nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒10‒28
seventeen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Intense Network Competition By Johan Stennek; Thomas TangerŒs
  2. FDI in Post-Production Services and Product Market Competition By Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
  3. Disentangling Specific Subsets of Innovations : A Micro-Econometric Analysis of their Determinants By Andreas Ziegler
  4. Loyalty inducing programs and competition with homogeneous goods By Nicolás Figueroa; Ronald Fischer; Sebastian Infante
  5. Innovation, Technology Transfer and Labor Productivity Linkages: Evidence from a Panel of Manufacturing Industries By Nicholas Apergis; Claire Economidou; Ioannis Filippidis
  6. Estimating Welfare in Insurance Markets Using Variation in Prices By Liran Einav; Amy Finkelstein; Mark R. Cullen
  7. The Welfare Effects of Tax Competition Reconsidered: Politicians and Political Institutions By Janeba, Eckhard; Schjelderup, Guttorm
  8. Firms' contribution to open source software and the dominant skilled user By Nicolas Jullien; Jean-Benoît Zimmermann
  9. Platform Rules: Multi-Sided Platforms as Regulators By Kevin J. Boudreau; Andrei Hagiu
  10. Competition, bargaining power and pricing in two-sided markets By Wilko Bolt; Kimmo Soramäki
  11. Ethanol: A Welfare-Increasing Market Distortion? By Du, Xiaodong (Sheldon); Hayes, Dermot J.; Baker, Mindy
  12. Network Externalities, Mutuality, and Compatibility By Matthew G. Nagler
  13. Concurrence dans les réseaux et incompatibilité technologique (Competition in networks and technological incompatibility) By Jacques Kiambu
  14. Do Strategic Substitutes Make Better Markets? A Comparison of Bertrand and Cournot Markets By Douglas D. Davis
  15. Impacts of Airports on Airline Competition: Focus on Airport Performance and Airport-Airline Vertical Relations By Tae H. Oum; Xiaowen Fu
  16. Searching for Innovations ? The Technological Determinants of Acquisitions in the Pharmaceutical Industry By Gautier Duflos; Etienne Pfister
  17. Do Menu Costs Make Prices Sticky? By Thomas A. Eife

  1. By: Johan Stennek (Gothenburg University); Thomas TangerŒs (Research Institute of Industrial Economics)
    Abstract: First, we demonstrate how unregulated price setting in mobile telecommunications may lead to monopolization, even when networks are highly substitutable. Second, we demonstrate that a menu of structural rules, including (i) mandatory interconnection, (ii) reciprocal access prices and (iii) a ban on price discrimination of calls to other networks, may restore competition. This regulation requires neither demand data nor information about call costs.
    Keywords: network competition; two-way access; mobile termination rates; network substitutability; entry deterrence
    JEL: L12 L14 L51 L96
    Date: 2008–09
  2. By: Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
    Abstract: Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. A foreign firm faces a higher cost to perform such services than its domestic rival because of the lack of proximity to customers. We explore an international duopoly model in which a foreign firm can reduce its cost for post-production services by foreign direct investment (FDI), or alternatively can outsource such services to its domestic rival. Trade liberalization, if not accompanied by liberalization of service FDI, can hurt domestic consumers and decrease world welfare, but the negative welfare impacts can be mitigated and eventually turned into positive ones as service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is limited compared to the substantial progress already made in trade liberalization.
    Keywords: post-production services, trade liberalization, FDI, outsourcing, international oligopoly
    JEL: F12 F13 F21 F23
    Date: 2008–10
  3. By: Andreas Ziegler (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: Based on a unique firm-level data set from the German manufacturing sector, this paper disentangles environmental and non-environmental product and process innovations. The multivariate probit analysis shows that the various innovation types are determined by different factors. The estimation results suggest a policy mix which comprises the encouragement of R&D activities, certified management systems, and specific management activities referring to environmentally friendly products when the implementation of all innovation types is to be supported.
