nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒01‒03
twenty-one papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Labor Pooling in R&D Intensive Industries By Gerlach, Heiko A.; Rønde, Thomas; Stahl, Konrad
  2. The Effect of Entry on R&D Investment of Leaders: Theory and Empirical Evidence By Czarnitzki, Dirk; Etro, Federico Gabriele; Kraft, Kornelius
  3. Innovation and Productivity in SMEs: Empirical Evidence for Italy By Bronwyn H. Hall; Francesca Lotti; Jacques Mairesse
  4. Price Discrimination between Retailers with and without Market Power By Barick Chung; Eric Rasmusen
  5. Drivers and Effects of Internationalising Innovation by SMEs By Rammer, Christian; Schmiele, Anja
  6. Incentives to Invest and to Give Access to Non-Regulated Next Generation Networks By Duarte Brito; Pedro Pereira; João Vareda
  7. Perfecting Imperfect Competition By Seißer, Goetz
  8. Are Local Milieus the Key to Innovation Performance? By Binz, Hanna L.; Czarnitzki, Dirk
  9. On R&D and the undersupply of emerging versus mature technologies By Tom-Reiel Heggedal
  10. Can Two-Part Tariffs Promote Efficient Investment on Next Generation Networks? By Duarte Brito; Pedro Pereira; João Vareda
  11. Extended RJV cooperation and social welfare By Gianluca Femminis; Gianmaria Martini
  12. The Effects of Experience on Selecting Innovation Projects: Better the Devil You Know By Schmidt, Tobias; Schwiebacher, Franz; Sofka, Wolfgang
  13. Barriers to Entry and Profitability By Heger, Diana; Kraft, Kornelius
  14. The Effects of R&D on Regional Invention and Innovation By Ejermo, Olof; Gråsjö,Urban
  15. Managing Search Strategies for Open Innovation: The Role of Environmental Munificence as well as Internal and External R&D By Sofka, Wolfgang; Grimpe, Christoph
  16. Exclusionary Vertical Contracts with Multiple Entrants By Hiroshi Kitamura
  17. Comparative Advertising: disclosing horizontal match information By Simon P. ANDERSON; Régis RENAULT
  18. Formal and Informal Technology Transfer from Academia to Industry: Complementarity Effects and Innovation Performance By Grimpe, Christoph; Hussinger, Katrin
  19. Innovation and Optimal Punishment, with Antitrust Applications By Keith N. Hylton; Haizhen Lin
  20. An explanation for the inverted-U relationship between competition and innovation By Ferdinand Rauch
  21. Open Innovation in a Global Perspective: What Do Existing Data Tell Us? By Koen De Backer; Vladimir López-Bassols; Catalina Martinez

  1. By: Gerlach, Heiko A.; Rønde, Thomas; Stahl, Konrad
    Abstract: We investigate the interplay between firms’ R&D decisions and labor market competition, and how this influences equilibrium location choices and welfare. Firms engage in risky R&D activities and thus create stochastic product and implied labor demand. Spatial agglomeration is more likely in situations where the innovation step is large and the probability for a firm to be the only innovator is high. When firms agglomerate, they tend to invest more in R&D compared to spatially dispersed firms. Agglomeration is welfare maximizing, because expected labor productivity is higher and firms choose a more efficient, diversified portfolio of R&D projects at the industry level. The latter aspect is ascertained by data from German firms in R&D intensive industries.
    JEL: L13 O32 R12
    Date: 2008
  2. By: Czarnitzki, Dirk; Etro, Federico Gabriele; Kraft, Kornelius
    Abstract: We develop a simple model of competition for the market that shows that, contrary to the Arrow view, endogenous entry threat in a market induces the average firm to invest less in R&D and the incumbent leader to invest more. We test these predictions with a Tobit model based on a unique dataset and survey for the German manufacturing sector (the Mannheim Innovation Panel). We confirm the empirical validity of our predictions and perform a number of robustness test with instrumental variables.
