nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒08‒31
fifteen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Is Service Innovation Different? By Aija Leiponen
  2. Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions By Draganska, Michaela; Seim, Katja; Mazzeo, Michael
  3. Retail Competition and the Dynamics of Consumer Demand for Tied Goods By Hartmann, Wesley R.; Nair, Harikesh S.
  4. Product Market Deregulation and the U.S. Employment Miracle By Monique Ebell; Christian Haefke
  5. Revenue Sharing and Competitive Balance in an Infinite Period Contest Model By Martin Grossmann; Helmut Dietl; Markus Lang
  6. Markets and Uncertainty in Pharmaceutical Development By Scherer, F. M.
  7. The Effect of Mixed Leagues on Aggregated Investments and Competitive Balance By Helmut Dietl; Markus Lang; Stephan Werner
  8. Confessions of an Internet Monopolist: Demand Estimation for a Versioned Information Good By Chappell, Henry; Guimaraes, Paulo; Ozturk, Orgul
  9. Welfare Effects of Salary Caps in Sports Leagues with Win-Maximizing Clubs By Helmut Dietl; Egon Franci; Markus Lang; Alexander Rathke
  10. Intra-firm Technology Transfer and R&D in Foreign Affiliates: Substitutes or Complements? Evidence from Japanese Multinational Firms By Belderbos, René; Ito, Banri; Wakasugi, Ryuhei
  11. The Evolution of Science Policy and Innovation Studies By Ben Martin
  12. The Effect of Luxury Taxes on Social Welfare in Team Sports Leagues By Helmut Dietl; Markus Lang; Stephan Werner
  13. Technological Innovation and Monopolization By Scherer, F. M.
  14. Creative Destruction and Regional Productivity Growth: Evidence from the Dutch Manufacturing and Services Industries By Niels Bosma; Erik Stam; Veronique Schutjens
  15. On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity By Fehr, Ernst; Brown, Martin; Zehnder, Christian

  1. By: Aija Leiponen
    Abstract: ABSTRACT : This exploratory empirical study compares the determinants of innovation in manufacturing and services through descriptive and regression analyses of sales from innovative products and services. The results suggest that, contrary to earlier research, R&D investments play a positive and significant role in both services and manufacturing. Service firms also benefit from broad strategies of sourcing external information. In contrast, strategic breadth in terms of pursuing multiple different innovation objectives or cooperating with different types of partners appears to have detrimental effects on service innovation. We interpret the latter results through reference to service firms’ R&D and alliance management capabilities : Managing multiple innovation projects or multiple cooperative arrangements is challenging, and some service firms may not have accumulated the requisite managerial capabilities to benefit from these strategies. The available data provide partial support for this conjecture.
    JEL: O31 O32 L8
    Date: 2008–08–22
  2. By: Draganska, Michaela (Stanford U); Seim, Katja (Northwestern U); Mazzeo, Michael (U of Pennsylvania)
    Abstract: In this paper, we take a first step toward exploring empirically the product assortment strategies of oligopolistic firms. Our starting point is a discrete- choice demand model for differentiated products. We incorporate the demand model into an equilibrium supply model, in which firms compete by first choosing which products to offer and then by setting prices. We show how modeling joint product assortment and pricing decisions enriches standard product choice models by allowing insights into how demand characteristics affect firms' product offerings in a competitive environment. We furthermore demonstrate that incorporating endogenous product choice into demand models is essential for policy simulations (e.g., mergers) as it entails at times dramatically different welfare assessments than the common assumption that product assortments are exogenous.
