nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒06‒21
sixteen papers chosen by
Joao Carlos Correia Leitao
University of the Beira Interior

  1. Platform Intermediation in a Market for Differentiated Products By Andrea Galeotti; José Luis Moraga-González
  2. Computing welfare losses from data under imperfect competition with heterogeneous goods By Luis C. Corchon; Galina Zudenkova
  3. Private CSR Activities in Oligopolistic Markets: Is there any room for Regulation? By Evangelos Mitrokostas; Emmanuel Petrakis
  4. Do firms' owners delegate both short-run and long-run decisions to their managers in equilibrium? By Evangelos Mitrokostas; Emmanuel Petrakis
  5. How does University Collaboration Contribute to Successful R&D Management? By Broström, Anders; Lööf, Hans
  6. Horizontal Mergers and Acquisitions with Endogenous Efficiency Gains By Christos Cabolis; Constantine Manasakis; Emmanuel Petrakis
  7. Tariff-Mediated Network Externalities: Is Regulatory Intervention Any Good? By Hoernig, Steffen
  8. Optimal ownership in joint ventures with contributions of asymmetric partners By Marinucci, Marco
  9. Bertrand Competition with Non-rigid Capacity Constraints By Prabal, Roy Chowdhury
  10. Post Merger Innovative Patterns in Small and Medium Firms By Elena Cefis; Mihaela-Livia Ghita
  11. Naked Exclusion: An Experimental Study of Contracts with Externalities By Landeo, Claudia M.; Spier, Kathryn E.
  12. Congestion Pricing, Slot Sales and Slot Trading in Aviation By Erik T. Verhoef
  13. How Demand Information Can Destabilize a Cartel By Liliane Karlinger
  14. License Prices for Financially Constrained Firms By Roberto Burguet; R. Preston McAfee
  15. Open and closed industry clusters: The social structure of innovation By Manuel Portugal Ferreira; Fernando A. Ribeiro Serra
  16. The impact of pooling and sharing broadcast rights in professional team sports By Kesenne S.

  1. By: Andrea Galeotti (University of Essex, U.K.); José Luis Moraga-González (University of Groningen, Groningen, the Netherlands, and CESifo)
    Abstract: We study a two-sided market where a platform attracts firms selling differentiated products and buyers interested in those products. In the unique subgame perfect equilibrium of the game, the platform fully internalizes the network externalities present in the market and firms and consumers all participate in the platform with probability one. The monopolist intermediary extracts all the economic rents generated in the market, except when firms and consumers can trade outside the platform, in which case consumers retain part of the economic rents. The market allocation is constraint efficient in the sense that the monopoly platform does not introduce distortions over and above those arising from the market power of the differentiated product sellers. An increase in the number of retailers increases the amount of variety in the platform but at the same time increases competition. As a result, the platform lowers the firm fees and raises the consumer charges. In contrast, an increase in the extent of product differentiation raises the value of the platform for the consumers but weakens competition. In this case, the platform raises both the charge to the consumers and the fee for the firms.
    Keywords: Two-sided markets; network externalities; intermediation; advertising
    JEL: L12 L13 D42 D43
    Date: 2008–02–25
  2. By: Luis C. Corchon; Galina Zudenkova
    Abstract: We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear and firms are identical, if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. However, if the elasticity of demand can be estimated, under a Cournot equilibrium, PWL is a function of the elasticity of demand, the number of firms and the price-marginal cost margin. In a Bertrand equilibrium, PWL is a function of the cross elasticity of demand, the number of firms and the price-marginal cost margin. When firms are not identical, we provide conditions under which PWL increases with concentration. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of firms. In all these cases we find that price-marginal cost margins and demand elasticities may influence PWL in quite a counterintuitive way.
    Date: 2008–05
  3. By: Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper examines the conditions under which the regulator can complement the provision of Corporate Social Responsibility (CSR) activities by private firms in an oligopolistic market. Our main finding is that if there is no credible information disclosure about SR characteristics of the firms' products to consumers, no firm will have incentives to undertake CSR effort in equilibrium. However, if the necessary information about the CSR aspects of each firm's product, otherwise unobservable, is made available to consumers through certification provided either by a profit-maximizing certifier or by the regulator, then both firms will have incentives to engage in CSR activities. Hence in equilibrium, consumers' surplus, firms profits and total welfare increase comparing to the benchmark case without CSR activities.
    Keywords: Corporate Social Responsibility, Oligopoly, Vertical Differentiation, Certification.
