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on Microeconomics |
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Issue of 2008‒10‒21
sixteen papers chosen by Joao Carlos Correia Leitao Technical University of Lisbon |
| By: | Schroth, Enrique (Faculty of Economics and Business, University of Amsterdam); Szalay, Dezsö (Department of Economics, University of Warwick) |
| Abstract: | This paper studies the impact of financing constraints on the equilibrium of a patent race. We develop a model where firms finance their R&D expenditures with an investor who cannot verify their effort. We solve for the optimal financial contract of any firm along its best-response function. In equilibrium, any firm in the race is more likely to win the more cash and assets it holds prior to the race, and the less cash and assets its rivals hold prior to the race. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the effect of all the racing firms' cash holdings on the equilibrium winning probabilities. The empirical findings support our theoretical predictions. |
| Keywords: | Patent Race ; optimal contract ; innovation ; financial constraints |
| JEL: | G24 G32 L13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:873&r=mic |
| By: | Alessandro Petretto (Università degli Studi di Firenze, Dipartimento di Scienze Economiche) |
| Abstract: | In this paper, we reconstruct the process by which the decisions of a regulated local public utility, in terms of productive efficiency and quality of the service provided, impact on prices of final consumption goods, supplied in a oligopolistic market operating in the same geographic area. We obtain some formula for these effects which can be quantified by estimating firms’ conditional input demand function of the public service and firms’ inverse demand function for this public good, non-rival, component. Finally, we draw the effects of productive efficiency and quality on consumer welfare and cost-of-living, via changes on tariffs, external effects and final goods prices. |
| Keywords: | regulation, x-efficiency, oligopoly, consumer welfare |
| JEL: | L51 D11 D21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2008_10.rdf&r=mic |
| By: | Daron Acemoglu; Kostas Bimpikis; Asuman Ozdaglar |
| Abstract: | This paper studies a simple model of experimentation and innovation. Our analysis suggests that patents may improve the allocation of resources by encouraging rapid experimentation and efficient ex post transfer of knowledge across firms. Each firm receives a private signal on the success probability of one of many potential research projects and decides when and which project to implement. A successful innovation can be copied by other firms. Symmetric equilibria (where actions do not depend on the identity of the firm) always involve delayed and staggered experimentation, whereas the optimal allocation never involves delays and may involve simultaneous rather than staggered experimentation. The social cost of insufficient experimentation can be arbitrarily large. Appropriately-designed patents can implement the socially optimal allocation (in all equilibria). In contrast to patents, subsidies to experimentation, research, or innovation cannot typically achieve this objective. We also show that when signal quality differs across firms, the equilibrium may involve a nonmonotonicity, whereby players with stronger signals may experiment after those with weaker signals. We show that in this more general environment patents again encourage experimentation and reduce delays. |
| JEL: | D83 D92 O31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14408&r=mic |
| By: | Avi Goldfarb (Rotman School of Management, University of Toronto); Mo Xiao (Eller College of Management, University of Arizona); |
| Abstract: | This paper examines how manager and firm characteristics relate to entry decisions in US local telephone markets. To do so, it develops a structural econometric model that allows managers to be heterogeneous in their ability to correctly conjecture competitor behavior. The model adapts Camerer, Ho, and Chong’s (2004) Cognitive Hierarchy model to a real-world setting. We observe the industry in 1998, shortly after the Telecommunications Act of 1996 opened up the market. We find that older firms with older, more experienced managers have higher estimated levels of strategic ability. Managers with degrees in economics or business, and managers with graduate degrees, also have higher estimated levels of strategic ability. We find no evidence that university quality is related to ability. We repeat this exercise using data from 2000, 2002, and 2004. While the core results do not change, the overall level of measured strategic ability increases substantially by 2004. The estimates of strategic ability are also correlated with survival: those firms with lower estimated levels of ability are more likely to exit the industry early. |
