nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒06‒07
seventeen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Competition and Innovation: An Experimental Investigation By Dario Sacco; Armin Schmutzler
  2. Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly By Dimitra Petropoulou
  3. A dynamic model of renewable resource harvesting with Bertrand competition By Beard, Rodney
  4. Investment decisions in Liberalized Electricity Markets: A framework of Peak Load Pricing with strategic firms By Gregor Zoettl
  5. Perfect Competition in an Oligoply (including Bilateral Monopoly) By Pradeep Dubey und Dieter Sondermann
  6. Optimal Patent Length By James Bergin
  7. All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence By Dario Sacco; Armin Schmutzler
  8. The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas By Lucas W. Davis; Lutz Kilian
  9. Intensity of Competition and Market Structure in the Italian Banking Industry By Giannetti, C.
  10. On Factors explaining Organizational Innovation and its Effects By Koson Sapprasert
  11. International Trade, Minimum Quality Standards and the Prisoners Dilemma By Dimitra Petropoulou
  12. Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model By James J Anton; Gary Biglaiser
  13. Effects of Regulation on Drug Launch and Pricing in Interdependent Markets By Patricia M. Danzon; Andrew J. Epstein
  14. Wage effects of R&D tax incentives:Evidence from the Netherlands By Lokshin, Boris; Mohnen, Pierre
  15. Agglomeration Economies and Clustering – Evidence from German Firms By Kurt A. Hafner
  16. The Role of Firm Size in Training Provision Decisions: evidence from Spain. By Laia Castany
  17. The Economic Properties of Software By Sebastian von Engelhardt

  1. By: Dario Sacco (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: The paper analyzes the effects of more intense competition on firms’ incentives to invest in process innovations. We carry out experiments based on two-stage games, where R&D investment choices are followed by product market competition. As predicted by theory, an increase in the number of firms from two to four reduces investments. However, a positive effect is observed for a switch from Cournot to Bertrand, even though theory predicts a negative effect in the four-player case.
    Keywords: R&D investment, intensity of competition, experiment
    JEL: C92 L13 O31
    Date: 2008–05
  2. 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 monopolistic 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: 2008–02
  3. By: Beard, Rodney
    Abstract: In this paper a dierential game model of renewable resource ex- ploitation is considered in which rms compete in exploiting a com- mon resource in a Bertrand price-setting game. The model character- izes a situation in which rms extract a common renewable resource which after harvesting may be considered a dierentiated product. Firms then choose prices rather than harvest quantities. Quantities extracted are determined by consumer demand. Optimal price and harvest policies are determined in a linear state dierential game for whichr open-loop and feedback strategies are known to be equuiva- lent. Furthermore, the case of search costs and capacity constraints is analysed and the role they play in determining the dynamics of the resource stock is considered. The results are compared to those of Cournot competition which has been analysed extensively in the literature. Previous studies of dierential games applied to renewable resource harvesting have concentrated on quantity competition (see for example [12]) and the case of price competition has been largely ignored. the exceptions to this have been in the more empirical litera- ture where evidence for price competition versus quantity competition for renewable resources such as sheries is mounting [1]. Consequently the results presented here are not only new, but possibly of greater empirical relevance than existing results on quantity competition.
    Keywords: linear-state differential game; Bertrand competition; renewable resources; fisheries
    JEL: L13 C02 C61 Q22 D43 Q20 C72
    Date: 2008–05–29
  4. By: Gregor Zoettl
    Abstract: In this article we analyze firms investment incentives in liberalized electricity markets. Since electricity is economically non storable, it is optimal for firms to invest in a differentiated portfolio of technologies in order to serve strongly fluctuating demand. Prior to the Liberalization of electricity markets, for regulated monopolists, optimal investment and pricing strategies haven been analyzed in the peak load pricing literature (compare Crew and Kleindorfer (1986)). In restructured electricity markets regulated monopolistic generators have often been replaced by competing and potentially strategic firms. This article aims to respond to the changed reality and model investment decisions of strategic firms in those markets. We derive equilibrium investment for strategic firms and compare to the benchmark cases of perfect competition and monopoly outcomes. We find that strategic firms have an incentive to overinvest in base-load technologies but choose total capacities too low from a welfare point of view. By fitting the framework to a specific electricity market (Germany) we are able to empirically analyze Investment choices of strategic firms, and quantify the potential for market power and its impact on generation portfolios in restructured electricity markets in the long run.
