nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒10‒07
23 papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Direction and intensity of technical change: a micro-founded growth model By zamparelli, luca
  2. Existence of pure strategy equilibria in Bertrand-Edgeworth games with imperfect divisibility of money By De Francesco, Massimo A.
  3. Outsourcing, Complementary Innovations and Growth By Alireza Naghavi; Gianmarco I.P. Ottaviano
  4. Monopoly Provision of Tune-ins By Levent Çelik
  5. Spatial Interaction, Spatial Multipliers, and Hospital Competition By Lee Mobley; Ted Frech; Luc Anselin
  6. Price Setting and Market Structure: An Empirical Analysis of Micro Data By Fabricio Coricelli; Roman Horváth
  7. Collusion and Durability By Dan Sasaki; Roland Strausz
  8. “Night of the Living Dead” or “Back to the Future”? Electric Utility Decoupling, Reviving Rate-of-Return Regulation, and Energy Efficiency By Brennan, Timothy J.
  9. Reputation and competition: evidence from the credit rating industry By Bo Becker; Todd Milbourn
  10. Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry By Jason Allen; Robert Clark; Jean-François Houde
  11. Forward Trading in Exhaustible-Resource Oligopoly By Juan Pablo Montero; Matti Liski
  12. Asymmetric Information and the Signaling Role of Prices By Wassim Daher; Leonard J. Mirman; Marc Santugini
  13. Strategic Informative Advertising in a Horizontally Differentiated Duopoly By Levent Çelik
  14. Irreversible R&D investment with inter-firm spillovers By Gianluca Femminis; Gianmaria Martini
  15. Nash Equilibrium and Dynamics By Sergiu Hart
  16. A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments By Victor Aguirregabiria; Chun-Yu Ho
  17. Risk management in electricity markets: hedging and market incompleteness By Bert Willems; Joris Morbee
  18. Bertrand-Edgeworth games under oligopoly with a complete characterization for the triopoly By De Francesco, Massimo A.; Salvadori, Neri
  19. Une analyse de R&D industrielle de longue période : le cas de l'industrie informatique By Christian Genthon
  20. Integrating European retail payment systems: some economics of SEPA By Kemppainen, Kari
  21. Monopoly Power and Endogenous Product Variety: Distortions and Remedies By Florin O. Bilbiie; Fabio Ghironi; Marc J. Melitz
  22. Lerning by Copying By Francisco Martinez
  23. Optimal Two-Part Tariff Licensing Contracts with Differentiated Goods and Endogenous R&D By Ramón Faulí-Oller; Joel Sandonís

  1. By: zamparelli, luca
    Abstract: This paper develops a growth model combining elements of endogenous growth and induced innovation literatures. In a standard induced innovation model firms select at no cost innovations from an innovation possibilities frontier describing the trade-off between increasing capital or labor productivity. The model proposed allows firms to choose not only the direction but also the size of innovation by representing the innovation possibilities through a cost function of capital and labor augmenting innovations. By so doing, it provides a micro-foundation both of the intensity and of the direction of technical change. The policy analysis implies that an increase in subsidies to R&D as opposed to capital accumulation raises per capita steady state growth, employment rate and wage share.
    Keywords: Induced innovation; endogenous growth; direction of technical change
    JEL: O33 O31 O40
    Date: 2008–02
  2. By: De Francesco, Massimo A.
    Abstract: This paper incorporates imperfect divisibility of money in a price game where a given number of identical firms produce a homogeneous product at constant unit cost up to capacity. We find necessary and sufficient conditions for the existence of a pure strategy equilibrium. Unlike in the continuous action space case, under discrete pricing there may be a range of symmetric pure strategy equilibria - which we fully characterize - a range which may or may not include the competitive price. Also, we determine the maximum number of such equilibria when competitive pricing is itself an equilibrium.
    Keywords: Bertrand-Edgeworth competition; Price game; Oligopoly; Pure strategy equilibrium; Discrete pricing.
    JEL: L13 D43 C72
    Date: 2008–09–29
  3. By: Alireza Naghavi; Gianmarco I.P. Ottaviano
    Abstract: This paper studies the parallel creation of complementary upstream and downstream innovations by independent labs to shed light on the impact of outsourcing on R&D when supply contracts are incomplete. In particular, we argue that outsourced upstream production contributes to the emergence of innovation networks by creating a demand for upstream R&D. We then analyze under which conditions this leads to faster innovation than in the case of vertically integrated production relying on integrated R&D. In the presence of incomplete supply contracts, the ex-post bargaining power of upstream and downstream parties feeds back to innovation. This determines whether outsourcing decisions leading to static gains from specialized production generate or not also dynamic gains in terms of faster innovation.