    Keywords: R&D, Entry, Endogenous market structures, Leadership
    JEL: O31 O32
    Date: 2008
  3. By: Bronwyn H. Hall; Francesca Lotti; Jacques Mairesse
    Abstract: Innovation in SMEs exhibits some peculiar features that most traditional indicators of innovation activity do not capture. Therefore, in this paper, we develop a structural model of innovation which incorporates information on innovation success from firm surveys along with the usual R&D expenditures and productivity measures. We then apply the model to data on Italian SMEs from the "Survey on Manufacturing Firms" conducted by Mediocredito-Capitalia covering the period 1995-2003. The model is estimated in steps, following the logic of firms' decisions and outcomes: in the first, R&D intensity is linked to a set of firm and market characteristics. We find that international competition fosters R&D intensity, especially for high-tech firms. Firm size, R&D intensity, along with investment in equipment enhances the likelihood of having both process and product innovation. Both these kinds of innovation have a positive impact on firm's productivity, especially process innovation. Among SMEs, larger and older firms seem to be less productive.
    JEL: D24 L25 L26 O30 O32
    Date: 2008–12
  4. By: Barick Chung (Department of Economics, Chinese University of Hong Kong); Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Some retail markets are more competitive than others. A manufacturer with market power in the wholesale market who sells his product to competing retailers in cities and monopolistic ones in each of various towns must set the wholesale price difference between towns and cities to be smaller than the transportation cost to prevent “grey market” arbitrage. If he uses linear pricing, the town retail price will be even higher than under single-retailer double marginalization. Two-part tariffs do not solve the problem as they would if there were a single retailer, because the wholesale unit price must be higher than marginal cost to prevent arbitrage to the cities. If transportation costs are low, price discrimination is difficult and two- part tariffs come to resemble inefficient linear monopoly pricing. High transportation costs allow greater efficiency in contracting, and this can outweigh the negative direct effect on welfare.
    Keywords: price discrimination, double marginalization, retail network, transportation costs, two-part tariffs, vertical restraints
    JEL: D4 L42 M21
    Date: 2008–10
  5. By: Rammer, Christian; Schmiele, Anja
    Abstract: This paper investigates the drivers and effects of the internationalisation of innovation activities in SMEs based on a large data set of German firms covering the period 2002-2007. We look at different stages of the innovation process (R&D, design, production and sales of new products, and implementation of new processes) and explore the role of internal resources, home market competition and innovationrelated location advantages for an SME’s decision to engage in innovation activities abroad. By linking international innovation activities to firm growth in the home market we try to identify likely internationalisation effects at the firm level. The results show that export experience and experience in knowledge protection are highly important for international innovation activities of SMEs. Fierce home market competition turns out to be rather an obstacle than a driver. High innovation costs stimulate internationalisation of non-R&D innovation activities, and shortage of qualified labour expels production of new products. R&D activities abroad and exports of new products spur firm growth in the home market while there are no negative effects on home market growth from shifting production of new products abroad.
    Keywords: Internationalisation of Innovation, Globalisation, SMEs, Effects of Innovation, Absorptive Capacities, Market Structure
    JEL: F23 L22 L25 O31 O32 O47
    Date: 2008
  6. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência); João Vareda (Autoridade da Concorrência)
    Abstract: We analyze the incentives of a telecommunications incumbent to invest and give access to a downstream entrant to a next generation network, NGN. 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 NGN 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
  7. By: Seißer, Goetz
    Abstract: This paper addresses the reduction of market failure under imperfect competition. It proposes a taxscheme that provides firms with an incentive to forgo their market power: Firms optimize after-tax profits. Now simply consider a firm´s gross profit margin the unique tax-rate it is charged on absolute profits. In theory the firm´s tax-rate would be the mark-up over marginal costs, the firm´s Lerner index. As a result every firm determines its own tax-rate by setting its price and incurring costs. This creates a new trade off for firms between a low tax-burden and the exercising of market power. Welfare for society increases since firms with market power choose a lower price and produce a quantity closer or equal to social optimum; at the original monopolistic price-level they can increase their profits by lowering their tax-burden. Essentially the tax-condition does not seem to distort profit incentives or markets; under perfect competition the tax-rate would be zero. Thus, it is clear that the tax only takes effect when markets work inefficiently and its countervailing nature subsequently helps to remedy inefficiencies of imperfectly competitive markets.
