nep-mic New Economics Papers
on Microeconomics
Issue of 2008‒11‒04
fifteen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. User Innovation in SMEs: Incidence and Transfer to Producers By Jeroen de Jong; Eric von Hippel
  2. The Effect of R&D Subsidies on Private R&D: Evidence from Italian Manufacturing Data By Oliviero A. Carboni
  3. A model of airport slot allocation with posted prices By Nicolas Gruyer; Kevin Guittet
  4. Brain drain, R&D-cost differentials and the innovation gap By Fabio Mariani
  5. Market Entry in E-Commerce By Maximilian Kasy; Michael Kummer
  6. Searching for Innovations ? The Technological Determinants of Acquisitions in the Pharmaceutical Industry By Gautier Duflos; Etienne Pfister
  7. Competition and the Ratchet Effect By Gary Charness; Marie-Claire Villeval; Peter Kuhn
  8. Environmental Taxes and Industry Monopolization By de Vries, Frans P.; Schoonbeek, Lambert
  9. Market Penetration and Late Entry in Mobile Telephony By Steffen Hoernig
  10. Taste for Variety and Endogenous Fluctuations in a Monopolistic Competition Model By Thomas Seegmuller
  11. A SSNIP test for two-sided markets: the case of media By Lapo Filistrucchi
  12. Complementary Patents and Market Structure By Klaus M. Schmidt;
  13. Decentralized Pricing in Minimum Cost Spanning Trees By Jens Leth Hougaard; Hervé Moulin; Lars Peter Østerdal
  14. International Competition and U.S. R&D Subsidies: A Quantitative Welfare Analysis By Giammario Impullitti
  15. Bigger is better: Market size, demand elasticity and innovation By Klaus Desmet; Stephen L. Parente

  1. By: Jeroen de Jong; Eric von Hippel
    Abstract: The contribution of this paper is threefold. Firstly, we measure the incidence of user innovation in a broad sample of firms. Previous work has collected repeated evidence on the frequency of user innovation in a variety of industries and products, but so far its incidence has not been demonstrated in samples of larger business populations. Secondly, we assess if current innovation surveys adequately capture user innovation. Surveys such as the CIS (Community Innovation Survey) take a producer perspective and seem to overlook that in practice many innovation efforts are done by users to satisfy their process needs. Thirdly, we explore to what extent user innovations are transferred to producer firms. In doing so we assess if user innovation is marked by voluntary spillovers which is a strong argument to justify policies for user innovation. Drawing on survey data of 2 416 SMEs in the Netherlands, we find that 21% of all SMEs engage in user innovation, i.e. they develop and/or significantly modify existing techniques, equipment or software to satisfy their own process-related needs. We also find that user innovation is remains largely invisible in the current innovation surveys. Next, in a survey of technology-based small firms in the Netherlands we identified 364 specific user innovations. We found that users tend not to patent or protect their innovations, and that one out of four is transferred to producers. The data suggest a significant feedstock of voluntary knowledge spillovers from users to producer firms. We conclude that future innovation surveys should explicitly capture user innovation, and develop some recommendations to guide this effort. We also plea for more research on policies for user innovation.
    Date: 2008–10–21
  2. By: Oliviero A. Carboni
    Abstract: This paper uses a comprehensive firm level data set for the manufacturing sector in Italy to investigate the effect of government support on privately financed R&D expenditure. Estimates from a two-step equation model suggest that public assistance has a positive effect on private R&D investment. A non parametric matching procedure is also used to investigate the same effect. Here again the results suggest that the recipient firms achieve more private R&D than they would have without public support. The paper also examines whether public funding effects the financial sources available for R&D and finds that grants encourage credit financing for R&D. The effects on the use of internal sources are not conclusive.
    Keywords: Applied Econometrics, matching, public subsidies, R&D investment
    JEL: C24 L10 O30 O31 O38
    Date: 2008
  3. By: Nicolas Gruyer (LEEA (air transport economics laboratory), ENAC); Kevin Guittet (DSNA/DTI/R&D)
    Abstract: In this paper, we study the impact of the introduction of posted prices in the slot allocation process currently in use at congested airports in most European countries. In particular, we show that if the airport is initially saturated, while low level of slot prices entail no response from the airlines, requests for slots ”suddenly and violently” drop when the price reaches a certain threshold. In general, there is therefore no market clearing price for airport slots. We also present a dynamic model which highlights how the current grandfather rule - stating that slots used today are kept in the future - generates baby-sitting, that is airlines requiring and using slots today just because they expect them to be profitable in the future.