    JEL: M14 L13 L5
    Date: 2008–06–17
  4. By: Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper explores the scope of strategic delegation, to the firms' R&D investments and market competition in a Cournot Oligopoly. The firms' owners' have two alternative strategies: either the Full Delegation (FD) one, in which firms' owners delegate both short-run and long-run decisions to their managers, or the Partial Delegation (PD) one, in which firms' owners delegate only short-run decisions to their managers. We investigate which delegation strategy will emerge in equilibrium, under the assumption that there is no credible commitment between the firms' owners over the strategy they will select. We find that the Universal Partial Delegation is never an equilibrium configuration. If the initial unit cost is relatively high (low), the Universal Full Delegation (Coexistence) configuration is the only endogenously emerging equilibrium. However, the above results are sensitive to the existence of the commitment assumption.
    Keywords: Strategic Delegation, Oligopoly, R&D Investments, Equilibrium Delegation Schemes.
    JEL: C20 C72 L22 O33
    Date: 2008–06–17
  5. By: Broström, Anders (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: The issue of through what processes R&D collaboration with universities affects a firms’ innovation performance remains under-researched. In particular, university relationships have not been fully integrated in the open innovation framework. This study explores the relationship between firms’ collaboration with universities and their capabilities for innovation, as perceived by R&D managers. Drawing on a series of interviews with R&D managers at 45 randomly selected firms collaborating with two research universities in Sweden, we explicitly recognise mechanisms through which university relationships contribute to successful R&D management.
    Keywords: University-Industry Link; Innovation; Technology transfer; R&D; Research collaboration
    JEL: I23 O31 O32
    Date: 2008–06–09
  6. By: Christos Cabolis (ALBA Graduate Business School); Constantine Manasakis (Department of Economics, University of Crete, Greece); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: We examine how the strategic long-run decisions, such as cost-reducing R&D investments, prior to the decision for integration; create endogenous efficiency gains that make a horizontal integration profitable. The "merger" and the "acquisition" are distinguished as different modes of horizontal integration, with respect to both incentives and equilibrium outcomes. We show that firms' incentives for integration depend on the magnitude of the cost efficiencies that R&D investments give rise to and the rule of sharing of the integrated entity's profits across participants. The welfare effects of horizontal integrations are also discussed.
    Keywords: Horizontal mergers and acquisitions; Processes Innovations; Endogenous efficiency gains.
    JEL: C72 G34 O31
    Date: 2008–06–18
  7. By: Hoernig, Steffen
    Abstract: Mobile phone networks' practice of charging higher prices for off-net than for on-net calls has been pinpointed as the source of two competition problems: underprovision of calls and permanent disadvantages for small networks. We consider these allegations and four different remedies: limiting on/off-net differentials or off-net margins, lower termination fees, and asymmetric termination fees. In all cases a trade-off has to be made between efficiency and networks' profits on the one hand, and consumer surplus on the other. Indeed, the total welfare effects of regulating on/off-net differentials are ambiguous and depend on demand characteristics.
    Keywords: Network competition; on/off-net differentials; retail price controls; termination fees
    JEL: L13 L51 L96
    Date: 2008–06
  8. By: Marinucci, Marco
    Abstract: This paper faces two questions concerning Joint Ventures (JV) agreements. First, we study how the partners contribution affect the creation and the profit sharing of a JV when partners' effort is not observable. Then, we see whether such agreements are easier to enforce when the decision on JV profit sharing among partners is either delegated to the independent JV management (Management Sharing) or jointly taken by partners (Coordinated Sharing). We find that the firm whose effort has a higher impact on the JV's profits should have a larger profit shares. Moreover, a Management sharing ensures, at least in some cases, a wider range of self-enforceable JV agreements.
    Keywords: D43; L13; L14; L22
    JEL: L14 L13 D43 L22
    Date: 2008–04
  9. By: Prabal, Roy Chowdhury
    Abstract: We examine a model of Bertrand competition with non-rigid capacity constraints, so that by incurring an additional cost, firms can produce beyond capacity. We find that there is an interval of prices such that a price can be sustained as a pure strategy Nash equilibrium if and only if it lies in this interval. We then examine the properties of this set as (a) the number of firms becomes large and (b) the capacity cost increases.
    JEL: D5 L2
    Date: 2008–06
  10. By: Elena Cefis; Mihaela-Livia Ghita
    Abstract: This paper investigates whether involvement in mergers and acquisitions (M&As) triggers distinct patterns of innovative behaviour across firms situated at different points on the firm size distribution. Firms use more and more M&As as mechanisms to bridge the gap between where they are and what they want to achieve in terms of innovation and performance. We explore the different impact of M&A activity on the likelihood that firms begin to innovate using an unique dataset combining innovation and economic firm-level data from two different sources: the 4 waves of Community Innovation Survey and the Business Register, for the Dutch manufacturing sector. The analysis is carried out at different size classes. The results show that both new entry and persistence in innovative activities are fostered by M&A involvement. Medium firms are the ones showing the highest probabilities of entering /persisting in innovative activities after M&As. For small firms, M&As do not ease the overcome of “the innovative threshold”; on the contrary they seem to increase the probability of exiting innovative status in the post-merger period.
