nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒04‒21
23 papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Input Pricing in a Model with Upstream and Downstream Product Innovation By EL ELJ, Moez
  2. A Model of Vertical Oligopolistic Competition By Reisinger, Markus; Schnitzer, Monika
  3. Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction By João Vareda
  4. Access Regulation under Asymmetric Information about Demand By João Vareda
  5. Price Skewness and Competition in Multi-Sided Markets By JULLIEN, Bruno
  6. Understanding Perpetual R&D Races By Yves Breitmoser; Jonathan H. W. Tan; Daniel John Zizzo
  7. The race for telecoms infrastructure investment with bypass: Can access regulation achieve the ?first best? By João Vareda; Steffen Hoernig
  8. Efficiency Enhancing Taxation in Two-sided Markets By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm
  9. Competition and quality in regulated markets: a di¤erential-game approach By Kurt R. Brekke; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
  10. Product Differentiation and the Equilibrium Structure of the Manufacturer-Retailer Relationship By Jerzy Mycielski; Yohanes Riyanto; Filip Wuyts
  11. Firm heterogeneity within industries: How important is “industry” to innovation? By Tommy Clausen
  12. From innovation to exporting or vice versa? Causal link between innovation activity and exporting in Slovenian microdata By Joze P. Damijan; Crt Kostevc; Saso Polanec
  13. Globalization and the effects of national versus international competition on the labour market. Theory and evidence from Belgian firm level data By Hilde Vandenbussche; Jozef Konings
  14. A Portrait of the Innovative Firm as a Small Patenting Entrepreneur By Andersson, Martin; Lööf, Hans
  15. R&D, Market Structure and Trade: A General Equilibrium Analysis By Leopoldo Yanes
  16. Innovation,Flexibility, Change-Premises of Organizational Development By Todorut, Amalia Venera
  17. Patent Protection, Market Uncertainty, and R&D Investment By Czarnitzki, Dirk; Toole, Andrew A.
  18. The Open-Loop Linear Quadratic Differential Game for Index One Descriptor Systems By Engwerda, J.C.; Salmah, Y.
  19. Revenue Sharing, Competitive Balance and the Contest Success Function By Marco Runkel
  20. Circular Aspects of Exchange Rates and Market Structure By Yunus Aksoy; Hanno Lustig
  21. On the Interaction between Taste and Distance and Its Implications on the Vertical Distribution Arrangement By Jerzy Mycielski; Yohanes Riyanto
  22. A percolation model of eco-innovation diffusion: the relationship between diffusion, learning economies and subsidies By Simona Cantono; Gerald Silverberg
  23. Minimum Wages and Welfare in a Hotelling Duopsony By Kaas, Leo; Madden, Paul

  1. By: EL ELJ, Moez
    Abstract: In this paper, we analyze the incentives for improving-quality R&D in a two-tier marketstructure where the quality of a differentiated good depends on the specific R&D of a downstream oligopoly and the R&D of an upstream monopoly. We show that input pricing is determining for the incentives for innovation in upstream and downstream industry. Fixed price agreements promote innovation in downstream and upstream industry by eliminating the opportunistic behaviour of the input supplier and are welfare enhancing. Theses agreements are all the more effective as the weight of the quality of the input in the consumer’s perception of the total quality of the final good is significant and as the goods are strongly differentiated.
    Keywords: Product Innovation; Vertical Market - Technological Spillovers - Input pricing
    JEL: L13 D43 O31
    Date: 2008–04–11
  2. By: Reisinger, Markus; Schnitzer, Monika
    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 profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. 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: 2008–04–09
  3. By: João Vareda (Autoridade da Concorrência)
    Abstract: We study the investment of a telecommunications incumbent in quality and in cost reduction when an entrant can use its network through unbundling of the local loop. We fi?nd that unbundling may lower incentives for quality improvements, but raises incentives for cost reduction. Therefore, it is not true that all types of investment are crowded out with unbundling. If the regulator can commit to a socially optimal unbundling price before investment, the incumbent makes both types of investment. In the absence of commitment, the incumbent will not invest, so that unbundling regulation may lower welfare as compared to no regulation.