    Keywords: Product and process innovations, Environmental and non-environmental innovations, Management systems, Multivariate probit models
    JEL: Q55 O31 O32 C35
    Date: 2008–10
  4. By: Nicolás Figueroa; Ronald Fischer; Sebastian Infante
    Abstract: We analyze a market where two firms producing a homogenous good compete by means of two mechanisms: prices and a loyalty bonus. We assume that firms act simultaneously when posting their loyalty bonus and prices. Consumers who purchase from a firmin the first period must return the bonus in case they switch providers in the second period. They fully anticipate the effects on future prices of accepting the bonus and maximize their total surplus over both periods. We first show that there is no equilibrium with prices and bonuses equal to zero. We then show the existence of a SPNE where firms are able to obtain half the monopoly profits using large bonuses in the first period and high prices in the second period. We completely characterize all the symmetric equilibria of the game and show that, in general, firms obtain positive profits even when they compete in prices, the good is homogenous, and consumers are forward-looking. Finally we show that if firms are allowed to discriminate between old and new customers, the standard zero price equilibria reappear. JEL Classification: L13.
    Date: 2008
  5. By: Nicholas Apergis; Claire Economidou; Ioannis Filippidis
    Abstract: The paper explores the linkages between labor productivity, innovation and technology spillovers in a panel of manufacturing industries. The roles of R&D, human capital and international trade are considered in stimulating innovation and/or facilitating technology transfer. Using panel-based unit root tests and cointegration analysis, the results indicate the existence of a single long-run equilibrium relation between labor productivity, innovation and technology transfer. Further, R&D, trade and human capital have statistically and, especially the latter, quantitatively important effects on labor productivity both directly via innovation and indirectly as they enhance technology diffusion.
    Keywords: productivity, innovation, technology transfer, manufacturing industries, panel cointegration.
    JEL: C23 L60 O30
    Date: 2008–10
  6. By: Liran Einav; Amy Finkelstein; Mark R. Cullen
    Abstract: We show how standard consumer and producer theory can be used to estimate welfare in insurance markets with selection. The key observation is that the same price variation needed to identify the demand curve also identifies how costs vary as market participants endogenously respond to price. With estimates of both the demand and cost curves, welfare analysis is straightforward. We illustrate our approach by applying it to the employee health insurance choices at Alcoa, Inc. We detect adverse selection in this setting but estimate that its quantitative welfare implications are small, and not obviously remediable by standard public policy tools.
    JEL: C13 C51 D14 D60 D82 I11
    Date: 2008–10
  7. By: Janeba, Eckhard (Dept. of Economics, University of Mannheim); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: The views on the welfare effects of tax competition differ widely. Some see the fiscal externalities as the cause for underprovision of public goods, while others see tax competition as means to reduce government inefficiencies. Using a comparative politics approach we show that tax competition among presidential-congressional democracies is typically welfare improving, while harmful among parliamentary democracies if under the latter the marginal benefit of the public good is sufficiently high. The results hold when politicians seek re-election because of exogenous benefits of holding office. By contrast, when politicians hold office only to extract rents, tax competition is harmful if politicians are sufficiently patient.
    Keywords: Tax competition; welfare effects; comparative politics approach
    JEL: H24
    Date: 2008–10–17
  8. By: Nicolas Jullien (Marsouin - Telecom Bretagne); Jean-Benoît Zimmermann (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: : Free/libre or open-source software (FLOSS) is nowadays produced not only by individual benevolent developers but, in a growing proportion, by firms that hire programmers for their own objectives of development in open source or for contributing to open-source projects in the context of dedicated communities. A recent literature has focused on the question of the business models explaining how and why firms may draw benefits from such involvement and their connected activities. They can be considered as the building blocks of a new modus operandi of an industry, built on an alternative approach to intellectual property management. Its prospects will depend on both the firms' willingness to rally and its ability to compete with the traditional “proprietary” approach. As a matter of fact, firms' involvement in FLOSS, while growing, remains very contrasting, depending on the nature of the products and the characteristics of the markets. The aim of this paper is to emphasize that, beside factors like the importance of software as a core competence of the firm, the role of users on the related markets - and more precisely their level of skills - may provide a major explanation of such diversity. We introduce the concept of the dominant skilled user and we set up a theoretical model to better understand how it may condition the nature and outcome of the competition between a FLOSS firm and a proprietary firm. We discuss these results in the light of empirical stylized facts drawn from the recent trends in the software industry
    Keywords: Software ; Open Source ; Intellectual Property ; Competition ; Users
    Date: 2008–10–20
  9. By: Kevin J. Boudreau (HEC – Paris School of Management); Andrei Hagiu (Harvard Business School, Strategy Unit)
    Abstract: This paper provides a basic conceptual framework for interpreting non-price instruments used by multi-sided platforms (MSPs) by analogizing MSPs as "private regulators" who regulate access to and interactions around the platform. We present evidence on Facebook, TopCoder, Roppongi Hills and Harvard Business School to document the "regulatory" role played by MSPs. We find MSPs use nuanced combinations of legal, technological, informational and other instruments (including price-setting) to implement desired outcomes. Non-price instruments were very much at the core of MSP strategies.