    Keywords: Imperfect competition, market power, tax-condition, monopoly, welfare, efficiency
    JEL: D00 D21 D40 H21 H25 H26 P11
    Date: 2008
  8. By: Binz, Hanna L.; Czarnitzki, Dirk
    Abstract: This study investigates how local milieus foster innovation success in firms. We complement the common practice of linking firm performance indicators to regional characteristics with survey evidence on the perceived importance of locational factors. While the former approach assumes that location characteristics affect all firms in the same way, the survey allows us to model how firms judge the attractiveness of locations using a heterogeneous set of criteria. It turns out that the availability of highly skilled labor and the proximity to suppliers matter for firms’ innovation performance. Interestingly, location factors obtained from the survey provide a more accurate explanation of how local milieus facilitate innovation.
    Keywords: Innovation performance, R&D, location factors, Flanders
    JEL: O31 O38
    Date: 2008
  9. By: Tom-Reiel Heggedal (Statistics Norway)
    Abstract: An important policy question is whether research and development (R&D) in new, emerging technologies should be more subsidized than R&D in other more mature technologies. In this paper I analyze if innovation externalities caused by knowledge spillovers from private firms may warrant a differentiated R&D policy. I find that R&D in emerging and mature technologies should not be subsidized equally. The reason is that R&D in the two technologies is not equally undersupplied in the market due to differences in their knowledge stocks. R&D in the mature technology should be subsidized more when the sum of the output elasticities with respect to labor and knowledge in R&D production is high, while R&D in the emerging technology should be subsidized more when the elasticities are low.
    Keywords: Endogenous growth; Innovation policy; Technological spillovers; Sector-specific R&D.
    JEL: O32 O38
    Date: 2008–12
  10. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência); João Vareda (Autoridade da Concorrência)
    Abstract: We analyze if two-part access tariffs solve the dynamic consistency problem of the regulation of Next Generation Networks. 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 next generation network that improves the quality of the retail services. We have three main results. First, we show that only if the investment cost is low, the regulator can induce investment when he cannot commit to a policy. Second, we show that in this case, two-part tariffs involve payments from the entrant to the incumbent that may be politically unacceptably high. Third, we show that if the regulator can commit to a policy, a regulatory moratorium may emerge as socially optimal.
    Keywords: Next Generation Networks, Investment, Regulation, Dynamic Consistency.
    JEL: L43 L51 L96 L98
    Date: 2008–10
  11. By: Gianluca Femminis (DISCE, Università Cattolica di Milano); Gianmaria Martini (Università di Bergamo)
    Abstract: A wider RJV extension hastens process innovations at the cost of increasing collusion in the final market. In a Cournot model, an extended RJV is welfare enhancing only when the Antitrust Authority is strong, so that the increase in distortion is limited, and when the size of the technical improvement is large, so that the introduction of the innovation is more valuable.
    Keywords: RJV, R&D, collusion
    JEL: L13 L41 O33
    Date: 2008–12
  12. By: Schmidt, Tobias; Schwiebacher, Franz; Sofka, Wolfgang
    Abstract: Innovation success depends heavily on firm’s ability to set priorities and select the most promising options from its project portfolio before the odds of success or failure become visible and reliable. We ask: What does previous innovation experience tell firms about what not to do in the future? With this in mind, we focus on projects that did not materialise or were abandoned - an important building block for choosing and implementing the “right” projects. We suggest two major learning mechanisms. On the one hand, real options theory suggests a process based on financial data. On the other hand, research on absorptive capacities finds that previous innovation experience translates into superior ability to value, extract and exploit external knowledge. We test both hypotheses on an empirical basis for more than 600 German firms, covering innovation activities in the period 1997 to 2005. Our results indicate congruence between firms’ innovation experience and their project selection patterns. Extensive R&D experience materialises as a stock of knowledge that enables firms to judge projects based on knowledge criteria. Non-R&D innovation experience, stemming from producing and introducing products to markets, resonates as decision-making based on economic factors in the future. Both types of innovation experience appear to generate distinct decision-making capabilities inside the firm which are subsequently exploited in selecting projects for the future.
    Keywords: Project selection, real options, absorptive capacity
    JEL: D83 F23 O31 O32
    Date: 2008
  13. By: Heger, Diana; Kraft, Kornelius
    Abstract: Barriers to entry are regarded as major impediments to the working of markets. Entry must not necessarily actually take place - the perceived threat of entry may encourage incumbent firms to behave as if they are in a competitive market, even if they are not. We present empirical evidence on effects of perceived threat of entry on profitability. Using information from managers about how they assess the existence of entry barriers a strong impact of these assessments on profitability is confirmed. The number and the relative size of competitors also exert considerable effects. We find no statistically significant relation between the perceived threat of entry and the actual number of firms if the size of the relevant market is taken into account.
