nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒08‒06
seventeen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Oligopolistic Competition in Price and Quality By Andrei Dubovik; Maarten C.W. Janssen
  2. Price Regulation and Investment: A Real Options Approach By Fernando T. Camacho; Flavio M. Menezes
  3. R&D Collaboration Networks in Mixed Oligopoly By Vasileios Zikos
  4. Negative Network Externalities in Two-Sided Markets: A Competition Approach By Kurucu, Gokce
  5. Innovation and Trade with Heterogeneous Firms By Ngo Van Long; Horst Raff; Frank Stähler
  6. Buyer Power in International Markets By Horst Raff; Nicolas Schmitt
  7. Water Misallocation and Environmental Externalities in Electricity Generation By Etienne BILLETTE DE VILLEMEUR; Annalisa VINELLA
  8. Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Non Linear Pricing and Resale Price Maintenance By BONNET, Céline; DUBOIS, Pierre
  9. Linking Environmental and Innovation Policy By Reyer Gerlagh; Snorre Kverndokk; Knut Einar Rosendah
  10. Cooperative Games in Strategic Form By Sergiu Hart; Andreu Mas-Colell
  11. Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock? By Hui Tong; Shang-Jin Wei
  12. Brain drain, R&D-cost differentials and the innovation gap By Fabio Mariani
  13. A Note on Emissions Taxes and Incomplete Information By Carlos A. Chavez; John K. Stranlund
  14. Least Unmatched Price Auctions: A First Approach By Jürgen Eichberger; Dmitri Vinogradov
  15. Market and Technology Access Through Firm Acquisitions: Beyond One Size Fits All By Grimpe, Christoph; Hussinger, Katrin
  16. Vertical Integration and Operational Flexibility By Michele Moretto; Gianpaolo Rossini
  17. The Political Economy of Incentive Regulation: Theory and Evidence from US States By Carmine Guerriero

  1. By: Andrei Dubovik (Erasmus University Rotterdam); Maarten C.W. Janssen (University of Vienna)
    Abstract: We consider an oligopolistic market where firms compete in price and quality and where consumers are heterogeneous in knowledge: some consumers know both the prices and quality of the products offered, some know only the prices and some know neither. We show that two types of signalling equilibria are possible. Both are characterised by dispersion and Pareto-inefficiency of the price/quality offers. But, better price/quality combinations are signalled with lower prices in one type and with higher prices in the other type.
    Keywords: oligopoly; competition; price; quality; imperfect information; signalling
    JEL: D43 D83 L13 L15
    Date: 2008–07–14
  2. By: Fernando T. Camacho; Flavio M. Menezes (School of Economics, The University of Queensland)
    Abstract: This paper examines a three-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we first consider a monopolist facing no downstream competition but subject to a price cap on the downstream retail (final good) market. We identify the welfare-maximising regulated prices using the unregulated market output as a benchmark. In particular, we show that the optimal regulation depends on market conditions (that is, the nature of demand) and there are three possible outcomes: (i) price regulation does not improve welfare; (ii) regulated prices include an option to delay value and provide a positive payoff to the firm; and (iii) regulated prices yield a zero payoff to the firm. Second, we consider a vertically integrated network provider that is required to provide access to downstream competitors. We show that when the regulator has only one instrument, namely the access price, an option-to-delay pricing rule generates (weakly) higher welfare than the Efficient Component Pricing Rule (ECPR), except under very specific conditions.
    Date: 2008
  3. By: Vasileios Zikos (Loughborough University)
    Abstract: We develop a model of endogenous network formation in order to examine the incentives for R&D collaboration in a mixed oligopoly. Our analysis reveals that the complete network, where each firm collaborates with all others, is uniquely stable, industry-profit maximizing and efficient. This result is in contrast with earlier contributions in private oligopoly where under strong market rivalry a conflict between stable and efficient networks is likely to occur. A key finding of the paper is that state-owned enterprises may be used as policy instruments in tackling the potential conflict between individual and collective incentives for R&D collaboration.
    Keywords: Networks, R&D Collaboration, Mixed Oligopoly
    JEL: C70 L13 L20 L31 L32 O31 D85
    Date: 2008–03
  4. By: Kurucu, Gokce
    Abstract: Consider a firm advertising in a job matching agency with the aim of employing the most qualified workers. Its chances of success would be higher for a smaller number of competitor firms advertising in the same job matching agency, i.e. How would the resulting competitive behavior among the firms which are advertising to this job matching agency affect the agency’s optimal pricing behavior? I analyze the optimal market structures and pricing strategies of a monopolist platform in a two-sided market setup in which the agents on each side prefer the platform to be less competitive on their side; that is, a market with negative intra-group network externalities. I find that the equilibrium market structure varies with the extent of negative externalities. If the market’s negative network externalities are substantial, that is, if an agent’s disutility given the size of the agent pool on his side is high (enough), then the profit-maximizing strategy for the matchmaker will be to match the highest types of one side with all of the agents on the other side, by charging a relatively high price from the former side and allowing free entrance for the agents of the latter side. However, if the network externalities on one side are not substantial, then the matchmaker will maximize profits by matching an equal number of agents from each side. This paper thus provides an explanation of the asymmetric pricing schedules in two-sided markets where the matchmaker uses a one-program pricing schedule.