| Keywords: | entry games, behavioral industrial organization, cognitive hierarchy, CLECs, local telephone competition |
| JEL: | L96 L20 C72 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0821&r=mic |
| By: | Johan Stennek (Gothenburg University); Thomas TangerŒs (Research Institute of Industrial Economics); |
| Abstract: | This paper questions whether competition can replace sector-specific regulation of mobile telecommunications. We show that the monopolistic outcome may prevail independently of market concentration when access prices are determined in bilateral negotiations. A lighthanded regulatory policy can induce effective competition. Call prices are close to the marginal cost if the networks are sufficiently close substitutes. Neither demand nor cost information is required. A unique and symmetric call price equilibrium exists under symmetric access prices, provided that call demand is sufficiently inelastic. Existence encompasses the case of many networks and high network substitutability. |
| Keywords: | network competition; two-way access; mobile termination rates; entry; collusion |
| JEL: | L12 L14 L51 L96 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0809&r=mic |
| By: | Gustavsson Tingvall, Patrik (China Economic Research Center (CERC)); Karpaty, Patrik (Department of Economics) |
| Abstract: | The central prediction of the Aghion et al. (2005) model is an inverted U-shaped relation between innovation and competition. The model is built on the assumption of a product market and has not yet been empirically tested on service-sector firms. Using detailed firm-level data, we find the inverse U-shaped relation to hold for both small and large service-sector firms. However, non-exporting service firms deviate from the overall pattern. A more detailed breakdown of innovation expenditures shows that the inverse U-shaped pattern holds for both intramural R&D and training, but not for extramural R&D. Finally, as competition increases, small firms tend to seek more strategic alliances with competitors while large firms tend to decrease their collaboration with competitors. To some extent, the behavior of large firms can be due to their greater capacity to handle innovation projects internally and as competition increases, so does the payoff of an edge to competitors. |
| Keywords: | R&D; innovation; competition; service sector |
| JEL: | D40 L10 L60 O30 |
| Date: | 2008–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0702&r=mic |
| By: | Oksana Loginova (Department of Economics, University of Missouri); X. Henry Wang (Department of Economics, University of Missouri); |
| Abstract: | We analyze a duopoly game in which products are initially differentiated in variety and quality. Each consumer has a most preferred variety and a quality valuation. Customization provides ideal varieties but has no effect on product qualities. The firms first choose whether to customize their products, then engage in price competition. We show that in equilibrium either both firms customize, only the higher quality firm customizes, or no firm customizes. Even if customization is costless, the firms might not customize. This happens when the quality difference between the firms is small. We explore how the total welfare changes with the fixed cost of customization. Interestingly, the relationship is not always monotonic. Contrasting with the situation when customization is not feasible, both consumer surplus and total welfare are higher when one or both firms customize. |
| Keywords: | customization, horizontal differentiation, vertical differentiation |
| JEL: | D43 L13 C72 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0833&r=mic |
| By: | Nicholas Economides (Stern School of Business, NYU); V. Brian Viard (Graduate School of Business, Stanford University); Katja Seim (University of Pennsylvania) |
| Abstract: | Local telecommunications competition was an important goal of the 1996 Telecommunications Act. We evaluate the consumer welfare effects of entry into residential local telephone service in New York State using household-level data from September 1999 to March 2003. We address the prevalence of nonlinear tariffs by developing a discrete/continuous demand model that allows for service bundling and unobservable provider quality. We find that the average subscriber to the entrants' services gains a monthly equivalent of $2.33, or 6.2% of her bill, in welfare from competition. These gains accrue primarily from firm differentiation and new plan introductions rather than from price effects. |
| Keywords: | Entry, Nonlinear Pricing, Telecommunications, Discrete/Continuous Demand |
| JEL: | D43 K23 L11 L13 L96 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0748&r=mic |
| By: | Catherine Tucker (MIT Marketing); Juanjuan Zhang (http://jjzhang.scripts.mit.edu); |