    Keywords: Access Pricing, Telecommunications Regulation; Unbundling; Investments; Quality upgrades; Cost reduction; Commitment
    JEL: D92 L43 L51 L96
    Date: 2007–11
  4. By: João Vareda (Autoridade da Concorrência)
    Abstract: We study the impact of access regulation in a telecommunications market on an entrant?s decision whether to invest in a network or ask for access when the regulator cannot observe its potential demand. Since the entrant has incentives to not compete vigorously right after entry in order to convince the regulator that it needs cheap access in the future, the regulator must set access prices which tend to be distorted (lower or higher) as compared to fi?rst best. Still, this is better than committing to ignore ex post demand information. Consulting the entrant earlier about its expectations improves welfare and may help to achieve the ?first best.
    Keywords: Access Pricing, Asymmetric Information, Signaling, Revelation principle
    JEL: D82 D92 L51 L96
    Date: 2007–11
  5. By: JULLIEN, Bruno
    Date: 2008–03
  6. By: Yves Breitmoser (Institute of Microeconomics, European University Viadrina); Jonathan H. W. Tan (Institute of Microeconomics, European University Viadrina); Daniel John Zizzo (Centre for Competition Policy, University of East Anglia)
    Abstract: This paper presents an experimental study of dynamic indefinite horizon R and 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
  7. By: João Vareda (Autoridade da Concorrência); Steffen Hoernig (FEUNL)
    Abstract: We analyze the impact of mandatory access on the infrastructure investments of two competing communications networks, and show that for low (high) access charges fi?rms wait (preempt each other). Contrary to previous results, under preemption a higher access charge can delay fi?rst investment. While fi?rst-best investment cannot be achieved with a fi?xed access tariff, simple instruments such as banning access in the future, or granting access holidays right after investment, can improve efficiency. The former forces investment when it would happen too late, while the latter allows for lower access charges in order to delay the second investment when it would happen too early.
    Keywords: Access pricing, Investments, Preemption, Access ban, Access holidays
    JEL: D92 L43 L51 L96
    Date: 2007–11
  8. By: Kind, Hans Jarle (Department of Economics, Norwegian School of Economics and Business Administration (NHH)); Koethenbuerger, Marko (Center for Economic Studies, Ludwig-Maximilians-Universität); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: This paper examines the efficient provision of goods in two-sided markets and characterizes optimal specific and ad-valorem taxes. We show that (i) a monopoly may have too high output compared to the social optimum; (ii) output may be reduced by imposing negative value-added taxes (subsidy) or positive specific taxes.
    Keywords: Market Structure and Pricing; Efficiency; Optimal Taxation; Incidence
    JEL: D40 D43 H21 H22 L13
    Date: 2008–01–25
  9. By: Kurt R. Brekke; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
    Abstract: We investigate the e¤ect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a di¤erential 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 feedback 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, and the results are similar to the ones obtained by static models. 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 e¤ectively eliminated. In this case, static models tend to exaggerate the positive e¤ect 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: 2008–04
  10. By: Jerzy Mycielski; Yohanes Riyanto; Filip Wuyts
    Abstract: In this paper, we analyse the manufacturers' choice of vertical arrangement with retailers. We focus on two types of vertical arrangements namely exclusive dealing and exclusive territory. Both are used by manufacturers as instruments to dampen manufacturer competition. Exclusive dealing is used to avoid a head-to-head competition with other brands within a retail outlet. Thus, it restricts interbrand competition. Exclusive territory is used to eliminate intrabrand competition. Our results show that the choice of vertical arrangement depends on the degree of product substitution. When products are less subsitutable, in other words the interbrand rivalry is weak, manufacturers prefer to sell the products to a large number of competitive retailers. When the interbrand rivalry is strong, exclusive territory with exclusive dealing might be adopted by manufacturers. We derive welfare and antitrust policy implications.
