nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒08‒21
twelve papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Network Structure and Design in the Deregulated U.S. Airline Industry: an Argument for Re-Regulation? By Sayed Ajaz Hussain; Serkan Bahceci
  2. Dynamic LMP Response Under Alternative Price-Cap and Price-Sensitive Demand Scenarios By Li, Hongyan; Sun, Junjie; Tesfatsion, Leigh S.
  3. A multilevel analysis of innovation in developing countries By Martin Srholec
  4. The Impact of FDI on Innovation in Target Firms By Joel Stiebale; Frank Reize
  5. Regulation with Budget Constraints Can Dominate Regulation by Price and by Quantity By Linda Cohen; Amihai Glazer
  6. Modeling of Suppliers Learning Behaviors in an Electricity Market Environment By Yu, Nanpeng; Liu, Chen-Ching; Tesfatsion, Leigh S.
  7. The Effect of Mixed Leagues on Aggregated Investments and Competitive Balance By Helmut Dietl; Markus Lang; Stephan Werner
  8. Joint Dominance and Tacit Collusion - An Analysis of the Irish Vodafone/O2 Case and the Implications for Competition and Regulatory Policy By Patrick Massey; Moore McDowell
  9. Diffusion Processes and Inter-firm Cooperation: An Extended Nelson-Winter Model By Brunner, Daniuel; Voigt, Tim
  10. Technology sourcing by large incumbents through acquisition of small firms By Marcus Wagner
  11. Optimal taxation of a monopolistic extractor: are subsidies necessary? By Julien Daubanes
  12. The Effect of Luxury Taxes on Social Welfare in Team Sports Leagues By Helmut Dietl; Markus Lang; Stephan Werner

  1. By: Sayed Ajaz Hussain; Serkan Bahceci
    Abstract: This paper develops a model to explain and analyze the evolution of network structure (connectivity)and design (flight frequency, aircraft size, prices) in the post-deregulation U.S. airline industry. We show that legacy carriers choice of Hub-and-Spoke networks and the emergence of low cost carriers (LCCs) operating Point-to-Point networks were optimal choices. We demonstrate that LCCs need not necessarily charge lower prices, and their entry impacted legacy carriers’ prices in all markets, even those where there is no direct competition. We show that in response to entry, legacy carriers optimally lower flight frequency, leading to longer wait times between flights for which passengers are compensated by lower prices; conversely, if the entrant later exits, legacy carriers raise flight frequency and therefore prices, which may erroneously appear to be predatory pricing when in fact it is the consequence of optimal network redesign. Finally, we demonstrate that even though low cost carriers lower prices, total social welfare with competing network structures can also be lowered. In other words, the poor financial performance of legacy carriers is not due to their inefficiency per se but due to an efficient Hub-and-Spoke network undermined by competition from inefficient Point-to-Point networks. We argue that social welfare may have been, and still can be, higher if entry and exit in air passenger travel industry is regulated.
    Keywords: Networks, Airlines, Regulation
    JEL: L4 L5 L9 C6 M2
    Date: 2008–08–08
  2. By: Li, Hongyan; Sun, Junjie; Tesfatsion, Leigh S.
    Abstract: This study investigates the complicated nonlinear effects of demand-bid price sensitivity and supply-offer price caps on Locational Marginal Prices (LMPs) for bulk electric power when profit-seeking generators can learn over time how to strategize their supply offers. Systematic computational experiments are conducted using AMES, an open-source agent-based test bed developed by the authors. AMES models a restructured wholesale power market operating through time over an AC transmission grid subject to line constraints, generation capacity constraints, and strategic trader behaviors.