    Keywords: Capacity-constrained competition, airport slots
    JEL: D21 L10 L93
    Date: 2008–10–29
  4. By: Fabio Mariani (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This paper aims at explaining why countries with comparable levels of education still experience notable differences in terms of R&D and innovation. High-skilled migration, ultimately linked to differences in R&D costs, might be responsible for the persistence of such a gap. In fact, in a model where human capital accumulation and innovation are strategic complements, we show that allowing labor outflows may strengthen educational incentives in the lagging economy if migration is probabilistic in nature, but at the same time reduces the share of innovative production. Income (growth) might be consequently affected, and a positive migration chance is very unlikely to act as a substitute for educational subsidies.
    Keywords: Innovation; Education; Brain drain.
    Date: 2008
  5. By: Maximilian Kasy (UC-Berkeley, Department of Economics); Michael Kummer (Johannes Keppler University, Linz, Austria)
    Abstract: We analyze the behavior of start-ups in e-commerce, namely on Austria's leading price-comparison-site, a multi-product environment with almost complete information. We use weekly panel data on price-quotes of digicams, Audio/HiFi-equipment and hardware. We furthermore use advanced estimation methods, which, having only recently been introduced to IO, aim at using a minimum of modeling assumptions. Thus, being able to trace the behavior of roughly 350 start-up companies and 600 incumbents, we investigate whether start-ups have a different composition of product-portfolios, charge lower prices and offer fewer goods.
    Keywords: nonparametric estimation, panel data, start-up, entry, e-commerce, strategic behavior, pricing
    JEL: C14 C23 L11 L14 L81
    Date: 2008–09
  6. 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 d'Économie de Paris); 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
  7. By: Gary Charness (Department of Economics - University of California, Santa Barbara); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Peter Kuhn (Department of Economics, University of California - University of California, Santa Barbara)
    Abstract: The ‘ratchet effect’ refers to a situation where a principal uses private information that is revealed by an agent’s early actions to the agent’s later disadvantage, in a context where binding multi-period contracts are not enforceable. In a simple, context-rich environment, we experimentally study the robustness of the ratchet effect to the introduction of ex post competition for principals or agents. While we do observe substantial and significant ratchet effects in the baseline (no competition) case of our model, we find that ratchet behavior is nearly eliminated by labor-market competition ; interestingly this is true regardless of whether market conditions favor principals or agents.
    Keywords: Ratchet effect, competition, experiment, private information, labor markets
    Date: 2008
  8. By: de Vries, Frans P.; Schoonbeek, Lambert
    Abstract: This paper considers a market with an incumbent monopolistic firm and a potential entrant. Production by both firms causes polluting emissions. The government selects a tax per unit emission by maximizing social welfare. The size of the tax rate affects whether or not the potential entrant enters the market. We identify the conditions that create a market structure where the preferences of the government and the incumbent firm coincide. Interestingly, there are cases where both the government and incumbent firm prefer a monopoly. Hence, the government might induce profitable monopolization by using a socially optimal tax policy instrument.
    Keywords: market structure; taxes; monopoly; environmental pollution
    Date: 2008–09
  9. By: Steffen Hoernig (School of Economics, Universidade Nova de Lisboa)
    Abstract: We consider some two dynamic models of entry in mobile telephony, with and without strategic pricing, and taking into account market penetration at entry, locked-in consumers and tariff-mediated network externalities. We show that on/off-net differentials may reduce the possibility of entry if incumbents are large, while they have no long-run effects if there are no locked-in consumers, or reduce the difference in subscriber numbers in their presence. Asymmetric fixed-to-mobile or mobile-to-mobile termination rates increase (decrease) market share and profit of the network with the higher (lower) rate. While the fixed-to-mobile waterbed effect is not full at the network level, it will be full in the aggregate.
    Keywords: Mobile Telephony, Entry, Penetration, Mobile termination rates
    JEL: L13 L51 L96
    Date: 2008–10
  10. By: Thomas Seegmuller (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 d'Économie de Paris)
    Abstract: In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost), and monopoly profits affect the occurrence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety due to endogenous product diversity. Introducing monopolistic competition (Dixit and Stiglitz (1977), Bénassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity, which has a direct influence on the real wage and the real interest rate.
    Keywords: Endogenous fluctuations; taste for variety; imperfect competition.