    Keywords: Investment Decisions, Technology Choice, Restructured Electricity Markets, Peak Load Pricing, Strategic Firms
    Date: 2008–05–26
  5. By: Pradeep Dubey und Dieter Sondermann
    Abstract: We show that if limit orders are required to vary smoothly, then strategic (Nash) equilibria of the double auction mechanism yield competitive (Walras) allocations. It is not necessary to have competitors on any side of any market: smooth trading is a substitute for price wars. In particular, Nash equilibria are Walrasian even in a bilateral monopoly.
    Keywords: Limit orders, double auction, Nash equilibria, Walras equilibria, mechanism design
    JEL: C72 D41 D44 D61
  6. By: James Bergin (Geary Institute & School of Economics, University College Dublin)
    Abstract: The intent of the patent system is to encourage innovation by granting the innovator exclusive rights to a discovery for a limited period of time: with monopoly power, the innovator can recover the costs of creating the innovation which otherwise might not have existed. And, over time, the resulting innovation makes everyone better off. This presumption of improved social welfare is considered here. The paper examines the impact of patents on welfare in an environment where there are large numbers of (small) innovators — such as the software industry. With patents, because there is monopoly for a limited time the outcome is necessarily not socially optimal, although social welfare may be higher than in the no-patent state. Patent acquisition and ownership creates two opposing incentives at the same time: the incentive to acquire monopoly rights conferred by the patent spurs innovation, but subsequent ownership of those rights inhibits innovation (both own innovation and that of others). On balance, which effect will dominate? In the framework of this paper separate circumstances are identified under which patents are either beneficial or detrimental to innovation and welfare; and comparisons are drawn with the socially optimal level of investment in innovation.
    Date: 2008–03–18
  7. By: Dario Sacco (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: The paper characterizes the mixed-strategy equilibria in all-pay auctions with endogenous prizes that depend positively on own effort and negatively on the effort of competitors. Such auctions arise naturally in the context of investment games, lobbying games, and promotion tournaments. We also provide an experimental analysis of a special case which captures the strategic situation of a two-stage game with investment preceding homogenous Bertrand competition. We obtain overinvestment both relative to the mixed-strategy equilibrium and the social optimum.
    Keywords: All-pay auctions, oligopoly, investment, experiment, overbidding
    JEL: C92 D44 L13 O31
    Date: 2008–05
  8. By: Lucas W. Davis; Lutz Kilian
    Abstract: A direct consequence of imposing a ceiling on the price of a good for which secondary markets do not exist, is that, when there is excess demand, the good will not be allocated to the buyers who value it the most. The resulting allocative cost has been discussed in the literature as a potentially important component of the total welfare loss from price ceilings, but its practical importance has yet to be established empirically. In this paper, we address this question using data for the U.S. residential market for natural gas which was subject to price ceilings during 1954-1989. This market is well suited for such an empirical analysis and natural gas price ceilings affected millions of households. Using a household-level, discrete-continuous model of natural gas demand, we estimate that the allocative cost in the U.S. residential market for natural gas averaged $4.6 billion annually since the 1950s, effectively tripling previous estimates of the net welfare loss to U.S. consumers. We quantify the evolution of this allocative cost and its geographical distribution during the post-war period, and we highlight implications of our analysis for the regulation of other markets.