    Keywords: Platforms, regulation, network effects, distributed innovation
    Date: 2008–10
  10. By: Wilko Bolt; Kimmo Soramäki
    Abstract: We develop a model of two-sided markets that illustrates the role of bargaining power between the two sides of the market. We are interested in the profit maximizing usage fees set by identical duopolistic platforms which engage in homogeneous, Bertrand-type competition. We find that for a sufficiently low marginal cost duopolistic two-sided competition reduces to a “grab-the-dollar” game with two asymmetric (pure) Nash equilibria. These equilibria are characterized by highly skewed prices, in which the side with all the bargaining power pays a minimum price. The other side of the market is used for cross-subsidization and is charged a high price. Compared to the monopoly outcome, competition lowers the total price charged to both sides, although the seller's equilibrium price may exceed the monopoly price. Both platforms enjoy excess profits.Key Words: platform competition, bargaining power, asymmetric equilibria, skewed pricing
    Keywords: platform competition; bargaining power; asymmetric equilibria; skewed pricing
    JEL: E24 E52 J50
    Date: 2008–09
  11. By: Du, Xiaodong (Sheldon); Hayes, Dermot J.; Baker, Mindy
    Abstract: This study estimates the welfare changes for consumers and producers resulting from ethanol production and related support polices in 2007. The results suggest a positive welfare gain from the support policies; this is possible because ethanol subsidies effectively replaced a market distortion that had a larger deadweight loss. Previous farm subsidies created overproduction, which then depressed market prices and increased the cost of maintaining target-price supports. Ethanol polices resulted in additional ethanol production, but because this additional ethanol was sold in price elastic energy markets, the price depressing impact of the government supports was less than before. This resulted in lower government spending and a net welfare gain of $2.65 billion for given market parameters. The results are based on a transparent analytical model of multiple markets including corn, ethanol, gasoline, and transportation fuel. We validate the model’s underlying assumption and test for the results’ sensitivity to assumed parameters.
    Keywords: consumer surplus, ethanol, deadweight loss, subsidy, substitution.
    Date: 2008–10–20
  12. By: Matthew G. Nagler (The City College of New York)
    Abstract: Positive network externalities can arise when consumers benefit from the consumption of compatible products by other consumers (user-positive consumption externalities) or, alternatively, when they incur costs from the consumption of incompatible products by other consumers (nonuser-negative consumption externalities). But whereas user-positive externalities are typically mutually imposed and imply mutual benefit because they relate to interoperability, with nonuser-negative externalities the costs of incompatibility may be imposed unilaterally and borne asymmetrically. For example, increased risks of death and injury on the roads due to the co-existence of large and small vehicles are imposed exclusively by the owners of the large vehicles and borne exclusively by the occupants of the small vehicles. This paper compares the social optimality of incentives for compatibility under regimes involving user-positive and nonuser-negative externalities. Earlier work with respect to user-positive externalities (e.g., Katz and Shapiro, 1985) suggests that firms with relatively small networks or weak reputations tend to be biased in favor of compatibility, while individual firms’ incentives for compatibility are suboptimal when their networks are closely matched in size. Meanwhile, intuition suggests that with nonuser-negative externalities incentives for incompatibility should always be excessive, reflecting the notion that activities involving unilaterally imposed negative externalities will always be overprovided by the market (in the absence of regulation or Coaseian mitigation). Using a “location” model of differentiated products, we find that, under both regimes, incentives for compatibility tend to be suboptimal when firms’ networks are close in size, and excessive for the small firm when the networks differ greatly in size. Surprising public policy implications with respect to externalities are discussed.