    Date: 2008–03
  11. By: Tommy Clausen (Nordland Research Institute, Bodø)
    Abstract: In this paper we assess how important “industry” is to innovation. Our empirical estimates suggest that “industry factors” matter little to how firms’ search for new innovations. These results offer empirical support to recent evolutionary theory where firms have heterogeneous capabilities and pursue different approaches to innovation. Structural variables at the industry level do however have a substantial influence on the firm level propensity to innovate. This result supports “sectoral innovation system” approaches where firms are “constrained” by technological regimes underlying industry evolution. Hence, the driving forces behind technological evolution are found at both the firm and industry level.
    Date: 2008–04
  12. By: Joze P. Damijan; Crt Kostevc; Saso Polanec
    Abstract: Firm productivity and export decision are closely related to its innovation ac- tivity. Product innovation may play a more important role in the decision to start exporting, while the decision for process innovation may be triggered by success- ful exporting. This suggests that the causality between innovation and exporting may run from product innovation to exporting and conesequently from exporting to process innovation and reverse productivity improvements. Using detailed mi- crodata, including innovation survey, industrial production survey and information on trade, for Slovenian firms in 1996-2002 we investigate this dual causal relation- ship between firms' innovation and exporting activity. We find no evidence for the hypothesis that either product or process innovations increase the probability of becoming a first time exporter, but find consistent support both in the innovation survey as well as in the industrial production survey that exporting does lead to pro- ductivity improvements. These, however, are likely to be related to process rather than product innovations and are limited to a sample of medium and large sized first time exporters only.
    Keywords: ?rm heterogeneity, innovation, exporting, productivity, matching
    JEL: D24 F14 F21
    Date: 2008
  13. By: Hilde Vandenbussche; Jozef Konings
    Abstract: In this paper we first develop a simple theoretical framework which shows that important differences exist between national and international competition and their effect on national labour markets. National competition refers to a reduction of monopoly power in the product market through improved market contestability and market access, which is the responsibility of competition authorities. International competition refers to a reduction in product market competition as a result of trade liberalization. We show that when the domestic market is unionized, national entry (FDI or domestic entry) has very different effects on the national labour market than international entry (imports in the relevant product market). One result we obtain is that national competition need not increase domestic employment while trade competition need not lower domestic employment. Our analysis has at least two important implications. First, geographic location of competitors matters when institutional settings like trade unions are country specific. Second, a change in competition policy is likely to affect labour markets differently than a change in trade policy. The results also indicate that apart from location, market structure and the level at which wages are bargained over (firm or sector level) matter. In a further step the theoretical predictions we derive, are tested on Belgian company accounts data supplemented with data from a postal survey.
    Date: 2008–03
  14. By: Andersson, Martin (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Lööf, Hans (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper examines small innovative entrepreneurs by contrasting patenting firms against non-patenting firms. The empirical analysis is based on new and unique data on internal attributes, location and international trade characteristics for over 20 000 manufacturing firms in Sweden with 1-25 employees. Our main findings are that firms’ access to financial means, human capital and trade with R&D-intensive economies correlate highly significant with their propensity to be engaged in innovation activities, as evidenced by patent applications. Interestingly, when controlling for firm attributes we do not find any significant effect of the local milieu on innovativeness among micro and very small firms.
