition; Takeovers; Wages
    JEL: J20 J31 J70
    Date: 2008–02–21
  19. By: Kyle Hyndman (SMU); Saltuk Ozerturk (SMU)
    Abstract: We analyze the implications of heterogeneously informed consumers in a market for expert services. Our main question is to investigate whether uninformed consumers are the most likely victims of expert cheating. We show that when consumers are heterogeneously informed on their true benefit from an expensive treatment, there is no equilibrium where the expert only cheats uninformed consumers. In fact, informed high-value consumers are the most frequent victims of cheating. Surprisingly, more information on the consumer side increases the inefficiency of the market outcome in terms of the foregone, but required, treatments. When some consumers receive noisy information signals on whether their problem is serious or minor, while others remain uninformed, in the unique equilibrium the expert is truthful to all types of consumers, regardless of their information status.
    Keywords: Credence Goods, Expert Cheating, Consumer Information
    Date: 2008–04
  20. By: Junichiro Ishida (Osaka School of International Public Policy (OSIPP),Osaka University); Noriaki Matsushima (Graduate School of Business Administration, Kobe University)
    Abstract: It is often argued, though mostly informally, that outward foreign direct investment (FDI) is a synonym for the export of employment and thus detrimental to the home economy. To see whether and under what conditions this intuition indeed holds true, we construct a model of unionized duopoly and examine welfare implications of outward FDI on the home country. It is found that the welfare effect of FDI is mostly non-monotonic: an asymmetric pattern of FDI, where only one firm undertakes FDI in the duopolistic case, is socially desirable for a wide range of parameter values in the presence of strong unions. This amounts to a critical policy implication that there are indeed such things as gexcessive FDIh and any form of government intervention to encourage outward FDI can be beneficial only up to some point. We also show that, when FDI reduces welfare, this negative effect arises more at the expense of consumers rather than the unions: in fact, quite contrary to the popular belief, FDI may actually benefit the unions because it serves to soften price competition between them. The paper points out that welfare effects of outward FDI hinges crucially on the nature of domestic competition, and policymakers must carefully take this aspect into consideration.
    Keywords: R&D investment, vertical relation, transport cost, welfare, wage bargaining
    JEL: F21 J31 L13
    Date: 2008–03
  21. By: Daniel Birke
    Abstract: Network effects, the increase in value of consuming a product if many other consumers use the same product, is a feature of many markets of high-technology products. Frequently cited examples of products exhibiting network effects are telecommunication or software products. This paper surveys the burgeoning empirical literature that has developed especially during the last years. After theoretical work dominated the earlier years of research in this area, newer research has combined theoretical models with empirical studies and applied work with direct implications for marketing and public policy. Furthermore, insights from the study of social networks have been applied to analyse how consumers interact with each other. The paper argues that a closer analysis of the network structure of consumer interaction promises fruitful future research avenues and advances in our understanding of how network effects operate.
    Keywords: network effects, social networks, structural models
    Date: 2008–04–04
  22. By: Rodrigo Harrison (Instituto de Economía. Pontificia Universidad Católica de Chile.); Roberto Muñoz;; Felipe Varas
    Abstract: In this paper we study the role of resale opportunities in secondary markets over the bidding process in first and second price auctions. This trade opportunity arises owing to the presence of two factors. On the one hand, after receiving the object, the winner obtains new information about the object’s value and on the other hand, the winner may suffer a liquidity shock that force him to sell the object regardless of his valuation. The buyer in the secondary market, however, does not know if the good is being sold because the new information reveals bad news regarding the object’s valuation, or because a liquidity shock affected the seller. Our results show that revenue equivalence still holds, and bids are usually lower than those observed in the absence of liquidity shocks.
    Keywords: Auctions; Resale Market; Adverse Selection
    JEL: D44 L1
    Date: 2008

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