    Date: 2007–10
  3. By: Hartmann, Wesley R. (Stanford U); Nair, Harikesh S.
    Abstract: We empirically investigate the demand for tied goods sold through competing retail channels. Tied good pricing strategies commonly involve a low price on the initial purchase (i.e. the primary good) to drive adoption, and a substantial markup on aftermarket goods to capture value. However, if the goods are sold through downstream channels, retail market power and a misalignment of incentives could distort the relative prices of primary and aftermarket goods. To evaluate whether retail competition is strong enough to prevent such distortions, we explore the commonly noted example of razors and blades, which are sold through drug, grocery, mass merchandising, and club stores. We specify a forward-looking demand model that incorporates dynamics arising from the tied good nature of the products and the stockpiling and durability aspects of razors and blades. Furthermore, we allow intertemporal substitution in the purchase of both razors and blades to occur across channels as well as time. This modeling feature enables a novel approach to measuring retail competition in single category demand analyses. Our estimates indicate that there is substantial cross-channel substitution in razors, but some retail market power in blades. However, the channel with the most market power in blades, club stores, specializes in high volume customers that would adopt a razor even if blade prices are higher. This suggests that the manufacturer can achieve its desired level of razor adoption without vertical restraints, though blade sales may be slightly reduced by double marginalization.
    Date: 2007–12
  4. By: Monique Ebell; Christian Haefke
    Abstract: We consider the dynamic relationship between product market entry regulation andequilibrium unemployment. The main theoretical contribution is combining a job matchingmodel with monopolistic competition in the goods market and individual bargaining. Wecalibrate the model to US data and perform a policy experiment to assess whether thedecrease in trend unemployment during the 1980's and 1990's could be attributed to productmarket deregulation. Under a traditional calibration, our results suggest that a decrease of lessthan two-tenths of a percentage point of unemployment rates can be attributed to productmarket deregulation, a surprisingly small amount. Under a small surplus calibration,however, product market deregulation can account for the entire decline in US trendunemployment over the 1980's and 1990's.
    Keywords: Product market competition, barriers to entry, wage bargaining
    JEL: E24 J63 L16 O00
    Date: 2008–06
  5. By: Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: This paper presents a dynamic model of talent investments where two clubs compete in each period with respect to a contest prize. We show that aggregate talent stocks of both clubs converge to an identical level such that competitive balance is assured in the steady state as long as league prizes are identical for clubs. In the transition the dynamics are mainly influenced by the elasticity of marginal costs. Finally, we generalize the static results of Szymanski and Kesenne (2004): It is possible to have a persistent inequality in team qualities and revenue sharing decreases competitive balance if clubs have different market potentials.
    Keywords: Contest, Sports Economics, Competitive Balance, Revenue Sharing
    JEL: L83 D92
    Date: 2008–08
  6. By: Scherer, F. M. (Harvard U)
    Abstract: This paper, written for a conference on biomedical innovation at the University of Kiel, examines the theory of induced innovation, with science-push and demand-pull variants, in the context of pharmaceutical R&D. It explores how the theory applies under varying market structure, uncertainty, and behavioral (i.e., rent-seeking vs. secure profit maximization) conditions. The paradox of high gross margins but only mildly supra-normal returns on investment in the pharmaceutical industry is consistent with the pursuit of parallel research paths under uncertainty, rent-seeking, and cannibalization hypotheses. Parallel paths strategies carried implicitly to near-zero profit equilibria by firms competing for monopoly positions may approach social optimality, given plausible differences between private and social returns. But evidence on whether this outcome is actually approximated remains scarce.
    Date: 2007–09
  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: L83 M21 D02
    Date: 2008–08
  8. By: Chappell, Henry; Guimaraes, Paulo; Ozturk, Orgul
    Abstract: We investigate profit-maximizing versioning plans for an information goods monopolist. The analysis employs data obtained from a web-based field experiment in which potential buyers were offered information goods in varied price-quality configurations. Maximum simulated likelihood (MSL) methods are used to estimate parameters describing the distribution of utility function parameters across potential buyers of the good. The resulting estimates are used to examine the impact of versioning on seller profits and market efficiency.
