nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒09‒13
twenty-two papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. The Investment Effects of Price Caps under Imperfect Competition: A Note By Stefan Bühler; Anton Burger; Robert Ferstl
  2. Product Market Competition, Incentives and Fraudulent Behavior By R. Andergassen
  3. A Network Model of Price Dispersion By Giacomo Pasini; Paolo Pin; Simon Weidenholzer
  4. "Exclusive Dealing Contract and Inefficient Entry Threat" By Noriyuki Yanagawa; Ryoko Oki
  5. A surplus and welfare analysis of asymmetric regulation By Cédric Clastres; Laurent David
  6. Bank competition - When is it Goog? By Christa Hainz;
  7. Aftermarket Power and Basic Market Competition By Luis Cabral
  8. R&D Investment and Financing Constraints of Small and Medium-Sized Firm By Czarnitzki, Dirk; Binz, Hanna L.
  9. Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach By Thomas Borek; Stefan Bühler; Armin Schmutzler
  10. The Impact of the Distribution of R&D Expenses on Firms’ Motivations to Patent By Barros, Henrique M.
  11. Choosing Fair Lotteries to Defeat the Competition By Wagman, Liad; Conitzer, Vincent
  12. Distance to Frontier and Appropriate Business Strategy By Alex Coad
  13. Brand popularity, endogenous leadership, and product introduction in industries with word of mouth communication By Christian Dahl Winther
  14. A Statistical Equilibrium Model of Competitive Firms By Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
  15. A note on collusion sustainability with optimal punishments and detection lags. By Aitor Ciarreta; Carlos Gutiérrez-Hita
  16. Networks with Group Counterproposals By Ricardo Nieva
  17. Entrepreneurial Competition and Its Impact on the Aggregate Economy By Katsuya Takii
  18. Measuring Welfare and the Effects of Regulation in a Government-Created Market: The Case of Medicare Part D Plans By Claudio Lucarelli; Jeffrey Prince; Kosali Simon
  19. Pricing for Scarcity By Roseta-Palma, Catarina; Monteiro, Henrique
  20. You Won the Battle. What about the War? A Model of Competition between Proprietary and Open Source Software By Riccardo Leoncini; Francesco Rentocchini; Giuseppe Vittucci Marzetti
  21. Demand Distribution Dynamics in Creative Industries: the Market for Books in Italy By E. Gaffeo; A. E. Scorcu; L. Vici
  22. The Knowledge Production of ‘R’ and ‘D’ By Czarnitzki, Dirk; Kraft, Kornelius; Thorwarth, Susanne

  1. By: Stefan Bühler; Anton Burger; Robert Ferstl
    Abstract: This note analyzes a simple Cournot model where firms choose outputs and capacities facing varying demand and price-cap regulation. We find that binding price caps set above long-run marginal cost increase (rather than decrease) aggregate capacity investment.
    Keywords: capacity, investment, Cournot competition, price cap
    JEL: D24 D43 L13 L51
    Date: 2008–08
  2. By: R. Andergassen
    Date: 2008–06
  3. By: Giacomo Pasini (Ca' Foscari University in Venice); Paolo Pin (Abdus Salam Internazional Centre for Theoretical Physics); Simon Weidenholzer (Institut für Volkswirtschaftslehre, Universität Wien)
    Abstract: We analyze a model of price competition ? la Bertrand in a network environment. Firms only have a limited information on the structure of network: they know the number of potential customers they can attract and the degree distribution of customers. This incomplete information framework stimulates the use of Bayesian-Nash equilibrium. We find that, if there are customers only linked to one firm, but not all of them are, then an equilibrium in randomized strategies fails to exist. Instead, we find a symmetric equilibrium in randomized strategies. Finally, we test our results on US gasoline data. We find empirical evidence consistent with firms playing random strategies.
    Keywords: Bertrand Competition, Bayesian- Nash Equilibrium, Mobility Index
    JEL: D43 D85 L11
    Date: 2008–03
  4. By: Noriyuki Yanagawa (Faculty of Economics, University of Tokyo); Ryoko Oki (Graduate School of Economics, University of Tokyo)
    Abstract: This paper examines the effects of exclusive dealing contracts in a simple model with manufacturers-distributors relations. We consider entrants in both manufacturing and distribution sectors. It is well-known that a potential entry threat is welfare increasing under homogenous price competition, even though the potential entrant is less productive. This paper reexamines this intuition by employing the above model. We show that the entry threat of a less-productive manufacturer is welfare decreasing when there is an exclusive dealing contract between the incumbent manufacturer and distributor. This result is in contrast to the view of the contestable markets literature.