    Keywords: two-sided market; externalities
    JEL: L11 D42 L12
    Date: 2007–08–30
  5. By: Ngo Van Long; Horst Raff; Frank Stähler
    Abstract: This paper examines how trade liberalization affects the innovation incentives of firms, and what this implies for industry productivity and social welfare. For this purpose we develop a reciprocal dumping model of international trade with heterogeneous firms and endogenous R&D. We identify two effects of trade liberalization on productivity: a direct effect through changes in R&D investment, and a selection effect due to inefficient firms leaving the market. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected industry productivity; and (iii) raises expected social welfare if trade costs are low
    Keywords: international trade, firm heterogeneity, R&D, productivity, market structure
    JEL: F12 F15
    Date: 2008–06
  6. By: Horst Raff; Nicolas Schmitt
    Abstract: This paper investigates the implications for international markets of the existence of retailers/wholesalers with market power. Two main results are shown. First, in the presence of buyer power trade liberalization may lead to retail market concentration. Due to this concentration retail prices may be higher and welfare may be lower in free trade than in autarky, thus reversing the standard effects of trade liberalization. Second, the pro-competitive effects of trade liberalization are weaker under buyer power than under seller power
    Keywords: buyer power, retailing, international trade
    JEL: F12 F15 L13
    Date: 2008–06
    Abstract: We explore the interactions between environmental externalities and intertemporal market power in electricity generation industries where thermal operators imperfectly compete with operators using scarce water stored in dams. Relying upon a two-period model, we show that, in countries where demand peaks at the first (, second) period after water renewal, dynamic market power worsens (, ameliorates) resource allocation and environmental health. We then address policy issues. We show that, in general, second best is not decentralized by means of standard tools such as price cap. We argue that the hydraulic process requires specific regulation. We put forward a quantity-based version of the contracts for price difference increasingly used in power pools, to be adopted jointly with either a flexible form of taxation or an intertemporal price cap.
    Keywords: power generation; water allocation; externalities; price cap; contracts for water difference.
    JEL: L13 L51 L94 D62 H23
    Date: 2008–07–29
  8. By: BONNET, Céline; DUBOIS, Pierre
    Date: 2008–05
  9. By: Reyer Gerlagh (University of Manchester); Snorre Kverndokk (Ragnar Frisch Centre for Economic Research); Knut Einar Rosendah (Research Department, Statistics Norway)
    Abstract: This paper addresses the timing and interdependence between innovation and environmental policy in a model of research and development (R&D). On a first-best path the environmental tax is set at the Pigouvian level, independent of innovation policy. With infinite patent lifetime, the R&D subsidy should be constant and independent of the state of the environment. However, with finite patent lifetime, optimal innovation policy depends on the stage of the environmental problem. In the early stages of an environmental problem, abatement research should be subsidized at a high level and this subsidy should fall monotonically over time to stimulate initial R&D investments. Alternatively, with a constant R&D subsidy, patents’ length should initially have a very long life-time but this should be gradually shortened. In a second-best situation with no deployment subsidy for abatement equipment, we find that the environmental tax should be high compared to the Pigouvian levels when an abatement industry is developing, but the relative difference falls over time. That is, environmental policies will be accelerated compared to first-best.
    Keywords: Environmental Policy, Research and Development, Innovation Subsidies, Patents
    JEL: H21 O30 Q42
    Date: 2008–06
  10. By: Sergiu Hart; Andreu Mas-Colell
    Abstract: In this paper we view bargaining and cooperation as an interaction superimposed on a strategic form game. A multistage bargaining procedure for N players, the "proposer commitment" procedure, is presented. It is inspired by Nash's two-player variable-threat model; a key feature is the commitment to "threats." We establish links to classical cooperative game theory solutions, such as the Shapley value in the transferable utility case. However, we show that even in standard pure exchange economies the traditional coalitional function may not be adequate when utilities are not transferable.