    Keywords: Mergers and acquisitions; innovation; small and medium enterprises; transition probabilities; probit models
    JEL: L11 L25 D21 C14
    Date: 2008–05
  11. By: Landeo, Claudia M.; Spier, Kathryn E.
    Abstract: This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.
    Keywords: Bargaining with Externalities; Contracting with Externalities; Experiments; Exclusive Dealing; Antitrust; Discrimination; Endogenous Payoffs; Communication; Coordination Games; Equilibrium Selection
    JEL: D86 C9 L0 K0 K21 D4 L1 L4 C72
    Date: 2007–12–11
  12. By: Erik T. Verhoef (VU University Amsterdam)
    Abstract: This paper studies the regulation of an airline duopoly on a congested airport. Regulation should then address two market failures: uninternalized congestion, and overpricing due to market power. We find that first-best charges are differentiated over airlines if asymmetric, and completely drive out the least efficient airline from the market. This is not generally the case for an undifferentiated charge, which is found to be a weighted average of first-best charge rules for the two airlines, and is less-than-optimally efficient because of its inability to differentiate between them. Tradeable slots may yield the first-best outcome if the congestion externality is relatively important and the market power distortion relatively unimportant, but may be less efficient than non-intervention when the reverse is true.
    Keywords: Airport congestion; congestion pricing; slot trading; tradeable permits; second-best
    JEL: R41 R48 D62
    Date: 2008–03–25
  13. By: Liliane Karlinger
    Abstract: This paper studies a symmetric Bertrand duopoly with imperfect mon- itoring where rms receive noisy public signals about the state of demand. These signals have two opposite eects on the incentive to collude: avoid- ing punishment after a low-demand period increases collusive prots, mak- ing collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter eect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These ndings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).
    JEL: L13 L41
    Date: 2008–02
  14. By: Roberto Burguet; R. Preston McAfee
    Abstract: It is often alleged that high auction prices inhibit service deployment. We investigate this claim under the extreme case of financially constrained bidders. If demand is just slightly elastic, auctions maximize consumer surplus if consumer surplus is a convex function of quantity (a common assumption), or if consumer surplus is concave and the proportion of expenditure spent on deployment is greater than one over the elasticity of demand. The latter condition appears to be true for most of the large telecom auctions in the US and Europe. Thus, even if high auction prices inhibit service deployment, auctions appear to be optimal from the consumers' point of view.
    Date: 2008–06–02
  15. By: Manuel Portugal Ferreira (Instituto Politécnico de Leiria); Fernando A. Ribeiro Serra (UNISUL Business School)
    Abstract: In this paper we discuss knowledge and innovation in clusters and the benefits of clustering from a knowledge-based perspective. Knowledge-based resources and innovations are important sources of competitive advantage for firms. Aware of the importance of continuously seeking new knowledge firms increasingly seek knowledge-rich locations such as specific industry clusters across the world. These are locations characterized by the concentration of firms operating in related and supporting activities, a specialized work force and a specialized institutional environment that nurtures the industry. However, it is not likely that these clusters are always locations from which the firms will be able to draw the intended knowledge benefits. The social structure of the relationships between individuals and firms determines the extent to which knowledge will be created, will flow between co-located firms and bounds the knowledge benefits the firms may capture. We finish with a discussion of the need of further examination of the network dynamics involved in an industry cluster to obtain a clearer identification of the actual positive externalities that may accrue to co-locating firms.
    Keywords: Strategy; Industry clusters; Innovation
    JEL: M0 M1
    Date: 2008–06–10
  16. By: Kesenne S.
    Abstract: In this theoretical analysis, we try to find out what the implications are of pooling and sharing broadcast rights in a sports league. We concentrate on the impact on talent demand, competitive balance and ticket price, using a simplified 2-club non-cooperative Nash equilibrium model with the hiring of talent as the only decision variable, as well as a more general competitive equilibrium model with a large number of teams in the league and with talent hiring and ticket price as decision variables. The main conclusion is that the case for pooling and sharing broadcast rights is not very strong if clubs are profit maximisers. Decentralised selling and performance-based distribution of the rights seems to be the most promising scenario to improve the competitive balance. If clubs are win maximisers, the sharing of broadcast money always improve the competitive balance, but the monopolisation of the broadcast rights by the league is not necessary for sharing.
    Date: 2008–05

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.