    Date: 2008–09
  5. By: Cédric Clastres (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II); Laurent David (Research Division - Gaz de France)
    Abstract: Some European regulators have decided to force competition in their nationalmarkets. They have decided to go beyond the second directive and apply asymmetric regulation. Gas release programs and market shares constraints are the two asymmetric decisions imposed to incumbents. When a regulator imposes a gas release program to an incumbent, this operator is compelled to release quantities of its long term contracts to its competitor. In this paper, we will focus on gas release and its impact on welfare, consumer surplus and on the level of released quantities set by regulators. The aim of a gas release program is to give access to natural gas to competitors. They become actives on the market and are in competition with the incumbent. These programs are time limited. They only help competitors in expecting the development of hubs or new investments in importation infrastructures. If competitors want to stay active after the program, they may find others supply sources to increase security of supply. The gas release can induce Raising Rival’s Costs or “Self-Sabotage” strategies. We use a Cournot model with capacity constraints to answer two questions. First, we will study the impact of these strategies on consumer surplus and welfare. We will show that there are no impact on consumer surplus but the welfare decreases. The gas release program introduces a transfer of profit between competitor and incumbent, reduces welfare because of the increase in costs of supply, but has no impact on total consumed quantities. Then, we will suppose that the regulator is setting released quantities maximising welfare. Gas release price is often based on costs plus a bid or a fixed premium. Quantities are set with a less obvious process. We will demonstrate that the regulator must set released quantities :- that would not be so high if incumbent’s supplies are small to avoid Self- Sabotage or RRC strategies ;- as a function of incumbent’s supplies if they are in intermediate values to avoid strategies seen above and to optimise quantities sold on the market ;- at a sufficient level to let the two operators playing their Cournot best reply function. Finally, we will conclude that the regulator can avoid RRC or Self-Sabotage strategies in maximising the welfare when it decides gas released quantities. Gathering from empirical studies, these quantities should not be so high in order to let a significant difference between the capacities of both competitor and incumbent to avoid collusive behaviours.
    Keywords: Energy market ; Gas release ; Regulation ; Optimal released quantities ; Efficiency ; Welfare
    Date: 2008
  6. By: Christa Hainz; (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany; )
    Abstract: The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms’ access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.
    Keywords: Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium
    JEL: D82 G21 K00
    Date: 2008–09
  7. By: Luis Cabral
    Date: 2008
  8. By: Czarnitzki, Dirk; Binz, Hanna L.
    Abstract: This study tests for financial constraints on R&D investment and how they differ from capital investment. To identify constraints in the access to external capital, we employ a credit rating index. Our models show that internal constraints, measured by mark-ups, are more decisive for R&D than for capital investment. For external constraints, we find a monotonic relationship between the level of constriction and firm size for both types of investment. Thus, external constraints turn out to be more binding with decreasing firm size. On the contrary, we do not find such monotonic relationships for internal constraints. Differentiation by firms’ age does not support lower constraints for older firms.
    Keywords: R&D Investment, Capital Investment, Financial Constraints, Panel Data, Censored Regression Models
    JEL: O31 O32
    Date: 2008
  9. By: Thomas Borek; Stefan Bühler; Armin Schmutzler
    Abstract: This paper provides a simple reduced-form framework for analyzing merger decisions in the presence of asymmetric information about firm types, building on Shapiro's (1986) oligopoly model with asymmetric information about marginal costs. We employ this framework to examine what types of firms are likely to be involved in mergers. While we give sufficient conditions under which only low-type firms merge, as a lemons rationale would suggest, we also argue that these conditions will often be violated in practice. Finally, our analysis shows how signaling considerations affect merger decisions.
    Keywords: merger, asymmetric information, oligopoly
    JEL: D43 D82 L13 L33
    Date: 2008–06
  10. By: Barros, Henrique M.
    Date: 2008–10
  11. By: Wagman, Liad; Conitzer, Vincent
    Abstract: We study the following game: each agent i chooses a lottery over nonnegative numbers whose expectation is equal to his budget b_i. The agent with the highest realized outcome wins and agents only care about winning). This game is motivated by various real-world settings where agents each choose a gamble and the primary goal is to come out ahead. Such settings include patent races, stock market competitions, and R&D tournaments. We show that there is a unique symmetric equilibrium when budgets are equal. We proceed to study and solve extensions, including settings where agents must obtain a minimum outcome to win; where agents choose their budgets (at a cost); and where budgets are private information.
    Keywords: Strategic gambling; Nash equilibrium; fair lotteries
    JEL: D81 L20 C70 C72
    Date: 2008–08–14
  12. By: Alex Coad
    Abstract: This paper is an empirical test of the hypothesis that the appropriateness of different business strategies is conditional on the firm’s distance to the industry frontier. We use data on four 2-digit high-tech manufacturing industries in the US over the period 1972-1999, and apply semi-parametric quantile regressions to investigate the contribution of firm behavior to market value at various points of the conditional distribution of Tobin’s q. Among our results, we observe that innovative activity, measured in terms of R&D expenditure or patents, has a strong positive association with market value at the upper quantiles (corresponding to the leader firms) whereas the innovative efforts of laggard firms are valued significantly less. Laggard firms, we suggest, should instead achieve productivity growth through efficient exploitation of existing technologies and imitation of industry leaders. Employment growth in leader firms is encouraged whereas growth of backward firms is not as well received on the stock market.