| Abstract: | This paper highlights how the provision of information about user participation can serve as a strategic marketing tool for firms seeking to grow two-sided exchange networks. A two-sided exchange network is a business model (such as Ebay or Craiglist) where revenue is generated from persuading people to buy and sell items through that particular exchange. It is not immediately clear whether broadcasting information about the number of sellers will grow further seller participation. On the one hand, a strong rival presence may dissipate payoff (a ``congestion effect''). On the other hand, a large number of rivals may signal high buyer demand (a ``cross-platform effect''). We use field experiment data from a B2B web site that brings together buyers and sellers of used equipment and real estate. Before each seller made a posting request, the web site randomized whether to disclose the number of buyers and/or sellers, and the exact number to disclose. We find that when presented together with the number of buyers, a larger number of sellers makes sellers less likely to list their products, indicating a negative congestion effect. However, when the number of sellers is presented in isolation, its negative impact on entry is significantly reduced, indicating a positive cross-platform effect. Higher buyer search intensity amplifies the moderating role of demand uncertainty. The results suggest that information on the number of users can be an effective tool to grow two-sided networks but should be used strategically. A network can attract more users by advertising dense competition when demand is not transparent, especially in search-intensive markets. |
| Keywords: | Network Effects, Local Networks, Stability, Option-Value |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0812&r=mic |
| By: | Alexei Alexandrov (Simon Graduate School of Business, University of Rochester); ; |
| Abstract: | I examine interconnection decisions of differentiated firms. I find that previous results that firms never interconnect enough do not hold. In a Hotelling model consumers may suffer from interconnection, and firms may interconnect when it is not socially optimal. The firms interconnect too much when the network effects are steeper - this makes firms compete much less aggressively after interconnection, raising prices for consumers and profits for firms. Price and profit rise results holds under quality and installed base asymmetries, or only some firms in the industry interconnecting. More dimensions of differentiation make interconnection less attractive. |
| Keywords: | network effects, interconnection, oligopoly, product differentiation |
| JEL: | D43 L15 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0807&r=mic |
| By: | Robert Seamans (Haas School of Business, UC Berkeley); ; |
| Abstract: | This paper links empirical literature on the use of price as an entry deterring mechanism with literature on the effect of multi-market contact on competition. The analysis uses a dataset of cable TV system prices to provide evidence that incumbent cable TV firms use price to deter entry by telecom overbuilders as well as cities with municipal utilities. There is also some evidence that multi-market contact with telecom overbuilders results in lower prices. However, there is no evidence that incumbents use price to deter cable overbuilders. In addition to linking entry deterrence with multi-market contact, this study has two other unique features. First, it establishes entry deterrence using two techniques, one of which relies on theory by Ellison and Ellison (2008) on non-monotonic price decreases in response to entry probability. Second, it uses detailed price and channel data at the service tier level. |
| Keywords: | price, entry, public enterprises, multi-market contact |
| JEL: | L11 L13 L32 L82 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0813&r=mic |
| By: | Ramon Casadesus-Masanell (Harvard Business School); Francisco Ruiz-Aliseda (Universitat Pompeu Fabra); |
| Abstract: | In their seminal 1985 paper, Katz and Shapiro study systems compatibility in settings with one-sided platforms and direct network effects. We consider systems compatibility when competing platforms are two-sided and there are indirect network effects to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. Specifically, we model competitive interaction between two platform providers that act as intermediaries between developers of platform-based products (applications) and users of such products. We show that the unique equilibrium under platform compatibility leads to higher profits than the symmetric equilibrium under incompatibility. Notwithstanding, incompatibility naturally gives rise to asymmetric equilibria with a dominant platform that captures all users and earns more than under compatibility. Our model allows a detailed analysis of social efficiency, and we show that entry by developers is socially excessive (insufficient) if competing platforms are compatible (incompatible). We conclude that while society would be better off if platforms were compatible, the quest for market dominance by competing platform providers prevents them from agreeing to a common standard. |