    Keywords: Versioning; price discrimination; field experiment; maximum simulated likelihood
    JEL: D12 C81 D83 D42 C93
    Date: 2006
  9. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Egon Franci (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Alexander Rathke (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: This paper studies the welfare effect of a percentage-of-revenue salary cap in a European context with win-maximizing clubs. It shows that a percentage-of-revenue cap increases competitive balance and decreases the overall salary payments in the league, therefore contributing to financial stability. A percentage-of-revenue cap will always increase social welfare if the weight on aggregate club surplus in the welfare function is sufficiently high. Additionally, if fans’ preferences for aggregate talent are sufficiently high then the percentage-of-revenue cap will also increase social welfare; no matter how much weight the league puts on financial stability.
    Keywords: Salary Caps, Social Welfare, Competitive Balance, Team Sports League
    JEL: L83
    Date: 2008–08
  10. By: Belderbos, René (Katholieke Universiteit Leuven, UNU-MERIT, and University of Maastricht); Ito, Banri (Research Institute of Economy Trade and Industry (RIETI)); Wakasugi, Ryuhei (Kyoto University, Institute of Economic Research)
    Abstract: R&D in foreign affiliates and technology transferred from their parent firms are important potential drivers of productivity in host countries. In this paper we examine the simultaneous impact of local R&D and intra-firm international technology transfer on productivity growth in foreign affiliates. We estimate a dynamic productivity model on a large sample of Japanese manufacturing affiliates worldwide in 1996-1997 and 1999-2000. We find that both affiliate R&D and intra-firm technology transfer contribute to productivity growth, while technology transfer exhibits decreasing marginal returns. The two sources of technology are complements: use of one source of technology increases the marginal impact of the other.
    Keywords: R&D, technology transfer, multinational firms
    JEL: F23 O32 O33
    Date: 2008
  11. By: Ben Martin (SPRU, University of Sussex)
    Date: 2008–08
  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: L83 M21 D02
    Date: 2008–08
  13. By: Scherer, F. M. (Harvard U)
    Abstract: This paper, written for an American Bar Association compendium on competition policy, reviews seven of the most important U.S. antitrust cases charging firms in high-technology industries with violations of Sherman Act Section II -- i.e., with monopolization. The principal target firms were Standard Oil of New Jersey, General Electric (in lamps), AT&T, du Pont (for cellophane), Xerox, IBM, and Microsoft (both in the United States and Europe). From an analysis of the historical records, it is clear that in most instances, the legal system took far too long to deal with the contested issues. In the interim, firms that had achieved dominant positions through innovation often embraced new technologies slowly, sometimes pursuing an explicit "fast second" strategy -- that is, waiting to innovate until their positions were threatened by outsiders. The stimulating effect of outside challenges suggests that entry should be kept open, among other things by combating the extension over time of blocking patent positions. Procedural reforms for accelerating the adjudication of complaints are proposed.
    Date: 2007–10
  14. By: Niels Bosma; Erik Stam; Veronique Schutjens
    Abstract: Do processes of firm entry and exit improve the competitiveness of regions? If so, is this a universal mechanism or is it contingent on the type of industry or region in which creative destruction takes place? This paper analyses the effect of firm entry and exit on the competitiveness of regions, measured by Total Factor Productivity (TFP) growth. Based on a study across 40 regions in the Netherlands over the period 1988-2002, we find that firm entry is related to productivity growth in services, but not in manufacturing. The positive impact found in services does not necessarily imply that new firms are more efficient than incumbent firms; high degrees of creative destruction may also improve the efficiency of incumbent firms. We also find that the impact of firm dynamics on regional productivity in services is higher in regions exhibiting diverse but related economic activities.
    Keywords: entrepreneurship, entry & exit, turbulence, creative destruction, regional competitiveness, total factor productivity
    JEL: L10 M13 O18 R11
    Date: 2008–08
  15. By: Fehr, Ernst (University of Zurich); Brown, Martin (Swiss National Bank); Zehnder, Christian (University of Zurich)
    Abstract: We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.
    Keywords: wage rigidity, price rigidity, relational contracts, reciprocity, reputation
    JEL: D82 J3 J41 E24 C9
    Date: 2008–08

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