    Keywords: Distance to frontier; Strategy; Market value; Innovation; Firm growth
    JEL: L25 L21 D21 O31
    Date: 2008
  13. By: Christian Dahl Winther (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: This paper considers the impact of popularity on duopolists’ entry strategies into an emerging industry, where each consumer holds a preference for one of two competing brands. Brand popularity is influenced by word of mouth communication, as early adopters recommend the brand they have bought to later buyers. Early introduction is, however, a costly strategy. The timing of product introduction is therefore of strategic importance to firms. I investigate the equilibria of the game when firms choose their time to market strategies sequentially, and observe how they relate to the popularity of the Stackelberg leader’s brand. This analysis reveals firms’ individual incentives for leader and follower roles, and the market structure that would result in this noncooperative game. As von Stackelberg showed a leader’s commitment to a strategy can preempt the follower. The present model shows that this situation, where both firms prefer the leader role, most likely occurs when brands hold equal levels of popularity. On the other hand it is interesting to observe that in certain markets, in particular where popularity is highly asymmetric, it is optimal for the dominant firm to become follower, and for the inferior firm to lead, because this facilitates soft competition. Still, the market structure may be insensitive to the order of moves. This warrants investigation of the connection between leadership and brand popularity, and the effect on market structure.
    Keywords: Endogenous leadership, product differentiation, product introduction, technological change, word of mouth communication
    JEL: D83 L11 O33
    Date: 2008–09–03
  14. By: Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
    Abstract: We argue that the complex interactions of competitive heterogeneous firms lead to a statistical equilibrium distribution of firms’ profit rates, which turns out to be an exponential power (or Subbotin) distribution. Moreover, we construct a diffusion process that has the Subbotin distribution as its stationary probability density, leading to a phenomenologically inspired interpretation of variations in the shape parameter of the statistical equilibrium distribution. Our main finding is that firms’ idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin.
    Keywords: Statistical equilibrium, maximum entropy principle, diffusion process, stochastic differential equation, competition, profit rate
    JEL: C16 D21 E10 L10
    Date: 2008
  15. By: Aitor Ciarreta (The University of the Basque Country); Carlos Gutiérrez-Hita (Universitas Miguel Hernández)
    Abstract: In this note we characterize optimal punishments with detection lags when the market consists of n oligopolistic firms. We extend a previous note by Colombo and Labrecciosa (2006) [Colombo, L., and Labrecciosa, P., 2006. Optimal punishments with detection lags. Economic Letters 92, 198-201] to show how in the presence of detection lags optimal punish- ments fail to restore cooperation also in markets with a low number of firms.
    Keywords: Optimal punishments; Detection lags; Collusion sustainability
    JEL: C73 D43
    Date: 2008–09–05
  16. By: Ricardo Nieva (University of Minnesota)
    Abstract: We study two n-player sequential network formation games with externalities. Link formation is tied to simultaneous transfer selection in a Nash demand like game in each period. Players in groups can counterpropose. We give necessary and sufficient conditions for efficiency in terms of cyclical monotonicity. The n-player group version always yields efficiency.
    Keywords: Efficiency, Bargaining Protocol, Counterproposals, Network Formation, Transfers, Externalities, Groups, Coalitions
    JEL: C71 C72 C73 C78
    Date: 2008–07
  17. By: Katsuya Takii (Associate Professor, Osaka School of International Public Policy, Osaka University)
    Abstract: This paper models entrepreneurship as the entrepreneur's information processing activity in order to predict changes in demand and reallocate resources. The results show that allocative efficiency---and therefore aggregate productivity---increases through intensified competition by entrepreneurs grasping at opportunities. This fierce competition leads to price reductions that result in the improvement of measured aggregate productivity. The price reduction also forces relatively less able entrepreneurs to become workers. As resources are then dealt with only by relatively talented entrepreneurs, this selection effect also increases aggregate productivity. The paper also discusses how the selection effect influences the distribution of firm size.