    Keywords: outsourcing, complementary innovations, incomplete contracts, organization of firms
    JEL: L14 L23 O32 D91
    Date: 2008–05
  4. By: Levent Çelik
    Abstract: This paper analyzes a single television station's choice of airing tune-ins (preview advertisements). I consider two consecutive programs located along a unit line. Potential viewers know the earlier program but are uncertain about the later one. The TV station may air a fully informative tune-in during the first program. The cost of the tune-in is the forgone advertising revenue. Under mild conditions, there exists a unique perfect Bayesian equilibrium in which some viewers watch the first program just to see if there is a tune-in or not, and the TV station airs a tune-in unless the two programs are too dissimilar. In the absence of a tune-in, no viewer within the first-period audience keeps watching TV. Full information disclosure never arises. The market outcome is suboptimal; a social planner would air a tune-in for a wider range of programs.
    Keywords: Informative Advertising, Tune-ins, Uncertainty, Information Disclosure.
    JEL: L82 M37
    Date: 2008–09
  5. By: Lee Mobley (RTI International); Ted Frech (University of California, Santa Barbara); Luc Anselin (Arizona State University)
    Abstract: The hospital competition literature demonstrates that estimates of the effect of local market structure on competition are sensitive to geographic market definition. Our spatial lag approach effects smoothing of the explanatory variables across the discrete market boundaries. This approach results in robust estimates of the impact of market structure on hospital pricing, which can be used to estimate the full effect of changes in prices inclusive of spillovers that cascade through the neighboring hospital markets. In markets where concentration is relatively high before a proposed merger, we demonstrate that OLS estimates can lead to the wrong antitrust policy conclusion while the more conservative lag estimates do not.
    Keywords: spatial econometrics, spatial lag model, spatial multiplier, spatial spillovers, hospital antitrust, hospital competition, strategic pricing, Nash bargaining,
    Date: 2008–06–01
  6. By: Fabricio Coricelli (University of Siena; University of Paris I; CEPR); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: Most empirical studies on price setting that use micro data focus on advanced industrial countries. In this paper we analyze the experience of an emerging economy, Slovakia, using a large micro-level dataset that accounts for a substantial part of the consumer price index (about 5 million observations). We find that market structure is an important determinant of pricing behavior. The effect of market structure on persistence of inflation results from two conflicting forces. Increased competition may reduce persistence by increasing the frequency of price changes. In contrast, higher competition may increase persistence through inertial behaviour induced by the strategic complementarity among price setters. In our case study, we find that the latter effects dominate. Indeed, the dispersion of prices is higher while persistence is lower in the non-tradable sectors, suggesting that higher competition is not conducive to lower persistence. Furthermore, we find that the frequency of price changes depends negatively on the price dispersion and positively on the product-specific inflation. These results seem consistent with predictions of Calvo’s staggered price model.
    Keywords: price setting, market structure, emerging markets
    JEL: D40 E31
    Date: 2008–09
  7. By: Dan Sasaki; Roland Strausz (University of Tokyo; FU Berlin)
    Abstract: We develop a model to show that cartels that produce goods with lower durability are easier to sustain implicitly. This observation gen- erates the following results: 1) implicit cartels have an incentive to pro- duce goods with an inefficiently low level of durability; 2) a monopoly or explicit cartel is welfare superior to an implicit cartel; 3) welfare is non–monotonic in the number of firms; 4) a regulator may demand inefficiently high levels of durability to prevent collusion.
    Keywords: cartels, collusion, durability
    JEL: L15
    Date: 2008–09
  8. By: Brennan, Timothy J. (Resources for the Future)
    Abstract: The distribution grid for delivering electricity to the user has been paid for as part of the charge per kilowatt-hour that covers the cost of the energy itself. Conservation advocates have promoted the adoption of policies that “decouple” electric distribution company revenues or profits from how much electricity goes through the lines. Their motivation is that usage-based pricing leads utilities to encourage use and discourages conservation. Because decoupling divorces profits from conduct, it runs against the dominant finding in regulatory economics in the last twenty years -— that incentive-based regulation outperforms rate-of-return. Even if distribution costs are independent of use, some usage charges can be efficient. Price-cap regulation may distort utility incentives to inform consumers about energy efficiency -— getting more performance from less electricity. Utilities will subsidize efficiency investments, but only when prices are too low. Justifying policies to subsidize energy efficiency requires either prices that are too low or consumers who are ignorant.
