nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒05‒17
fourteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Does entry improve welfare? A general equilibrium approach to competition policy By Bertrand Crettez; Marie-Cécile Fagart
  2. Discriminatory prices, endogenous locations and the Prisoner Dilemma problem By Stefano Colombo
  3. Entrepreneurial Innovations, Competition and Competition Policy By Norbäck, Pehr-Johan; Persson, Lars
  4. Bertrand-Edgeworth games under oligopoly with a complete characterization for the triopoly By De Francesco, Massimo A.; Salvadori, Neri
  5. Complementarities, Below-Cost Pricing, and Welfare Losses By Vanessa von Schlippenbach
  6. Complementary Assets, Start-Ups and Incentives to Innovate By Luca Colombo; Herbert Dawid
  7. On the Equivalence of Nash and Evolutionary Equilibrium in Finite Populations By Tobias Guse; Burkhard Hehenkamp; Alex Possajennikov
  8. Can Imports Discipline Collusive Firms? The Case of the Philippine Cement Industry By Aldaba, Rafaelita Mercado
  9. Measuring market power in the Iberian electricity wholesale market through the residual demand curve By Vitor Marques; Isabel Soares; Adelino Fortunato
  10. The return to the technological frontier: The conditional effect of plants’ R&D on their productivity in Finnish manufacturing By Böckerman, Petri; Eero , Lehto; Huovari, Janne
  11. Informational Benefits of International Environmental Agreements By Amihai Glazer; Vesa Kanniainen; Panu Poutvaara
  12. Where Can Capabilities Come From? How the Content of Network Ties Affects Capability Acquisition By Ishtiaq P. Mahmood; Hong-Jin Zhu; Edward J. Zajac
  13. Moral Hazard: Messages, Delegation and Efficiency By Andrea Attar; Eloisa Campioni; Gwenaël Piaser; Uday Rajan
  14. A Study of Pricing Evolution in the Online Toy Market By Yang, Zhenlin; Gan Loo Geok, Lydia; Tang, Fang-fang

  1. By: Bertrand Crettez; Marie-Cécile Fagart
    Abstract: We consider a simple general equilibrium model with imperfect competition. Firms are price taker in the input market and compete à la Cournot in some or all of the product markets (their technology displays constant returns to scale). We show that an increase in the number of firms does not always improve welfare. We also provide a characterization in terms of mark-up rates of the sectors for which entry is welfare enhancing. Thus, this paper challenges the common idea that mergers with no cost synergy are not desirable for consumers.
    Keywords: Cournot competition, competition policy, general equilibrium and imperfect competition, effciency
    JEL: D50 L13 L40
    Date: 2008
  2. By: Stefano Colombo (DISCE, Università Cattolica, Milan)
    Abstract: In the Hotelling framework, the equilibrium first-degree discriminatory prices are all lower than the equilibrium uniform price. When firms’ locations are fixed, price discrimination emerges as the unique equilibrium in a game in which every firm may commit not to discriminate before setting the price schedule. This paper assumes endogenous locations and shows that uniform pricing emerges as the unique equilibrium in a game in which every firm may commit not to discriminate before choosing where to locate in the market. Price discrimination still is the unique equilibrium outcome when firms may commit only after the location choice.
    Keywords: Price discrimination; Commitment; Location
    JEL: D43 L11
    Date: 2008–04
  3. By: Norbäck, Pehr-Johan; Persson, Lars
    Abstract: We construct a model where an entrepreneur could either innovate for entry or for sale. It is shown that increased product competition tends to increase the relative profitability of innovation for sale relative to entry. Increased competition reduces entrants' and acquirers' profits in a similar fashion, but also reduces the profit of non-acquirers. Therefore, incumbents' valuations of innovations are less negatively affected by increased competition than entrants' profits. This, in turn, implies that the incentive for innovation for sale can increase with increased competition. Finally, we show that a stricter, but not too strict, merger policy tends to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation, without reducing the total rents for innovations too much.
    Keywords: Antitrust; Competition; Competition Policy; Entrepreneurs; Innovations
    JEL: L13 L40 O31
    Date: 2008–05
  4. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: The paper extends the analysis of price competition among capacity-constrained sellers beyond the cases of duopoly and symmetric oligopoly. We first provide some general results for the oligopoly and then focus on the triopoly, providing a complete characterization of the mixed strategy equilibrium of the price game. The region of the capacity space where the equilibrium is mixed is partitioned according to the features of the mixed strategy equilibrium arising in each subregion. Then computing the mixed strategy equilibrium becomes a quite simple task. The analysis reveals features of the mixed strategy equilibrium which do not arise in the duopoly (some of them have also been discovered by Hirata (2008)).