| Keywords: | Two-sided Platforms, Incompatibility, Network Externalities, Market Dominance, Tipping, Pricing Structure |
| JEL: | L11 L15 L40 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0832&r=mic |
| By: | Gaetan de Rassenfosse; Bruno van Pottelsberghe de la Potterie |
| Abstract: | This paper investigates whether patent counts can be taken as indicators of macroeconomic innovation performance. The empirical model explicitly accounts for the two components of patenting output: research productivity and patent propensity. The empirical analysis aims at explaining the `correct' number of priority filings in 34 countries. It confirms that the two components play a substantial role as witnessed by the impact of the design of several policies, namely education, intellectual property and science and technology policies. A major policy implication relates to the design of patent systems, which ultimately induces, or allows for, aggressive patenting strategies. |
| Keywords: | education policy; patent policy; propensity to patent; R&D productivity; S&T policy |
| JEL: | O30 O38 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2008_007&r=mic |
| By: | Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência and IST); João Vareda (Autoridade da Concorrência and Universidade Nova de Lisboa) |
| Abstract: | We analyze the incentives of a telecommunications incumbent to invest and give access to a downstream entrant to a next generation network. We model the industry as a duopoly, where a vertically integrated incumbent and a downstream entrant, that requires access to the incumbent's network, compete on Hotelling's line. The incumbent can invest in the deployment of a NGN that improves the quality of the retail services. Access to the old network is regulated, but access to the new network is not. If the innovation is drastic, the incumbent always invests in the NGN, but does not give access to the entrant. If the innovation is non-drastic and if the access price to the old network is low, the incumbent voluntarily gives access to the NGN. If the innovation is non-drastic, there is no monotonic relation between the access price to the old network and the incumbent's incentives to invest. A regulatory moratorium emerges as socially optimal, if the innovation is large but non-drastic. We also analyze the case where both firms can invest in the deployment of a NGN. |
| Keywords: | Next Generation Networks, Investment, Access, Regulation |
| JEL: | L43 L51 L96 L98 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0810&r=mic |
| By: | Miklos-Thal, Jeanine |
| Abstract: | Cost asymmetry is generally thought to hinder collusion because a more efficient firm has both more to gain from a deviation and less to fear from retaliation than less efficient firms. Our paper reexamines this conventional wisdom and characterizes optimal collusion without any prior restriction on the class of strategies. We first stress that firms can credibly agree on retaliation schemes that maximally punish even the most efficient firm. This implies that whenever collusion is sustainable under cost symmetry, some collusion is also sustainable under cost asymmetry; efficient collusion, however, remains more di¢ cult to sustain when costs are asymmetric. Finally, we show that, in the presence of side payments, cost asymmetry generally facilitates collusion. |
| Keywords: | horizontal collusion; cost asymmetry; optimal punishments; side payments |
| JEL: | L13 L41 C72 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11044&r=mic |
| By: | Pehr-Johan Norbäck (Research Institute of Industrial Economics (IFN)); Lars Persson (Research Institute of Industrial Economics (IFN)); Joacim Tåg (Research Institute of Industrial Economics (IFN)) |
| Abstract: | In this paper, we study entrepreneurial innovations in an industry characterized by network effects. We show that the presence of network externalities tends to make the entrepreneur prefer sale to entry. Moreover, we also show that the incentive to innovate for entry decreases when network effects become stronger, whereas there is an increase in the incentive for innovation for sale. Moreover, we show that increasing the degree of industry-wide standardization furthers the goal of increasing entry by entrepreneurs. However, this may come at the cost of reducing the research intensity by reducing the bidding competition among incumbents over the innovations of entrepreneurs. |
| Keywords: | Entrepreneurship, Entry, Compatibility, Innovation, Network Effects, Standardization. |
| JEL: | D40 L10 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0802&r=mic |