    Keywords: decoupling, price caps, electricity, energy efficiency, conservation
    JEL: L51 L94 Q41
    Date: 2008–08–15
  9. By: Bo Becker (Harvard Business School, Finance Unit); Todd Milbourn (Washington University, St. Louis.John M. Olin School of Business)
    Abstract: Fair and accurate credit ratings arguably play an important role in the financial system. In an environment absent free entry of rating agencies, the provision of quality ratings is at least partially sustained by the reputational concerns of the rating agencies. The economically significant entry of a third agency into a market that was previously best described as a duopoly provides a unique experiment to examine the effect of increased competition on the disciplining effects of reputation. Using a variety of data sources, we find that competition leads to more issuer-friendly and less informative ratings. First, the credit ratings issues by the two incumbent agencies increased toward good ratings. Second, the correlation between bond yields and ratings fell. And lastly, negative stock price responses to announced rating downgrades are larger in absolute value (a downgrade in this weaker ratings environment is even worse news). Ultimately, our findings are consistent with models that suggest competition can impede the reputational mechanism.
    JEL: C7 D83 G14
    Date: 2008–10
  10. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking (and electronic commerce more generally) reduces the cost of performing many types of transactions for firms. The full benefits for firms from adoption, however, only accrue once consumers begin to perform a significant share of their transactions online. Since there are learning costs to adopting the new technology firms may try to encourage consumers to go online by affecting the relative quality of the online and offline options. Their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas, this is less of a concern for a more dominant firm. We develop a model of branch-service quality choice with switching costs meant to characterize the trade-off banks face when rationalizing their network between technology penetration and business stealing. The model is solved numerically and we show that the incentive to lower branch-service quality and drive consumers into electronic banking is greater in more concentrated markets and for more dominant banks. We find support for the predictions of the model using a panel of household survey data on electronic payment usage as well as branch location data, which we use to construct measures of branch quality.
    Keywords: Financial institutions; Market structure and pricing
    JEL: D14 D4 G21 L1
    Date: 2008
  11. By: Juan Pablo Montero (Instituto de Economía. Pontificia Universidad Católica de Chile.); Matti Liski
    Abstract: We analyze oligopolistic exhaustible-resource depletion when firms can trade forward contracts on deliveries, a market structure prevalent in many resource commodity markets. We find that this organization of trade has substantial implications for resource depletion. As firms’ interactions become infinitely frequent, resource stocks become fully contracted and the symmetric oligopolistic equilibrium converges to the perfectly competitive Hotelling (1931) outcome. Asymmetries in stock holdings allow firms to partially escape the procompetitive effect of contracting: a large stock provides commitment to leave a fraction of the stock uncontracted. In contrast, a small stock provides commitment to sell early, during the most profitable part of the equilibrium.
    Keywords: Forward Trading, Exhaustible Resources, Oligopoly Pricing.
    JEL: G13 L13 Q30
    Date: 2008
  12. By: Wassim Daher; Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal)
    Abstract: We study asymmetric information and the signaling role of prices in a noiseless and imperfectly competitive environment. Here, the price is determined by market forces. After describing the general model, we study information flows in applications of industrial organization and finance: a quantity-setting monopoly, Cournot oligopoly, and a model of choice and allocation of a risky asset. For each application, there is a unique signaling equilibrium in which the price conveys all the information. Moreover, the signaling equilibrium differs from the full information equilibrium..
    Date: 2008–09
  13. By: Levent Çelik
    Abstract: When firms possess information about their competitors’ products, their advertisements may leak extra information. I analyze this within a duopoly television market that lasts for two periods. Each station may advertise its upcoming program by airing a tune-in during the first program. Viewers may alternatively sample a program. I find that each station’s equilibrium tune-in decision depends on both upcoming programs - thereby revealing more information than the actual content - when the sampling cost is sufficiently low. Otherwise, tune-in decisions are made independently. It is welfare improving to ban tune-ins in the latter case but not in the former.
    Keywords: Informative advertising, Tune-ins, Sampling, Information disclosure, Signaling.
    JEL: D83 L13 M37
    Date: 2008–09
  14. By: Gianluca Femminis (DISCE, Università Cattolica); Gianmaria Martini (Università di Bergamo)
    Abstract: In our duopoly, an irreversible investment incorporates a significant amount of R&D, so that the improvement it introduces in production processes generates a spillover lowering the second comer's investment cost. The presence of the inter-firm spillover substantially affects the equilibrium of the dynamic game: for low -- and hence realistic -- spillover values, the leader delays her investment until the stochastic fundamental has reached a level such that the follower's optimal strategy is to invest as soon as he attains the spillover. This bears several interesting implications. First, because the follower invests upon benefiting from the spillover, in our equilibrium the average time delay between the two investments is short, which is realistic. Second, we show that in case of a major innovation, an optimal public policy requires a substantial intervention in favour of the investment activity; moreover, an increase in uncertainty -- delaying the equilibrium -- calls for higher subsidization rates. Third, we find, by means of numerical simulations, that the spillover reduces the difference in the leader's and in the follower's maximum value function. Accordingly, our model can help generating realistic market betas.