    Keywords: Entrepreneurship; Innovation and Invention; Intellectual Property Rights; SMEs; Technology Transfer; Location; Agglomeration
    JEL: F43 L26 M13 O31 O34
    Date: 2008–04–09
  15. By: Leopoldo Yanes (School of Economics, The University of Queensland)
    Abstract: That many industries exhibit highly concentrated market structures, even at the global level, calls for trade theoretic analyses which can accommodate this fact. We present a two-country, general equilibrium analysis in which high concentration levels can be sustained through the interaction between R&D and market structure, whilst emphasizing the effects of trade and industrial policy on wages and welfare. The world economy is characterized by asymmetric initial conditions and populations. If initial conditions are very different, freetrade reduces wages in a backward economy, relative to autarky. However, the advanced economy always achieves higher wages through trade. Welfare gains from trade arise when economies are either very similar or very different. In the intermediate case, when initial conditions are not too different, and the advanced economy’s population is not very large, the backward economy loses from trade, while the advanced economy gains. A compensation mechanism is feasible and would ensure that no nation loses from trade. The analysis provides formal criteria for the choice of trade partners and the formation of trade blocs. Moreover, industrial policy (an R&D subsidy) is shown to be neutral or ineffective, in the sense that it does not affect any real magnitudes.
    Keywords: International trade, industrial policy, product quality, R&D, market structure, initial conditions
    Date: 2008
  16. By: Todorut, Amalia Venera
    Abstract: The features of innovation, flexibility and change mutually influence one another. Provided that change is perceived as a feature leading to innovation, flexibility is the feature that enables it. Innovation cannot exist without change but nonetheless each and every change leads to innovation. Flexibility is a necessary condition but not sufficient for the innovation since it is influenced by change and balanced by flexibility. This fact suggests that the flexible companies lead to a more significant innovation comparatively to those inflexible. The innovations are more likely to develop when the organizational conditions allow flexibility. Concerning innovation, two types of flexibilities have been identified. The first type creates a routine allowing to companies to take advantage of opportunities leading to increasing the input capacity. The second type avoids the existent routine with the aim of creating new opportunities leading to high innovation. The type of innovation requested and that of flexibility are determined by the stability of the organization change and its environment.
    Keywords: innovation;flexibility;change; quality;strategy
    JEL: M11 D2
    Date: 2008–02
  17. By: Czarnitzki, Dirk; Toole, Andrew A.
    Abstract: Real options investment theory predicts current investment falls as uncertainty about market returns increases. In the case of R&D investment, which is usually considered an irreversible form of investment, this effect should be quite pronounced. This paper tests the real options prediction about the R&D investment–uncertainty relationship and further considers how patent protection influences this relationship. Patent protection, by limiting the threat of market rivalry, should mitigate firm-specific uncertainty and stimulate current R&D investment. Our empirical results support both the prediction of real options theory and the mitigating effect of patent protection.
    Keywords: Real Options Theory, Uncertainty, R&D, Intellectual Property Protection, Censored Regression
    JEL: C25 O31 O33
    Date: 2008
  18. By: Engwerda, J.C.; Salmah, Y. (Tilburg University, Center for Economic Research)
    Abstract: In this paper we consider the linear quadratic differential game for descriptor systems that have index one. We derive both necessary and sufficient conditions for existence of an open-loop Nash equilibrium.
    Keywords: Linear quadratic differential games; open-loop information structure; descriptor systems.
    JEL: C61 C72 C73
    Date: 2008
  19. By: Marco Runkel (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper investigates revenue sharing in an asymmetric two team contest model of a sports league with Nash behavior of team owners. The innovation of the analysis is that it focuses on the role of the contest success function (CSF). In case of an inelastic talent supply, revenue sharing turns out to worsen competitive balance regardless of the shape of the CSF. For the case of an elastic talent supply, in contrast, the effect of revenue sharing on competitive balance depends on the specification of the CSF. We fully characterize the class of CSFs for which revenue sharing leaves unaltered competitive balance and identify CSFs ensuring that revenue sharing renders the contest closer.