    Keywords: Restructured wholesale power markets; Agent-based test bed; Locational marginal prices; demand-bid price sensitivity; supply-offer price caps
    JEL: B4 C0 C6 C7 C9 D4 D43 D8 L1 L13 Q4
    Date: 2008–08–19
  3. By: Martin Srholec (Centre for Technology, Innovation and Culture, University of Oslo)
    Abstract: Innovation is a multilevel phenomenon. Not only characteristics of firms but also the environment within which firms operate matter. Although this has been recognized in the literature for a long time, a quantitative test that explicitly considers the hypothesis that framework conditions affect innovativeness of firms has been lacking. Using a large sample of firms from many developing countries, we estimate a multilevel model of innovation that integrates explanatory factors at different levels of the analysis. Apart from various firm’s characteristics, national economic, technological and institutional conditions are demonstrated to directly predict the likelihood of firms to innovate.
    Keywords: Innovation, technological capability, multilevel modeling, institutions, developing countries.
    Date: 2008–08
  4. By: Joel Stiebale; Frank Reize
    Abstract: This paper contributes to the ongoing debate on the welfare effects of foreign direct investment by investigating the effects of cross-border mergers and acquisitions on innovation activities in target firms. The empirical analysis is based on survey and ownership data for a large sample of small- and mediumsized German firms. After controlling for endogeneity and selection bias, it is found that foreign takeovers have a large negative impact on the propensity to perform innovation activities and a negative impact on average R&D expenditures in innovative firms. Furthermore, innovation output, measured as the share of sales from product innovations is not significantly affected by a foreign takeover for a given amount of innovation efforts. Hence, the estimation results do not show any evidence of significant technology spillovers through foreign direct investment in form of a higher innovation success.
    Keywords: Multinational enterprises, mergers and acquisitions, innovation
    JEL: D21 F23 G34 C31 O31 O33
    Date: 2008–07
  5. By: Linda Cohen (Department of Economics, University of California-Irvine); Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: A government can use several mechanisms to induce firms to reduce pollution. Well studied are regulations by price and by quantity. We consider a third form of regulation -- government allocates a budget to an agency which subsidizes abatement. We demonstrate that uncertainty can make such constrained regulation more efficient than either regulation by quantity or regulation by price. We also show that the optimal budget declines with a mean-preserving spread in the distribution of marginal costs.
    Keywords: Regulation; Environmental subsidy; Pollution control
    JEL: H23 Q52
    Date: 2008–08
  6. By: Yu, Nanpeng; Liu, Chen-Ching; Tesfatsion, Leigh S.
    Abstract: The day-ahead electricity market is modeled as a multi-agent system with interacting agents including supplier agents, load-serving entities, and a market operator. Simulation of the market clearing results under the scenario in which agents have learning capabilities is compared with the scenario where agents report true marginal costs. It is shown that, with Q-learning, electricity suppliers are making more profits compared to the scenario without learning due to strategic gaming. As a result, the LMP at each bus is substantially higher.
    Keywords: Electricity market; Supplier modeling; Competitive Markov decision process; Q-learning
    JEL: B4 C0 C6 C7 D4 D43 D8 L1 L13 Q4
    Date: 2008–08–19
  7. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Stephan Werner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: A wide range of literature which discusses the impact of the chosen objective function on competitive balance and revenue sharing. Some authors argued that sports clubs (or the owners of the sports clubs) behave like profit maximizers. This assumption of profit maximization coincides with the standard microeconomic theory of firms. On the other hand, some researchers pronounced that European football clubs behave like utility maximizers having a utility function that incorporates variables other than (only) club profits. Also, this assumption is well-known in standard microeconomic theory, since households maximize their utility with respect to a given budget constrain. In this paper, we want give a formal framework for the so called mixed leagues, i.e. professional sports leagues, where some club owners maximize clubs’ profits and the rest of the clubs are interested in maximizing their winning probability. This paper fills the gap in the existing literature since mixed leagues have not (formally) discussed, and therefore, no policy implications exist.