    Keywords: irreversible investment, knowledge spillover, dynamic oligopoly
    JEL: C73 L13 O33
    Date: 2008–09
  15. By: Sergiu Hart
    Abstract: John F. Nash, Jr., submitted his Ph.D. dissertation entitled Non-Cooperative Games to Princeton University in 1950. Read it 58 years later, and you will find the germs of various later developments in game theory. Some of these are presented below, followed by a discussion concerning dynamic aspects of equilibrium.
    Date: 2008–09
  16. By: Victor Aguirregabiria; Chun-Yu Ho
    Abstract: This paper studies the contribution of demand, costs, and strategic factors to the adoption of hub-and-spoke networks in the US airline industry. Our results are based on the estimation of a dynamic oligopoly game of network competition that incorporates three groups of factors which may explain the adoption of hub-and-spoke networks: (1) travelers value the services associated with the scale of operation of an airline in the hub airport (e.g., more convenient check-in and landing facilities); (2) operating costs and entry costs in a route may decline with an airline's scale operation in origin and destination airports (e.g., economies of scale and scope); and (3) a hub-and-spoke network may be an effective strategy to deter the entry of other carriers. We estimate the model using data from the Airline Origin and Destination Survey with information on quantities, prices, and entry and exit decisions for every airline company in the routes between the 55 largest US cities. As a methodological contribution, we propose and apply a simple method to deal with the problem of multiple equilibria when using the estimated model to predict the effects of changes in structural parameters. We find that the most important factor to explain the adoption of hub-and-spoke networks is that the cost of entry in a route declines very importantly with the scale of operation of the airline in the airports of the route. For some of the larger carriers, strategic entry deterrence is the second most important factor to explain hub-and-spoke networks.
    Keywords: Airline industry; Hub-and-spoke networks; Entry costs; Industry dynamics; Estimation of dynamic games; Counterfactuals with multiple equilibria
    JEL: C10 C35 C63 C73 L10 L13 L93
    Date: 2008–09–29
  17. By: Bert Willems; Joris Morbee
    Abstract: The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what extent this depends on market completeness. We develop an equilibrium model of the electricity market with risk-averse firms and a set of traded financial products, more specifically: forwards and an increasing number of options. Using this model, we first show that aggregate welfare in the market increases with the number of derivatives offered. If firms are concerned with large negative shocks to their profitability due to liquidity constraints, option markets are particularly attractive from a welfare point of view. Secondly, we demonstrate that increasing the number of derivatives improves investment decisions of small firms (especially when firms are risk-averse), because the additional financial markets signal to firms how they can reduce the overall sector risk. Also the information content of prices increases: the quality of investment decisions based on risk-free probabilities, inferred from market prices, improves as markets become more complete Finally, we show that government intervention may be needed, because private investors may not have the right incentives to create the optimal number of markets.
    Date: 2008–08
  18. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: The paper extends the analysis of price competition among capacity-constrained sellers beyond the cases of duopoly and symmetric oligopoly.We first provide some general results for the oligopoly and then focus on the triopoly, providing a complete characterization of the mixed strategy equilibrium of the price game. The region of the capacity space where the equilibrium is mixed is partitioned according to the features of the mixed strategy equilibrium arising in each subregion. Then computing the mixed strategy equilibrium becomes a quite simple task. The analysis reveals features of the mixed strategy equilibrium which do not arise in the duopoly
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Triopoly; Mixed strategy equilibrium
    JEL: L13 D43 C72
    Date: 2008–05–11
  19. By: Christian Genthon (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - CNRS : FRE2664 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Cet article revisite le thème des rapports entre innovation, profitabilité et grandeur des entreprises à partir d'une analyse de longue période (18 ans de 1983 à 2000) de l'industrie informatique. La dynamique industrielle de cette industrie nous induit à émettre l'hypothèse que cette industrie a vécu un changement de régime de concurrence sur la période. Le travail empirique est réalisé à partir d'une base de données propriétaire construite sur les 60 premières entreprises du secteur. Les résultats montrent qu'il n'existe pas de relation entre intensité de R&D et dimension des entreprises, ni entre R&D et profits. Par contre, la relation entre profit et dimension est plus complexe : elle dépend de la période considérée et donc de l'organisation industrielle du secteur.