    Keywords: Barriers to Entry, Profitability, Discrete Regression Models
    JEL: C25 L13 L25
    Date: 2008
  14. By: Ejermo, Olof; Gråsjö,Urban
    Abstract: This paper examines the effects of regional R&D on patenting for Sweden within an accessibility framework. We use two measures of patenting: number of patents granted per capita and a composite of quality-adjusted patents which we regard as an innovation indicator, respectively. Three conclusions emerge. First, we find that the specification where innovations per capita is used as a dependent variable performs much better than with granted patents per capita for capturing relationships with regional R&D. In fact, quantile regressions over the distribution of different patenting and innovation levels per capita show that R&D efforts within regions affect innovations per capita positively, except for the regions with the lowest levels of R&D. The effects on granted patents per capita are less robust and depend inconsistently on the level of R&D. Secondly, accessibility to inter-regional R&D do not affect innovation significantly in our results, which suggests that effects are locally bounded. This implies that studies of the R&D-innovation relationship are plagued by misspecification, since studies tend to show that R&D-effects diffuse to other regions. This is also the case in our study; the inter-regional effects are an important factor for granted patents. Third, the share of university R&D of all regional R&D has no effect on patenting, which suggests that the two types of R&D are substitutes. In view of these results the recommendation must be to use quality-adjusted patents for regional innovation studies rather than patent grants.
    Keywords: R&D, patenting, innovations, regions, spatial dependence.
    JEL: O31 O32 O33 O34 O38 N5 O47 R58
    Date: 2008
  15. By: Sofka, Wolfgang; Grimpe, Christoph
    Abstract: Firms compete increasingly in an open innovation environment. Search strategies for external knowledge become therefore crucial for firm success. Existing research differentiates between the breadth (diversity) and depth (intensity) with which firms pursue external knowledge source. A consensus exists that resource constrains force firms to balance both dimensions. However, relatively little is known on how managers can selectively strengthen one of these dimensions. We argue conceptually that the breadth and depth of a search strategy depends upon the nature of a firm’s absorptive capacity (i.e. whether they are built through internal or external R&D activities) and the munificence of its innovation environment. We test these hypotheses empirically for a large sample of more than 8,300 firms from 12 European countries. Our empirical results show that in-house R&D strengthens the depth of a firm’s search strategy while external R&D activities (e.g. contract research) increase its breadth. Moreover, we find that scarce innovation environments favor deep search strategies while breadth is more prevalent in munificent environments. We develop targeted management recommendations based on these results.
    Keywords: Open innovation, absorptive capacity, search strategies
    JEL: L60 O32
    Date: 2008
  16. By: Hiroshi Kitamura (Graduate School of Economics, Osaka University)
    Abstract: This paper constructs a model of anticompetitive exclusive dealing in the presence of multiple entrants. Unlike a single-entrant model in the extant literature, an entrant competes not only with the incumbent to deal with buyers but also with other entrants. The competition among entrants then plays the role of commitment such that low wholesale prices are offered to buyers when they deviate from exclusive contracts. We argue that this commitment effect becomes a barrier to exclusive dealing and that the results differ drastically from the predictions of the single-entrant framework.
    Keywords: Vertical Relation; Exclusive Dealing; Multiple Entrants; Antitrust Policy.
    JEL: L12 L41 L42
    Date: 2008–12
  17. By: Simon P. ANDERSON (Department of Economics, University of Virginia); Régis RENAULT (THEMA, University of Cergy-Pontoise)
    Abstract: Improved consumer information about (symmetric) products can lead to better matching but also higher prices, so consumer surplus can go up or down, while profits rise. With enough firm asymmetry though, the stronger firm's price falls with more information, so both effects benefit consumers. This is when comparative advertising is used, against a large firm by a small one. Comparative advertising, as it imparts more information, therefore helps consumers. While it also improves profitability of the small firm, overall welfare goes down because of the large loss to the attacked firm.