    Keywords: Revenue Sharing, Competitive Balance, Contest Success Function
    JEL: D72 C72
    Date: 2008–04
  20. By: Yunus Aksoy; Hanno Lustig
    Abstract: This modified version of Salop's (1979) spatial competition model yields clear-cut predictions about the effects of exchange rate shocks on market structure and pass-through. Shocks within the band of inaction do not affect market structure. The upper bound of this range rises as the industry ratio of sunk to fixed costs increases. As fixed costs and product heterogeneity jointly increase, the lower bound drops. Outside of the range, depreciations cause one or several of those foreign brands closest to the home brand to leave. This decreases the overall responsiveness of prices to exchange rate shocks. Large appreciations induce entry and increase the elasticity of prices. This asymmetry implies larger positive than negative PPP deviations. When accounting for price changes in foreign markets, strategic pricing behavior is no longer sufficient to generate real exchange rate variability. Incomplete pass-through obtains if and only if the domestic firms have a smaller market share abroad. With large nominal exchange rate shocks hysteresis result obtains if and only if sunk costs are non-zero.
    Date: 2008–03
  21. By: Jerzy Mycielski; Yohanes Riyanto
    Abstract: This paper studies the vertical distribution arrangement between manufacturers and retailers in a two dimensional horizontal product differentiation framework. Products are differentiated along consumers' taste and retailers' location. Consumers have to incur transportation costs to visit a retailer and substitution costs to substitute their preferred products with the available products. The objective of the paper is to analyse the incentive of manufacturers to impose an exclusive territory restriction. We employ a four-stage game. In the first stage manufacturers decide on the optimal number of retailers. In the second stage manufacturers decide on the wholesale prices. In the third stage retailers set the retail prices. Finally, in the fourth stage consumers purchase goods. We show that the relative magnitude of the transportation and substitution costs is crucial in determining the decision of manufacturers to impose an exclusive territory restriction.
    Date: 2008–03
  22. By: Simona Cantono (Department of Economics, University of Turin); Gerald Silverberg (UNU-MERIT)
    Abstract: An obstacle to the widespread adoption of environmentally friendly energy technologies such as stationary and mobile fuel cells is their high upfront costs. While much lower prices seem to be attainable in the future due to learning curve cost reductions that increase rapidly with the scale of diffusion of the technology, there is a chicken and egg problem, even when some consumers may be willing to pay more for green technologies. Drawing on recent percolation models of diffusion by Solomon et al. [7], Frenken et al. [8] and Höhnisch et al. [9], we develop a network model of new technology diffusion that combines contagion among consumers with heterogeneity of agent characteristics. Agents adopt when the price falls below their random reservation price drawn from a lognormal distribution, but only when one of their neighbors has already adopted. Combining with a learning curve for the price as a function of the cumulative number of adopters, this may lead to delayed adoption for a certain range of initial conditions. Using agent-based simulations we explore when a limited subsidy policy can trigger diffusion that would otherwise not happen. The introduction of a subsidy policy seems to be highly effective for a given high initial price level only for learning economies in a certain range. Outside this range, the diffusion of a new technology either never takes off despite the subsidies, or the subsidies are unnecessary. Perhaps not coincidentally, this range seems to correspond to the values observed for many successful innovations.
    Keywords: Innovation diffusion, learning economies, percolation, networks, heterogeneous agents, technology subsidies, environmental technologies
    JEL: C61 H23 O32 O33
    Date: 2008
  23. By: Kaas, Leo (University of Konstanz); Madden, Paul (University of Manchester)
    Abstract: Two firms choose locations (non-wage job characteristics) on the interval [0,1] prior to announcing wages at which they employ workers who are uniformly distributed; the (constant) marginal revenue products of workers may differ. Subgame perfect equilibria of the two-stage location-wage game are studied under laissez-faire and under a minimum wage regime. Up to a restriction for the existence of pure strategy equilibria, the imposition of a minimum wage is always welfare-improving because of its effect on non-wage job characteristics.
    Keywords: hotelling, duopsony, minimum wages
    JEL: D43 E24 J48
    Date: 2008–04

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