    Date: 2008–05
  11. By: Hui Tong; Shang-Jin Wei
    Abstract: We develop a methodology to study how the subprime crisis spills over to the real economy. Does it manifest itself primarily through reducing consumer demand or through tightening liquidity constraint on non-financial firms? Since most non-financial firms have much larger cash holding than before, they appear unlikely to face significant liquidity constraint. We propose a methodology to estimate these two channels of spillovers. We first propose an index of a firm's sensitivity to consumer demand, based on its response to the 9/11 shock in 2001. We then construct a separate firm-level index on financial constraint based on Whited and Wu (2006). We find that both channels are at work, but a tightened liquidity squeeze is economically more important than a reduced consumer spending in explaining cross firm differences in stock price declines.
    Keywords: Working Paper , United States ,
    Date: 2008–07–25
  12. By: Fabio Mariani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This paper aims at explaining why countries with comparable levels of education still experience notable differences in terms of R&D and innovation. High-skilled migration, ultimately linked to differences in R&D costs, might be responsible for the persistence of such a gap. In fact, in a model where human capital accumulation and innovation are strategic complements, we show that allowing labor outflows may strengthen educational incentives in the lagging economy if migration is probabilistic in nature, but at the same time reduces the share of innovative production. Income (growth) might be consequently affected, and a positive migration chance is very unlikely to act as a substitute for educational subsidies.
    Keywords: Innovation; Education; Brain drain.
    Date: 2008
  13. By: Carlos A. Chavez (Departamento de Economia, Universidad de Concepcion, Concepcion, Chile); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: In contrast with what we perceive is the conventional wisdom about setting emissions taxes under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, efficient emissions tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.
    Keywords: Emissions Taxes, Incomplete Information, Uncertainty
    JEL: L51 Q28
    Date: 2008–07
  14. By: Jürgen Eichberger (University of Heidelberg, Department of Economics); Dmitri Vinogradov (University of Essex, Essex Business School,)
    Abstract: Least-Unmatched Price Auctions have become a popular format of TV and radio shows. Increasingly, they are also applied in internet trading. In these auctions the lowest single (unique) bid wins. We analyze the game-theoretic solution of least unmatched price auctions when prize, bidding cost and the number of participants are known. We use a large data-set of such auctions in order to contrast actual behavior of players with game-theoretic predictions. In the aggregate, bidding behaviour seems to conform with a Nash equilibrium in mixed strategies.
    Keywords: games, experiments
    JEL: C71 C93 D01 D81
    Date: 2008–07
  15. By: Grimpe, Christoph; Hussinger, Katrin
    Abstract: Firm acquisitions have been shown to serve as a way to gain access to international markets, technological assets, products or other valuable resources of the target firm. Given this heterogeneity of takeover motivations and the skewness of the distribution of the deal value we show whether and how the importance of different takeover motivations changes along the deal value distribution. Based on a comprehensive dataset of 652 European mergers and acquisitions in the period from 1997 to 2003, we use quantile regressions to decompose the deal value at different points of its distribution. Our results indicate that the importance of technological assets is indeed higher for smaller target firms. The findings support the view on small acquisition targets to complement the acquirer’s technology portfolio while larger acquisition targets tend to be used to gain access to international markets.
    Keywords: Firm acquisitions, technological assets, market access, quantile regression
    JEL: G34 L20 O34
    Date: 2008
  16. By: Michele Moretto (University of Padova); Gianpaolo Rossini (University of Bologna)
    Abstract: The main aim of the paper is to highlight the relation between flexibility and vertical integration. To this purpose, we go through the selection of the optimal degree of vertical disintegration of a flexible firm which operates in a dynamic uncertain environment. The enterprise we model enjoys flexibility since it can switch from a certain amount of disintegration to vertical integration and viceversa. This means that the firm never loses vertical control, i.e., the ability to produce all inputs even when it buys them in the market. This sort of flexibility makes for results which are somehow contrary to the Industrial Organization recent literature and closer to the Operations Research results. In this sense we provide a bridge between the two approaches and rescue Industrial Organization from counterintuitive conclusions.
    Keywords: Vertical Integration, Outsourcing, Entry, Flexibility
    JEL: L24 G C61
    Date: 2008–04
  17. By: Carmine Guerriero (University of Cambridge)
    Abstract: The determinants of incentive regulation are a key issue in industrial policy. I study an asymmetric information model of incentive rules selection by a political principal endowed with an information-gathering technology whose efficiency increases with the effort exerted by two accountable supervisors (a regulator and a judge). This set up captures the institutions of several international markets. The model predicts that reforms toward higher powered rules are more likely the more inefficient (efficient) is the production (information-gathering) technology, the less tight is political competition and the greater are pro-consumer supervisors’ incentives. This prediction is consistent with evidence based on US electric power market data.
    Keywords: Incentive Schemes, Accountability Rules, Regulatory Capture
    JEL: D73 H11 L51 K2
    Date: 2008–04

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