nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒04‒29
fifteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Aftermarket Power and Basic Market Competition By Cabral, Luís M B
  2. Net Neutrality on the Internet: A Two-sided Market Analysis By Economides , Nicholas; Tåg, Joacim
  3. Advertising, Entry Deterrence, and Industry Innovation By Shi Qi
  4. The Non-Linear Cournot Model as a Best-Response Potential Game By Davide Dragone; Luca Lambertini
  5. On Environmental Subsidy/Tax Policy with Heterogeneous Consumers: An Application of an Environmentally Differentiated Duopoly Model By Tsuyoshi Toshimitsu
  6. Strategic aspects of bundling By Marion PODESTA
  7. Competition and Regulation via Supply and Demand Functions in Oligopolistic-Oligopsonistic Markets By Bulut, Harun; Koray, Semih
  8. Competition and Quality in Regulated Markets: a Differential-Game Approach By Brekke, Kurt Richard; Cellini, Roberto; Siciliani, Luigi; Straume, Odd Rune
  9. Optimal Nonlinear Pricing, Bundling Commodities and Contingent Services By Marion PODESTA; Jean-Christophe POUDOU
  10. Cross-Border Mergers & Acquisitions Policy in Service Markets By Norbäck, Pehr-Johan; Persson, Lars
  11. Genetic Codes of Mergers, Post Merger Technology Evolution and Why Mergers Fail By Alexander Cuntz
  12. The Role of an Imitating Firm in a Dynamic Context By Francisco Martínez-Sánchez
  13. Monopoly and the incentive to innovate when adoption involves switchover disruptions By Thomas J. Holmes; David K. Levine; James A. Schmitz, Jr.
  14. Privatization and competition in the delivery of local services: An empirical examination of the dual market hypothesis By Germà Bel; Xavier Fageda
  15. R&D and the agglomeration of industries By Jan Kranich

  1. By: Cabral, Luís M B
    Abstract: I revisit the relation between aftermarket power and basic market competition. I consider an infinite period model with overlapping consumers: in each period, one consumer is born and joins one of the existing installed bases, then aftermarket payoffs are received by sellers and consumers, then finally one consumer dies. I derive the unique symmetric Markov equilibrium of this game and the resulting stationary distribution over states (each firm's installed base). I show that an increase in aftermarket power increases the extent of increasing dominance (i.e., a large firm is increasingly more likely to capture a new consumer than a small firm). This in turn leads to several implications of aftermarket power. First, the stationary distribution places greater weight on asymmetric states. Second, social welfare is greater. Third, under some conditions consumer welfare is also greater. Fourth, the value of a firm with zero installed base is lower, and so barriers to entry are higher.
    Keywords: aftermarkets; dynamic price competition; market power
    JEL: L1 L4
    Date: 2008–04
  2. By: Economides , Nicholas (Stern School of Business); Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers "on the other side" of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees "on the other side" of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees "on the other side" of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.
    Keywords: Net Neutrality; Two-sided Markets; Internet; Monopoly; Duopoly; Regulation; Discrimination
    JEL: C63 D40 D42 D43 L10 L12 L13
    Date: 2008–01–15
  3. By: Shi Qi
    Date: 2008–04–18
  4. By: Davide Dragone (Department of Economics, University of Bologna, Italy); Luca Lambertini (Department of Economics, University of Bologna and The Rimini Centre for Econonic Analisys, Italy)
    Abstract: WeshowthattheCournotoligopolygamewithnon -linearmarketdemandcanbereformulatedasab est-responsepotentialgamewherethebest-re sponsepotentialfunctionislinear-quadrati c.