    Keywords: network effects, negative externalities, differentiated products, competition, welfare
    JEL: L13 L14 D62 D11
    Date: 2008–10
  13. By: Jacques Kiambu (Department of Economics, Grandiose University)
    Abstract: Nous proposons dans cet article un modèle théorique pour analyser les conséquences de la concurrence dans les réseaux dotés des systèmes technologiques différents. Nous nous inspirons du modèle de Demange-Ponssard (1986), en mettant l’accent sur l'incompatibilité des technologies utilisées par les protagonistes pour analyser la dynamique concurrentielle sur le marché. Dans ce contexte, nous montrons que le marché livré à lui-même sans aucune régulation étatique a pour conséquence l’inefficacité concurrentielle et la dégradation de bien-être collectif. We propose in this paper a theoretical model to analyse the consequences of competition in networks characterised by different technological systems. We draw inspiration from the model of Demange-Ponssard (1986), by putting the emphasis on the incompatibility of technologies used by the protagonists to analyse competitive dynamics on the market. In this context, we show that the functioning of market without any state regulation results in ineffective competition and in the deterioration of the collective welfare.
    Keywords: competition, networks, technological incompatibility, model Demarge Ponssard
    JEL: O14 C50
    Date: 2008–04
  14. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: Recent experiments suggest that games where actions are strategic substitutes rather than strategic complements exhibit some desirable performance characteristics. This paper reports an experiment conducted to test whether these characteristics extend to differentiated product Cournot and Bertrand markets. We find that Cournot markets do not generally outperform Bertrand markets, and that the opposite is often true. Bertrand markets exhibit comparatively higher convergence levels and speeds, particularly when products are close substitutes. Bertrand sellers do engage in more signaling activity than Cournot sellers. Such efforts, however, affect market outcomes only occasionally, and only when products are differentiated. Analysis of individual decisions suggests that the observed differences in convergence levels and speeds are driven by a propensity for sellers to use forecast and inertia anchors as bases for action choices in addition to best replies. Given these propensities, Bertrand markets converge more rapidly and more completely to static Nash predictions, particularly when products are close substitutes, because the differences between the various anchors is smaller in Bertrand markets.
    Keywords: Experiments, Market Concentration, Market Power
    JEL: C9 D4 L4
    Date: 2008–10
  15. By: Tae H. Oum; Xiaowen Fu
    Abstract: This paper examines revenue structure, regulation, and market power of airports, and how they affect airport’s services to airlines and influence the form of vertical relationship between airport and airlines, and thus, eventually on competition in airline markets. In addition, we also examine the competitive consequences of common ownership, coordination or alliance among multiple airports in a region. The key findings are: Concession revenues are of increasing importance to airports. The positive externality of air traffic on the demand for non-aeronautical services, along with competition among both airlines and airports, induces a vertical cooperation between airports and the dominant carrier at the airport. Airports have substantial market power due to the low price elasticity of their aeronautical services. However, such airports’ market power is moderated by competition in both the airline and airport markets. There are benefits for both airports and airlines from entering into long term relationships.
    Date: 2008–09
  16. By: Gautier Duflos (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole des Hautes Etudes en Sciences Sociales - Ecole Normale Supérieure de Paris - ENPC - Université Panthéon-Sorbonne - Paris I - INRA - CNRS); Etienne Pfister (BETA-Règles - Université de Nancy II)
    Abstract: This article analyzes the individual determinants of acquisition activity and target choices in the pharmaceutical industry over the period 1978-2002. The "innovation gap" hypothesis states that acquiring firms lack promising drug compounds and acquire firms with more promising drug prospects. A duration model implemented over a panel of more than 400 firms relates the probabilities of being an purchaser or a target to financial, R&D ant patent data to investigate this explanation more deeply. Results show that purchasers are firms with a lower Tobin's Q and decreasing sales, which could indicate that acquisitions are used to compensate for low internal growth prospects. Firms with a higher proportion of radical patents in their portfolio, especially in pharmaceutical and biothechnological patent classes, face a higher probability of being targeted, indicating that acquiring firms are indeed searching for innovative competencies. However, acquiring firms also present a significant absorptive capacity : their R&D investment increases in the year preceding the operation and their patent stock is larger and more diversified than for non-acquiring firms. Finally, we observe that over the last ten years of the sample period, firms have paid a greater attention to the size of the target's portfolio.
    Keywords: M&A, pharmaceutical, innovations, patent citations.
    Date: 2008–09
  17. By: Thomas A. Eife (University of Heidelberg, Department of Economics)
    Abstract: This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.
    Keywords: menu costs, price stickiness
    JEL: E30
    Date: 2008–10

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