    JEL: D21 D61 D83 L25 L26
    Date: 2008–09
  18. By: Claudio Lucarelli; Jeffrey Prince; Kosali Simon
    Abstract: Medicare's prescription drug benefit (Part D) has been its largest expansion of benefits since 1965. Since the implementation of Part D, many regulatory proposals have been advanced to improve this government-created market. Among the most debated are proposals to limit the number of options, in response to concerns that there are "too many" plans. In this paper we study the welfare impacts of limiting the number of Part D plans. To do this, we first provide evidence that consumers view Medicare Part D plans as differentiated products. In doing so, we determine how much Medicare beneficiaries value the plans' various features -- an important measurement not only for our analysis, but also because these features are heavily dictated by policy. Second, using our demand- and supply-side estimates, we conduct several policy experiments to understand the implications of reducing the number of plans. Specifically, we assess the effects on equilibrium premia and welfare from removing plans that cover "the gap," reducing the maximum number of plans each firm can offer per region, and, for validation purposes, the impact of a recent major merger. Our counterfactuals regarding removal of plans provide an important assessment of the losses to consumers (and producers) resulting from government limitations on choice. These costs must be weighed against the widely discussed expected gains from limiting options (due to expected reductions in consumer search costs) when considering new restrictions on the number of plans that can be offered. We find that the search costs should be at least two thirds of the average monthly premium in order to justify a regulation that allows only two plans per firm, and that this number would be substantially lower if the limitation in the number of plans is coupled with a decrease in product differentiation (e.g., by removing plans that cover "the gap").
    JEL: H42 H51 I11 I18 L13 L51 L88
    Date: 2008–09
  19. By: Roseta-Palma, Catarina; Monteiro, Henrique
    Abstract: In many areas where water is not abundant, water pricing schedules contain significant nonlinearities. Existing pricing literature establishes that efficient schedules will depend on demand and supply characteristics. However, most empirical studies show that actual pricing schemes have little to do with theoretical efficiency results. In particular, there are very few models recommending increasing blocks, whereas we present evidence that this type of tariff structure is abundantly used. Water managers often defend increasing blocks, both as a means to benefit smaller users and as a way to signal scarcity. Naturally, in the presence of water scarcity the true cost of water increases due to the emergence of a scarcity cost. In this paper, we incorporate the scarcity cost associated with insufficient water availability into the optimal tariff design in several different models. We show that when both demand and costs respond to climate factors, increasing marginal prices may come about as a combined result of scarcity and customer heterogeneity under specific conditions. We also investigate the effect that rising water scarcity in the long run can have on the steady-state amount of capital invested in water storage and supply infrastructures and obtain some results that are consistent with the static models.
    Keywords: water pricing; nonlinear pricing; increasing block tariffs; water scarcity
    JEL: D42 Q25
    Date: 2008–06
  20. By: Riccardo Leoncini; Francesco Rentocchini; Giuseppe Vittucci Marzetti
    Abstract: Although open source software has recently attracted a relevant body of economic literature, a formal treatment of the process of com- petition with its proprietary counterpart is still missing. Starting from an epidemic model of innovation di?usion, we try to ?ll this gap. We propose a model where the two competing technologies depend on dif- ferent factors, each one speci?c to its own mode of production (prof- its and developers’ motivations respectively), together with network e?ects and switching costs. As the speed of di?usion of these tech- nologies is crucial for the ?nal outcome, we endogenize the parame- ter in?uencing it across the population of adopters. We ?nd that an asymptotically stable equilibrium where both technologies coexist can always be present and, when the propagation coe?cient is endogenous, it coexists with winner–take–all solutions. Furthermore, an increase in the level of the switching costs for one technology increases the num- ber of its adopters, while reducing the number of the other one. If the negative network e?ects increase for one of the two technologies, then the equilibrium level of users of that technology decrease.
    Keywords: Increasing returns; Open-source software; Technological competition; Technology di?usion
    JEL: L17 L86 O33
    Date: 2008
  21. By: E. Gaffeo; A. E. Scorcu; L. Vici
    Date: 2008–03
  22. By: Czarnitzki, Dirk; Kraft, Kornelius; Thorwarth, Susanne
    Abstract: Many studies investigate the relationship between R&D expenditures as an input and patents as an intermediate product or output of a knowledge production function. We suggest that the productivity of research in patent production functions has been underestimated in the literature, as scholars typically use information about R&D, i.e. the sum of research expenditure and development expenditure, due to data availability. However, in most industries only (applied) research will lead to patentable knowledge, and development happens after the initial research phase that may have led to a patent. Instead of using data on R&D, we separate the knowledge creating process into `R’ and `D’. This data stems from R&D surveys of Belgian firms. It turns out that only the `R’ part of R&D expenditure has a significant effect on patents and that development expenditure are insignificant. Thus previous literature relying on R&D expenditure suffers from a measurement error, such that the coefficient of R&D is biased towards zero, as R&D includes a large fraction of irrelevant expenditure, i.e. development expenditure, with respect to patenting.
    Keywords: Patents, Research, Development, Knowledge Production Function
    JEL: O31 O32
    Date: 2008

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