    Keywords: potential function, potential game, Cournot oligopoly
    JEL: C72 L13
    Date: 2007–07
  5. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: We apply a model of an environmentally differentiated duopoly to the analysis of environmental policy in the form of a subsidy/tax on consumers based on emission levels of products. More specifically, we consider environmental and welfare effects of subsidizing consumers who purchase environmental-friendly goods such as hybrid vehicles. Focusing on types of market coverage by heterogeneous consumers, we examine the issue in the cases of a Bertrand and a Cournot duopoly. In the case of full market coverage with a Bertrand duopoly, an environmental subsidy improves the environment and is socially optimal. However, in the case of partial market coverage, irrespective of mode of competition, the optimal policy depends on the magnitude of the marginal social valuation of environmental damage. That is, if the marginal social valuation of environmental damage is sufficiently large (small), an environmental tax (subsidy) is optimal. Furthermore, in the Bertrand duopoly case, the effect of subsidy on the environment is ambiguous, whereas in the Cournot duopoly case, the subsidy degrades the environment.
    Keywords: Environmentally differentiated product, Environmental subsidy/tax, Green market, Bertrand and Cournot duopoly
    JEL: D43 H23 L13
    Date: 2008–04
  6. By: Marion PODESTA
    Abstract: The increase of bundle supply has become widespread in several sectors (for instance in telecommunications and energy fields). This paper review relates strategic aspects of bundling. The main purpose of this paper is to analyze profitability of bundling strategies according to the degree of competition and the characteristics of goods. Moreover, bundling can be used as price discrimination tool, screening device or entry barriers. In monopoly case bundling strategy is efficient to sort consumers in different categories in order to capture a maximum of surplus. However, when competition increases, the profitability on bundling strategies depends on correlation of consumers reservations values.
    Keywords: Product bundling, foreclosure, price discrimination
    JEL: D21 D43 L13
    Date: 2008
  7. By: Bulut, Harun; Koray, Semih
    Abstract: In this study, we regard the oligopolistic-oligopsonistic markets within the framework of a “double auction” in which both buyers and sellers make bids. To this end, we introduce games where declarations of supply and demand functions (which need not be true) are treated as strategic variables of producers and consumers, respectively, rather than just as “binding commitments” on the part of these parties. Existence of symmetric equilibria of each of these games is established. Most of them are shown to be unique. The equilibrium outcomes of these are compared with the standard Cournot outcome as well as among themselves regarding the market price, total quantity produced, individual consumer’s surplus, individual firms’ profit and social welfare they lead to. To allow the consumers to behave strategically along with the producers, naturally makes the former better off and the latter worse off, while the net effect of this on total social welfare turns out to be case-contingent.
    Keywords: buyer power, demand function equilibria, double auction, oligopoly, oligopsony, supply function equilibria
    JEL: C7 L1 L5
    Date: 2008–04–26
  8. By: Brekke, Kurt Richard; Cellini, Roberto; Siciliani, Luigi; Straume, Odd Rune
    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 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 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: Competition; Quality; Regulated markets
    JEL: H42 I11 I18 L13
    Date: 2008–04
  9. By: Marion PODESTA; Jean-Christophe POUDOU
    Abstract: In this paper, we propose to analyze optimal nonlinear pricing when a firm offers in a bundle a commodity and a contingent service. The paper studies a mechanism design where all private information can be captured in a single scalar variable in a monopoly context. We show that to propose the package for commodity and service is less costly for the consumer, the firm has lower consumers rent than the situation where it sells their good and contingent service under an independent pricing strategy. In fact, the possibility to use price discrimination via the supply of package is dominated by the fact that it is costly for the consumer to sign two contracts. Bundling energy and a contingent service is a profitable strategy for a energetician monopoly practising optimal nonlinear tariff. We show that the rates of the energy and the contingent service depend to the optional character of the contingent service and depend to the degree of complementarity between commodities and services.
    Keywords: Bundling, Nonlinear pricing, Energy market
    JEL: D42 L12 Q4
    Date: 2008
  10. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: We provide facts showing that in service markets: (i) restrictions on foreign direct investment (FDI) are under reform, (ii) cross-border Mergers & Acquisitions dominate as the entry mode of FDI, and (iii) there is often a high market concentration. Based on these facts, we present a model for analyzing cross-border M&A policy in liberalized service markets taking into account efficiency and market power effects. Our findings suggest that a merger policy, but not a discriminatory policy towards foreigners, seems warranted. Moreover, policies ensuring competition for domestic target firms seem warranted. In this vein, harmonization of the EU takeover regulations may particularly benefit assets owners in countries with many target firms.