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Triopoly; Mixed strategy equilibrium
    JEL: L13 D43 C72
    Date: 2008–05–07
  5. By: Vanessa von Schlippenbach
    Abstract: We analyze below-cost pricing in retail markets and examine its impact on social welfare as well as on suppliers' incentives to invest in quality. Considering negotiations about a linear wholesale price between the retailer and her suppliers, we find that below-cost pricing aggravates the double marginalization problem and causes welfare losses compared to a regime where below-cost pricing is banned. Furthermore, suppliers have stronger incentives to invest in high quality products if a ban of below-cost pricing is enforced.
    Keywords: Complementarities, Retailing, Below-Cost Pricing
    JEL: L22 L42
    Date: 2008
  6. By: Luca Colombo (DISCE, Università Cattolica); Herbert Dawid (Universität Bielefeld)
    Abstract: In this paper we examine in a game theoretic framework in how far market conditions facilitating start-up formation positively affect technical change and firms' profits. We consider a model in which R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to form a start-up. Market conditions, in particular the availability of complementary assets, influence whether new firms are created and determine expected profits for start-up-founders. Easy availability of complementary assets has the direct effect that the generation of start-ups, which leads to the diffusion and duplication of know-how, is fostered. However, incentives of incumbent firms to invest in R&D might be reduced because of the increased danger of knowledge loss through spin-out formation. We fully characterize the effects of an increase in the availability of complementary assets, demonstrating that under certain market conditions the effects on innovative activities and industry profits can be negative.
    Keywords: Complementary Assets, Technical Change, R&D Effort, Startup
    JEL: L20 M13 O30
    Date: 2008–04
  7. By: Tobias Guse (Department of Economics and Social Sciences, University of Dortmund); Burkhard Hehenkamp (Department of Economics and Social Sciences, University of Dortmund); Alex Possajennikov (School of Economics, University of Nottingham)
    Abstract: This paper provides sufficient and partially necessary conditions for the equivalence of Nash and evolutionary equilibrium in symmetric games played by finite populations. The focus is on symmetric equilibria in pure strategies. The conditions are based on properties of the payoff function that generalize the constant-sum property and the ”smallness” property, the latter of which is known from models of perfect competition and non-atomic, anonymous, or large games. The conditions are illustrated on examples of Bertrand and Cournot oligopoly games.
    Keywords: Nash equilibrium, Evolutionary stability, Finite populations
    JEL: C72 C73
    Date: 2008–04
  8. By: Aldaba, Rafaelita Mercado
    Abstract: <p>Applying a conjectural variations (CV) model introduced by Haskel and Scaramozzino (H&S model 1997), the paper examines the impact of trade liberalization on the Philippine cement industry where alleged cartel activities have taken place after the entry of the world’s Big Three cement firms: Holcim, Cemex, and Lafarge. In the H&S model, the relationship between firm behavior and competition is estimated with price cost margin (price minus marginal costs over price) as indicator of competition and profitability. The model is extended to assess the impact of imports on competition using import penetration ratio as proxy for trade policy.</p> <p>The paper focuses on the following questions: did the removal of import restriction and reduction of tariffs affect competition in the cement industry? Are imports effective in disciplining domestic firms and reducing their market power? The results imply that imports do not seem to affect profitability and competition in the industry. Given the ability of firms to engage in anticompetitive behavior and the absence of an effective competition policy in the Philippines, the gains from trade liberalization are nullified. The country’s experience in the cement industry illustrates that trade liberalization is not a substitute for competition policy. For imports to effectively discipline the market, trade liberalization must be accompanied by strict competition policy.</p>
    Keywords: trade liberalization, competition, cartel, cement industry, conjectural variations
    Date: 2008
  9. By: Vitor Marques (Entidade Reguladora dos Serviços Energéticos, Lisboa); Isabel Soares (CETE, Faculdade de Economia, Universidade do Porto); Adelino Fortunato (Faculdade de Economia da Universidade de Coimbra)
    Abstract: The existence of market power in the electricity market is a recurrent issue. Measuring and understanding market power practices in the Iberian electricity market turn out to be interesting: though a liberalized market, two integrated firms control 80% of total demand and there is a strong - often direct - intervention of government in the market. For various reasons, among which the difficulty in obtaining reliable, extensive data stands out, market power in the Iberian electricity market has rarely been measured. This work aims to contribute to a better knowledge of the way market power occurs. We calculate the elasticity of residual demand to evaluate the two dominant firm’s market power, using hourly bides in the Spanish spot market for the period July-August 2004 to 2006. Although our approach was highlighted by Frank Wolak work on the electricity sector, we extend it and discuss its constraints. We discuss the results obtained in the light of the evolution of the electricity sector during that period.