    Keywords: recherche et développement ; industrie informatique ; organisation industrielle ; taille de l'entreprise ; dynamique industrielle ; innovation
    Date: 2007
  20. By: Kemppainen, Kari (Bank of Finland Research)
    Abstract: Using a spatial competition model of retail payment networks, this paper discusses the likely economic consequences associated with the formation of the Single Euro Payments Area (SEPA). The model considers an expansion of positive network externalities on the demand side and adjustment cost on the supply side and reveals that the introduction of SEPA may not lead to a fully competitive and integrated retail payment markets. This is especially the case when the markets are segments before the introduction of SEPA. In such a scenario, the post-integrated markets are likely to remain segmented or will be characterised by a kinked equilibrium where no significant price competition takes place. In both outcomes, SEPA leads to increased prices, larger network sizes (ie increased number of customers) and a higher consumer surplus. Additionally, if the SEPA-induced adjustment costs for payment networks are not prohibitively high, SEPA may also lead to an increase in both profits and social welfare.
    Keywords: integration; network effects; retail payments
    JEL: G21 L14 L15
    Date: 2008–09–24
  21. By: Florin O. Bilbiie; Fabio Ghironi; Marc J. Melitz
    Abstract: We study the efficiency properties of a dynamic, stochastic, general equilibrium, macroeconomic model with monopolistic competition and firm entry subject to sunk costs, a time-to-build lag, and exogenous risk of firm destruction. Under inelastic labor supply and linearity of production in labor, the market economy is efficient if and only if symmetric, homothetic preferences are of the C.E.S. form studied by Dixit and Stiglitz (1977). Otherwise, efficiency is restored by properly designed sales, entry, or asset trade subsidies (or taxes) that induce markup synchronization across time and states, and align the consumer surplus and profit destruction effects of firm entry. When labor supply is elastic, heterogeneity in markups across consumption and leisure introduces an additional distortion. Efficiency is then restored by subsidizing labor at a rate equal to the markup in the market for goods. Our results highlight the importance of preserving the optimal amount of monopoly profits in economies in which firm entry is costly. Inducing marginal cost pricing restores efficiency only when the required sales subsidies are financed with the optimal split of lump-sum taxation between households and firms.
    JEL: D42 H32 L16
    Date: 2008–10
  22. By: Francisco Martinez (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: We analyze the behavior of a multiproduct monopolist, a duopolist and consumers who are able to learn by copying. We show that when the effect of learning by copying is strong and the cost of copying is low enough, consumers decide to copy all goods, independently of their prices. This suggests that the DRM systems implemented by the digital industry have adverse consequences, because they hinder the use of original information goods and provide consumers with an incentive for copying. Moreover, we obtain two more kinds of equilibrium: one where each firm sells to the consumer who values its good more highly and another where each firm sells to all consumers. These results are robust when we consider that consumers’ preferences are “opposed.” Finally, by analyzing social welfare we show that, from a static perspective, the multiproduct monopoly provides a welfare at least as great as the duopoly and, from a dynamic perspective, a duopolist has at least the same incentive to create a new product as a monopolist.
    Keywords: Consumers, Learning by Copying, Opposed Preferences, DRM, Copy, Piracy.
    JEL: K42 L11 L86 O34
    Date: 2008–06–13
  23. By: Ramón Faulí-Oller (Universidad de Alicante); Joel Sandonís (Universidad de Alicante)
    Abstract: In this paper we get the optimal two-part tariff contract for the licensing of a cost reducing innovation to a differentiated goods industry of a general size. We analyze the cases where the patentee is an independent laboratory or an incumbent firm. We show that, regardless of the number of firms, the degree of product differentiation and the type of patentee, the innovation is licensed to all firms. Moreover, we endogenize R&D investment and get that an internal patentee invests more (less) in R&D when the technological opportunity is low (high). In this paper we get the optimal two-part tariff contract for the licensing of a cost reducing innovation to a differentiated goods industry of a general size. We analyze the cases where the patentee is an independent laboratory or an incumbent firm. We show that, regardless of the number of firms, the degree of product differentiation and the type of patentee, the innovation is licensed to all firms. Moreover, we endogenize R&D investment and get that an internal patentee invests more (less) in R&D when the technological opportunity is low (high).
    Keywords: patent licensing, two-part tariff contracts, R&D, product differentiation.
    JEL: L11 L13 L14
    Date: 2008–07

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