    Keywords: Services; Mergers and Acquisitions; Investment Liberalization; Foreign Direct Investments; Ownership
    JEL: F23 K21 L13 O12
    Date: 2008–04–08
  11. By: Alexander Cuntz
    Abstract: This paper addresses the key determinants of merger failure, in par- ticular the role of innovation (post-merger performance) and technology (ex-ante selection) when rms decide to separate. After a brief review of the existing literature we introduce a model of process innovation where merged firms exibit intra-merger spillover of knowledge under different mar- ket regimes, depending on whether firms integrate vertically or horizontally. Secondly, we describe an ideal matching pattern for ex-ante selection cri- teria of technological partnering, abstracting from nancial market power issues. In a final section we test the model implications for merger failure for M&A data from the US biotechnology industry in the 90s. We find that post-merger innovation performance, in particular with large spillovers, in- creases the probability of survival, while we have no evidence that market power effects do so in long run. Additionally, we find extensive technology sourcing activity by firms (already in the 90s) which contradicts the notion of failure and suits well the open innovation paradigm.
    Keywords: merger failure, innovation performance, technology, matching, open innovation, biotechnology
    JEL: O30 L22 L25 C78 L65
    Date: 2008–04
  12. By: Francisco Martínez-Sánchez
    Abstract: Resumen: se analizan los efectos de una empresa imitadora en el comportamiento de una empresa innovadora. La estructura del análisis usada es un modelo de duopolio dinámico de diferenciación de producto vertical, donde tanto el innovador como el imitador compiten simultáneamente en precio y calidad. Se obtiene, que cuando el mercado es pequeño, la presencia de un imitador estimula al innovador a aumentar su proceso de innovación, de modo que la entrada de un imitador no debería ser obstruida; y cuando el mercado es grande, el imitador reduce los incentivos del innovador a invertir sus recursos en I+D y a producir una mayor calidad, de modo que la entrada del imitador no debería ser fomentada. Abstract: We analyze the effects of an imitating firm on the behavior of the innovating firm. The framework of analysis used is a dynamic duopoly model of vertical product differentiation, where both the innovator and the imitator compete simultaneously in price and quality. We obtain that when the market is small, the presence of an imitator encourages the innovator to increase its innovating process, so the entry of the imitator should not be obstructed; and, when the market is large, the imitator reduces the innovator.s incentives to invest its economic resources in R&D and to provide a higher quality, so the entry of the imitator should not be encouraged.
    Date: 2007–12–05
  13. 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.
    Date: 2008
  14. By: Germà Bel (PPRE-IREA, Universitat de Barcelona (SPAIN).); Xavier Fageda (PPRE-IREA, Universitat de Barcelona (SPAIN).)
    Abstract: This paper empirically analyses the hypothesis of the existence of a dual market for contracts in local services. Large firms that operate on a national basis control the contracts for delivery in the most populated and/or urban municipalities, whereas small firms that operate at a local level have the contracts in the least populated and/or rural municipalities. The dual market implies the high concentration and dominance of major firms in large municipalities, and local monopolies in the smaller ones. This market structure is harmful to competition for the market as the effective number of competitors is low across all municipalities. Thus, it damages the likelihood of obtaining cost savings from privatization.
    Keywords: Competition, Concentration, Local Services, Privatization.
    Date: 2008–04
  15. By: Jan Kranich (Leuphana Universität Lüneburg)
    Abstract: This paper discusses a model of the New Economic Geography, in which the seminal core-periphery model of Krugman (1991) is extended by endogenous research activities. Beyond the common ’anonymous’ consideration of R&D expenditures within fixed costs, this model introduces vertical product dierentiation, which requires services provided by an additional R&D sector. In the context of international factor mobility, the destabilizing eects of a mobile scientific workforce are analyzed. In combination with a welfare analysis and a consideration of R&D promoting policy instruments and their spatial implications, this paper makes a contribution to the so-called brain drain debate.
    Keywords: R&D, New Economic Geography, Vertical Dierentiation
    JEL: F12 F14 F17
    Date: 2008–04

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