    Date: 2008
  11. By: Lapo Filistrucchi (Department of Economics, CentEr & TILEC, Tilburg University)
    Abstract: I discuss the design and implementation of a SSNIP test in order to identify the relevant market in a media market. I argue that in such a two-sided market the traditional SSNIP test cannot be applied as it is usually conceived but rather should be modified in order to take into account indirect network externalities. I discuss the issues of which price the hypothetical monopolist should be thought of as raising, of whether we should look at profits changes on only one side or on both sides of the market and of which feedback among the two sides of the market we should take into account. I then derive the relevant formulas for Critical Loss Analysis. These look much uglier than in a single-sided market but in fact they are easy to calculate as they are still expressed in terms of elasticities and of current observed markups, prices and quantities. Data requirements are however higher as one needs to estimate the matrixes of the own and cross price elasticities of demand on the two-sides of the market and the matrixes of the network effects. The paper fills a gap in the economic literature, so much more as market definition in media markets is at the centre of many recent competition policy and regulation cases around the world.
    Keywords: two-sided markets, SSNIP test, Hypothetical Monopolist test, critical loss analysis, critical elasticity analysis, market definition, media
    JEL: L40 L50 K20
    Date: 2008–10
  12. By: Klaus M. Schmidt; (Department of Economics, University of Munich, Ludwigstrasse 28, D-80539 Muenchen, Germany; )
    Abstract: Many high technology goods are based on standards that require access to several patents that are owned by different IP holders. We investigate the royalties chosen by IP holders under different market structures. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders (or a patent pool) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always encourages entry and innovation.
    Keywords: IP rights, complementary patents, standards, licensing, patent pool, vertical integration
    JEL: L15 O31 L24 O32 K11
    Date: 2008–09
  13. By: Jens Leth Hougaard (Department of Food and Resource Economics, University of Copenhagen); Hervé Moulin (Department of Economics, Rice University); Lars Peter Østerdal (Department of Economics, University of Copenhagen)
    Abstract: In the minimum cost spanning tree model we consider decentralized pricing rules, i.e. rules that cover at least the efficient cost while the price charged to each user only depends upon his own connection costs. We define a canonical pricing rule and provide two axiomatic characterizations. First, the canonical pricing rule is the smallest among those that improve upon the Stand Alone bound, and are either superadditive or piece-wise linear in connection costs. Our second, direct characterization relies on two simple properties highlighting the special role of the source cost.
    Keywords: pricing rules; minimum cost spanning trees; canonical pricing rule; stand-alone cost; decentralization
    Date: 2008–10
  14. By: Giammario Impullitti
    Abstract: The geographical distribution of R&D investment changes dramatically in the 1970s and 1980s. In the early 1970s U.S. firms are the uncontested world leaders in R&D investment in most manufacturing sectors. Later, led by Japan and Europe, foreign firms start challenging American R&D leadership in many sectors of the economy. In this period of increasing competition we also observe a substantial increase in the U.S. R&D subsidy. In a version of the multi-country quality ladder growth model I study the effects of foreign R&D competition on domestic welfare and on the optimal R&D subsidy. I build a new empirical index of international R&D rivalry that can be used to perform quantitative analysis in this type of frameworks. In a calibrated version of the model I focus on the period 1979-1991 and perform the following quantitative exercises: first, I evaluate the quantitative effects of the observed increase in foreign R&D competition on U.S. welfare. I find that the positive growth effect and the negative business-stealing effect of foreign competition on U.S. welfare substantially balance each other, and the overall welfare effect of competition is negligible - less then 1 percent of per-capita consumption. Moreover, using estimates of the effective U.S. R&D subsidy rate, I compute the distance from optimality of the observed subsidy at each level of competition. I find that international competition increases the optimal subsidy and that, surprisingly, the U.S. subsidy observed in the data is fairly close to the optimal subsidy.
    Date: 2008–06
  15. By: Klaus Desmet (Universidad Carlos III); Stephen L. Parente (University of Illinois)
    Abstract: This paper proposes a novel mechanism whereby larger markets increase competition and facilitate process innovation. Larger markets, in the sense of more people or more open trade, support a larger variety of goods, resulting in a more crowded product space. This raises the price elasticity of demand and lowers mark-ups. Firms, therefore, become larger to break even. This facilitates process innovation as larger firms can amortize R&D costs over more goods. We demonstrate this mechanism in a standard model of process and product innovation. In doing so, we question some important results in the new trade and endogenous growth literatures.
    Keywords: trade; population; price elasticity; competition; innovation; firm-size; scale effects; Dixit-Stiglitz; Hotelling
    JEL: F12 L11 O31
    Date: 2008–10–27

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