    Keywords: Mixed League, objective function, competitive balance, aggregated investments
    JEL: M21 D02
    Date: 2008
  8. By: Patrick Massey (Compecon Limited); Moore McDowell (University College Dublin)
    Abstract: The paper takes as its starting point the Irish telecom regulator ComReg’s finding of joint dominance by two firms in the mobile phone market in Ireland. The paper argues that the regulator’s decision was inconsistent with the facts in the case. However, it argues that the case raises wider questions about the whole concept of joint dominance as it has evolved under EU competition law which in our view is confused. We regard the approach of the ECJ in trying to use a single approach to joint dominance in merger analysis and in competition analysis as unjustified, misguided and at odds with economic analysis.
    Date: 2008–03–15
  9. By: Brunner, Daniuel; Voigt, Tim
    Abstract: The simulation studies presented by Nelsen and Winter (1982) examine the modelling of industry dynamics. These studies are a prominent and unique approach visualizing innovation and imitation processes. Assuming the standard model envisages firms acting individually, this paper treats the question concerning how the dynamic of the market changes in the case of inter-firm cooperation. Thereby we refer to one of our case studies (Brunner / Voigt 2008) and reconstruct interactions between the cooperation participants. On the one hand, we extend the Nelson-Winter-model by a factor market where the cooperation is able to bundle its demand. On the other hand, the model is enlarged by interactions of the cooperation actors in terms of innovation and imitation processes. A fundamental result of the simulation studies is that the cooperation participants improve their market position due to the cooperation. In particular, this study shows how the cooperation supports and simultaneously accelerates the dissemination of innovation.
    Keywords: Nelson-Winter; diffusion proccesses; knowledge communication; simulation study
    JEL: O33 D4 M13
    Date: 2008–08
  10. By: Marcus Wagner
    Abstract: Innovation activities in high technology industries provide considerable challenges for technology and innovation management. In particular, since these industries have a long history of radical innovations taking place through distinct industry cycles of higher and lower demand, firms frequently consider the option to use acquisitions as a means for technology sourcing. The paper investigates this behaviour for three high technology industries, namely semiconductor manufacturing, biotechnology and electronic design automation which is a specific sub-segment of the semiconductor industry. It analyses the association of firm characteristics with different aspects of acquisition behaviour with a particular focus being put on innovation-related firm characteristics. The paper confirms a substitutive relationship between acquisitions and own research activities as well as between own and acquired firm patenting, but also finds that firm size, financial conditions and geographical origin of the firm matter for acquisition behaviour.
    Keywords: Acquisition, innovation, high technology, quantitative methods, research, R&D
    JEL: L10 L86 M20
    Date: 2008
  11. By: Julien Daubanes (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In a standard partial equilibrium model of resource depletion, this paper charac- terizes and examines the solution to the optimal taxation problem when extraction is monopolistic. The main result is that the family of subgame perfect effciency- inducing tax/subsidy schemes may include some strict tax policies. This illustrates how the static trade-off between inducing effciency and raising tax revenues in the presence of market power is relaxed under exhaustibility.
    Keywords: Exhaustible resources, Imperfect competition, Optimal taxation
    JEL: Q30 L12 H21
    Date: 2008–07
  12. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Stephan Werner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: In this paper we model the effect of a luxury tax in the framework of profit maximizing clubs. A well-known effect of luxury taxes is a more balanced league, but no social welfare evaluation has taken place in existing literature. The effects of a more equal league are not surprising since large clubs reduce their investments. We discuss the simple case of a taxation-redistribution scenario: Large clubs finance the subsidy for the small clubs through a luxury tax. Under this assumption, the social welfare tax rate will not fully balance the league. In the second step, we assume that the league organization gets a share (exogenous) of the tax revenues and can determine the ’optimal’ tax rate. From their point of view a 100% tax rate is optimal. This tax rate can result in the social welfare optimum. We also show that there exists a second and third best where the welfare optimizing tax rate is below the league revenue maximizing tax rate. On the other hand we show, a fully balancing tax rate is, in general, not welfare maximizing.
    Keywords: Luxury Taxes, social welfare, redistribution, taxation regimes
    JEL: M21 D02
    Date: 2008

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