    Keywords: comparative advertising, information, product differentiation, quality
    JEL: D42 L15 M37
    Date: 2008
  18. By: Grimpe, Christoph; Hussinger, Katrin
    Abstract: Literature has identified formal and informal channels in university technology transfer. While formal technology transfer typically involves a legal contract on a patent or on collaborative research activities, informal transfer channels refer to personal contacts and hence to the tacit dimension of knowledge transfer. Research is, however, scarce regarding the interaction of formal and informal transfer mechanisms. In this paper, we analyze whether these activities are mutually reinforcing, i.e. complementary. Our analysis is based on a comprehensive dataset of more than 2,000 German manufacturing firms. We perform direct and indirect tests for the complementarity of formal and informal technology transfer. Our results confirm a complementary relationship: using both transfer channels contributes to higher innovation performance. The management of the firm should therefore strive to maintain close informal relationships with universities to realize the full potential of formal technology transfer.
    Keywords: University technology transfer, complementarity, innovation performance
    JEL: L24 O31
    Date: 2008
  19. By: Keith N. Hylton (Boston University Law School); Haizhen Lin (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper modifies the optimal penalty analysis by incorporating investment incentives with external benefits. In the models examined, the recommendation that the optimal penalty should internalize the marginal social harm is no longer valid as a general rule. We focus on antitrust applications. In light of the benefits from innovation, the optimal policy will punish monopolizing firms more leniently than suggested in the standard static model. It may be optimal not to punish the monopolizing firm at all, or to reward the firm rather than punish it. We examine the precise balance between penalty and reward in the optimal punishment scheme.
    Keywords: optimal law enforcement, optimal antitrust penalty, monopolization, innovation, internalization, strict liability, static penalty
    JEL: D42 K14 K21 K42 L41 L43
    Date: 2008–11
  20. By: Ferdinand Rauch
    Abstract: The Dixit-Stiglitz model is extended by the possibility for rms to un- dertake process innovation. The model can provide a new explanation to describe the relationship that research activity of rms is positively corre- lated with product market competition at low levels of competition, and negatively at high levels that has been found in the data. The initial pos- itive relationship is caused by an increased business stealing opportunity with more competition, while the negative eect comes from the reduc- tion of the markup due to higher competition (measured as elasticity of substitution). Also the ambiguous relationship of market entry barriers with respect to research activity is discussed using a less general form of the model. This framework may also be used to explain the inverted-U relationship found between competition and advertising expenditures.
    JEL: L10 O3
    Date: 2008–12
  21. By: Koen De Backer; Vladimir López-Bassols; Catalina Martinez
    Abstract: Open innovation has received a lot of attention in the business management literature and recently also in policy discussions. Until now, most of the empirical evidence has been based on case study work offering detailed insights into some best practices of open innovation in companies’ innovation strategies. While existing large-scale data may offer interesting empirical evidence on open innovation, they have surprisingly not really been analysed in great detail. Especially the increasing importance of open innovation on a global scale in so-called global innovation networks, calls for internationally comparable data on open innovation. This paper presents different indicators using existing data on R&D investments, innovation survey data, patent data and data on licensing, illustrating the increasing importance and the different characteristics of open innovation across companies, industries and countries. <P>L'Innovation ouverte dans une perspective mondiale? : Que nous disent les données disponibles? <BR>L'innovation ouverte a suscité une grande attention dans les travaux publiés sur la gestion d'entreprise,ainsi que dans le cadre des débats récents sur l'action publique. Pour l'heure, la plupart des données empiriques sur le sujet reposent sur des études de cas, offrant des indications précises sur certaines des meilleures pratiques observées en matière d'innovation ouverte dans le cadre des stratégies d'innovation des entreprises. Alors que de vastes ensembles de données pourraient offrir des éléments empiriques intéressants sur l'innovation ouverte, ils n'ont étonnamment pas vraiment été analysés de manière très poussée. Or, compte tenu de l'importance croissante que revêt en particulier l'innovation ouverte à l'échelle mondiale dans le cadre des « réseaux mondiaux d'innovation », il est nécessaire que l'on puisse disposer de données comparables au niveau international sur l'innovation ouverte. Nous présentons dans ce document différents indicateurs fondés sur des données disponibles relatives aux investissements en recherche-développement (R-D), tirées d'enquêtes sur l'innovation, relatives aux brevets et portant sur les concessions de licences, qui illustrent l'importance grandissante et les caractéristiques diverses de l'innovation ouverte dans une multitude d'entreprises, de secteurs d'activité et de pays.
    Date: 2008–12–16

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