    Keywords: Market power, wholesale market, residual demand curve elasticity, government intervention
    JEL: L13
    Date: 2008–05
  10. By: Böckerman, Petri; Eero , Lehto; Huovari, Janne
    Abstract: This paper examines, through the use of plant-level data, whether R&D’s productivity impact is contingent on the distance of a plant’s productivity from the industry’s technological frontier. R&D is specified as an accumulated stock from R&D investments. We analyse the productivity effect of a plant’s own R&D as well as the productivity impact of the plant’s parent firm’s and other firms’ proximity-weighted R&D stocks. The results show that a plant’s own and a parent firm’s R&D have a positive productivity impact and that the former impact decreases as the distance from the industry’s technological frontier increases. Furthermore, the productivity effect of other firms’ proximity-weighted R&D is, on average, positive, but this impact increases in the distance from the technological frontier. Another important finding is that all the plants tend to converge towards the industry’s technological frontier despite the size of external R&D spillovers.
    Keywords: productivity; efficiency; technological frontier; spillovers; convergence
    JEL: D24 L00
    Date: 2008–05–12
  11. By: Amihai Glazer (Department of Economics, University of California-Irvine); Vesa Kanniainen (Department of Economics, University of Helsinki); Panu Poutvaara (Department of Economics, University of Helsinki)
    Abstract: This paper develops a theory of consumer boycotts. Some consumers care not only about the products they buy but also about whether the firm behaves ethically. Other consumers do not care about the behavior of the firm but yet may like to give the impression of being ethical consumers. Consequently, to affect a firm's ethical behavior, moral consumers refuse to buy from an unethical firm. Consumers who do not care about ethical behavior may join the boycott to (falsely) signal that they do care. In the firm's choice between ethical and unethical behavior, the optimality of mixed and pure strategies depends on the cost of behaving ethically. In particular, when the cost is (relatively) low, ethical behavior arises from a prisoners' dilemma as the firm's optimal strategy.
    Keywords: Firm's ethical code; Consumer morality; Boycotts
    JEL: M14 D43
    Date: 2008–05
  12. By: Ishtiaq P. Mahmood; Hong-Jin Zhu; Edward J. Zajac
    Abstract: While strategy researchers have devoted considerable attention to the role of firm-specific capabilities in the pursuit of competitive advantage, less attention has been directed at how firms obtain these capabilities from outside a firm’s boundaries. This study analyzes how firms’ network ties represent one important source of capability acquisition. Theoretically, we go beyond the traditional focus on network structure and offer a novel contingency model that specifies how differences in the content of network ties (e.g., buyer-supplier, equity, and director ties) will differentially affect the process of R&D capability acquisition. Empirically, we also seek to provide an original contribution to the capabilities literature by utilizing a stochastic frontier estimation to rigorously measure firm capabilities, and we demonstrate the value of this approach using longitudinal data on business groups in emerging economies. The supportive results of our analysis show that the effect of network ties on the acquisition of new affiliate capabilities is clearly and predictably contingent on the content of the ties.
    Date: 2008–04
  13. By: Andrea Attar; Eloisa Campioni; Gwenaël Piaser (CREFI-LSF, University of Luxembourg); Uday Rajan
    Abstract: A the present paper we show that messages may improve efficiency even in model of complete information. Messages are useful two main reasons. First, if the principal is not allowed to use stochastic mechanisms, mechanisms with messages can induced mixed strategies and hence indirectly a stochastic outcome. Second, even if stochastic mechanisms are allowed, messages can allow correlation between efforts and outcome. We then argue that indirect mechanisms can be interpreted as delegation and show how simple indirect mechanisms can improve efficiency in a simple model of moral hazard.
    Keywords: Efficiency, Moral Hazard, Messages, Correlated Equilibrium, Recommendation, Delegation.
    JEL: D82 D83 D86
    Date: 2008
  14. By: Yang, Zhenlin; Gan Loo Geok, Lydia; Tang, Fang-fang
    Abstract: We examine the pricing trends in the online toy markets by using panel data regression models with error components and serial correlation. Our results indicate that both online branch of multi-channel retailers (OBMCRS) and dotcoms charge similar prices on average, and that over time their prices move in tandem. Although the OBMCR retailers charge significantly different prices, the dotcoms do charge similar prices. Moreover, both retailer types demonstrate different magnitudes of price dispersion that move at different rates over time. Although the price dispersion of OBMCRS is higher than that of the dotcoms at the beginning, the gap narrows over time.
    Keywords: E-commerce, online pricing strategies, online toy market, price dispersion, pricing trends
    JEL: L11 L81 L86
    Date: 2008

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