    JEL: D45 L51 L71 Q41 Q48
    Date: 2008–05
  9. By: Giannetti, C. (Tilburg University, Center for Economic Research)
    Abstract: This work tests the predictions of Sutton?s model of independent submarkets for the Italian retail banking industry. In the first part of this paper, I develop a model of endogenous mergers to evidence the relationship between firms? conduct, market entry and market structure. In the second part, I identify the submarket dimension and estimate the relationship between market size and market structure using data on bank branches. The size of the submarkets turned out to be at most provincial whereas the limiting concentration index - as argued by Sutton for industries with exogenous sunk costs - goes to zero as the market becomes larger.
    Keywords: Concentration;Truncated Poisson and Negative Binomial models;quantile regressions
    JEL: C24 D43 L11 L89
    Date: 2008
  10. By: Koson Sapprasert (Centre for Technology, Innovation and Culture, University of Oslo)
    Abstract: This paper shows how the probability of attempts at organizational innovation and its effects can be explained by firm age and size and other determinants. The integrated firm-level dataset obtained from the latest two Norwegian Community Innovation Surveys (CIS3 & 4) and annual accounts is used to investigate these complex relationships. The analysis employing Heckman two-step estimation to correct potential sample selection bias demonstrates that firm age and size have different impacts on the firm’s decision to undertake organizational innovation and on the effects of such innovation on firm performance. Older and larger firms are found to be more inclined to make an attempt at organizational change; while, concerning the outcome, smaller firms are more able to benefit from such an attempt. The results further reveal that different types of organizational change do foster firm performance where even greater effects can be led by persistence of organizational innovation as well as complementarity of organizational and technological innovation. In addition, it is evidence that past economic performance and high costs of innovation influence the firm’s decision to pursue organizational change.
    Keywords: Organizational Innovation, Age & Size, Structural Inertia, Firm Performance, Complementarity, Persistence.
    JEL: L25 O21 O39
    Date: 2008–06
  11. By: Dimitra Petropoulou
    Abstract: Unilateral minimum quality standards are endogenously determined as the outcome of a non-cooperative standard-setting game between the governments of two countries. Cross-country externalities from the implementation of minimum quality standards are shown to give rise to a Prisoners' Dilemma structure in the incentives of policy-makers leading to inefficient policy outcomes. The role of minimum quality standards as non-tariff barriers is examined and the scope for mutual gains from reciprocal adjustment in minimum standards analysed. The analysis delivers four results. First, there exist four unregulated Nash equilibria in minimum standards, two symmetric and two asymmetric, depending on the quality ranking of firms in each market. The analysis establishes that in all four cases, unilaterally selected minimum quality standards are inefficient as a result of cross-country externalities. Second, minimum quality standards are shown to operate as non-tariff barriers to trade. Third, the world welfare maximising symmetric standard can be reached through reciprocal adjustments in national minimum standards from either of the two symmetric Nash equilibria. Finally, the scope for mutually beneficial cooperation is shown to be significantly restricted when cross-country externalities are asymmetric. Asymmetric externalities make a cooperative agreement at the world optimum infeasible.
    Keywords: standards, quality, international trade, standard coordination
    JEL: L13 F19 F13
    Date: 2008–02
  12. By: James J Anton; Gary Biglaiser
    Date: 2008–06–01
  13. By: Patricia M. Danzon; Andrew J. Epstein
    Abstract: This study examines the effect of price regulation and competition on launch timing and pricing of new drugs. Our data cover launch experience in 15 countries for drugs in 12 therapeutic classes that experienced significant innovation over the decade 1992-2003. We use prices of established products as a measure of the direct effect of a country's own regulatory system, and find that launch timing and prices of innovative drugs are influenced by prices of established products. Thus, if price regulation reduces drug prices, it contributes to launch delay in the home country. New drug launch hazards and launch prices in low-price countries are also affected by referencing by other, high-price countries, especially within the EU, as expected if manufacturers delay launch in low-price markets to avoid undermining higher prices in other countries. Thus, referencing policies adopted in high-price countries can impose welfare loss on low-price countries. Prices of new drugs are influenced mainly by prices of other drugs within the same subclass; however, dynamic competition from new subclasses undermines new drug launch in older subclasses. Association with a local firm accelerates launch only in certain regulated markets. These findings have implications for US proposals to constrain pharmaceutical prices in the US through external referencing and drug importation.
    JEL: I11 I18 K2 L5 L65
    Date: 2008–05
  14. By: Lokshin, Boris (UNU-MERIT); Mohnen, Pierre (UNU-MERIT)
    Abstract: This paper examines the impact of the Dutch R&D tax incentives program, known as WBSO, on the wages of R&D workers. In our model these wages are partly determined by the governments WBSO tax disbursements. We construct detailed firm- and time specific R&D tax credit rates as a function of the R&D tax incentives scheme to capture the wage effects of the government R&D support. An instrumentalvariables econometric model is estimated using an unbalanced firm-level panel data covering the period 1996-2004. After controlling for firm and industry effects and business cycle fluctuations, R&D tax incentives are found to increase R&D wages. The R&D wage effect of these incentives is smaller than their effect on real R&D investment, but it is still sizeable. The elasticity of the R&D wage with respect to the fraction of the wage supported by the WBSO scheme is estimated at 0.1.
    Keywords: price effect of tax incentives, tax credits, panel data model, R&D workers, wages
    JEL: O32 O38 H25 J30 C23
    Date: 2008
  15. By: Kurt A. Hafner
    Abstract: The paper quantifies the impact of agglomeration economies on the clustering of German firms. Therefore, I use the 2006 Innobarometer survey, which focuses on cluster characteristics and activities of German firms, to empirically identify agglomeration economies derived from the New Economic Geography and Marshall externalities. At the industry specific level, I find that within-industry spillovers are important for German low-tech firms but not for high-tech firms or knowledge intensive firms. At the department level, Marshall externalities such as hiring skilled labor and technological spillover effects are empirically confirmed for some departments like Human Resources or R&D but rarely for others like Production.
    Keywords: Agglomeration Economies, New Economic Geography, Externalities, Cluster
    JEL: C20 D21 F12 R12
    Date: 2008–05–08
  16. By: Laia Castany (Faculty of Economics, University of Barcelona)
    Abstract: The level of training provided by small firms to their employees is below that provided by their larger counterparts. The provision of firm-related training is believed to be associated to certain characteristics of the firm. In this paper we argue that small firms provide fewer training opportunities as they are less likely to be associated with these characteristics than large firms. The suitability of estimating training decisions as a double-decision process is examined here: first, a firm has to decide whether to provide training or not and, second, having decided to do so, the amount of training to provide. The differences in training provision between small and large firms are decomposed in order to analyse the individual contribution of these characteristics to explaining the gap. The results show that small firms face greater obstacles in accessing training and that the main reasons for that are related to their technological activity and the geographical scope of the market in which they operate.
    Keywords: Continuous training, Firm size, Innovative activity.
    JEL: J21 L11 M53 L25
    Date: 2008–06
  17. By: Sebastian von Engelhardt (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: Software is a good with very special economic characteristics. Taking a general deï¬nition of software as its starting-point, this article systematically elaborates the central qualities of the commodity which have implications for its production and cost structure, the demand, the contestability of software-markets, and the allocative efï¬ciency. In this context it appears to be reasonable to subsume the various characteristics under the following generic terms: software as a means of data-processing, software as a system of commands or instructions, software as a recombinant system, software as a good which can only be used in discrete units, software as a complex system, and software as an intangible good. Evidently, software is characterized by a considerable number of economically relevant qualities—ranging from network effects to a subadditive cost function to nonrivalry. Particularly to emphasise is the fact that software fundamentally differs from other information goods: First, from a consumer's perspective the readability and other aspects concerning how the information is presented, is irrelevant. Second, the average consumer/user is interested only in the funtionality of the algorithms but not in the underlying information.
    Keywords: digital goods, compatibility, information good, network effects, nonrivalry, open source, recombinability, software
    JEL: D82 D83 D62 D85 K11 L17
    Date: 2008–06–04

This nep-mic issue is ©2008 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.