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on Microeconomics |
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Issue of 2009‒01‒10
twelve papers chosen by Joao Carlos Correia Leitao Technical University of Lisbon |
| By: | Ilir Maçi; Kresimir Zigic |
| Abstract: | We study the potential loss in social welfare and changes in incentives to invest in R&D that result when the market leading firm is deprived of its position. We show that under plausible assumptions like free entry or repeated market interactions there is a social value of market leadership and its mechanical removal by means of competition policy is likely to be harmful for society. |
| Keywords: | Market leaders, Competition policy, Innovation. |
| JEL: | F12 F13 L11 L13 L16 K21 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp375&r=mic |
| By: | Zhou, Jidong |
| Abstract: | This paper extends Armstrong, Vickers, and Zhou (2007) to the case with multiple prominent firms. All consumers first search among prominent firms, and if their products are not satisfactory, they continue to search among non-prominent ones. Prominent firms will charge a lower price than their non-prominent rivals as in the case with a single prominent firm, but relative to the situation without any prominent firm, the presence of more than one prominent firm can induce all firms to raise their prices. We also characterize how market prices and welfare vary with the number of prominent firms. |
| Keywords: | consumer search; marketing; prominence; product differentiation |
| JEL: | L13 D83 D43 |
| Date: | 2009–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12554&r=mic |
| By: | Kresimir Zigic |
| Abstract: | Allowing for endogenous entry in the traditional Stackelberg setup with product differentiation, leads to reverting of the standard comparative static and limiting results. Unlike in the standard Stackelberg setup with barriers to entry, the leader's profit increases when the differentiation becomes lower. The reason is that competition becomes tougher when products become more alike, and consequently, fewer firms enter in equilibrium. On the other hand, increasing product differentiation towards its limit results in number of entrants tending to infinity and for very large market, the profit of the leader approaches zero. Thus market structure approaches monopolistic competition, rather than the standard monopoly outcome that occurs with exogenous number of followers. |
| Keywords: | Stackelberg leadership, product differentiation, endogenous entry. |
| JEL: | L1 D43 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp369&r=mic |
| By: | Fumiko Hayashi; Zhu Wang |
| Abstract: | This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-14&r=mic |
| By: | Brita Bye, Taran Fæhn, and Leo A. Grünfeld (Statistics Norway) |
| Abstract: | Research and development (R&D) play a pivotal role for innovation and productivity growth, and knowledge spillovers can make the case for public support to private R&D. In small and open economies, absorption of foreign knowledge through exports and imports can be even more decisive for economic growth than domestic innovation. This macro economic analysis investigates how policies should be formed in order to reap the largest productivity effects, when both these sources of growth interplay. In particular, the firms’ capacity to absorb knowledge from abroad depends on domestic R&D, and this reinforces the efficiency arguments for stimulating R&D. We find that from a welfare perspective, export promotion of R&D-based technologies proves slightly more efficient than R&D support. |
| Keywords: | Absorptive capacity; Computable general equilibrium model; Endogenous growth; Research and Development; Spillovers; Two faces of R&D. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:572&r=mic |
| By: | J. David Brown; Julie L. Hotchkiss; Myriam Quispe-Agnoli |
| Abstract: | Do firms employing undocumented workers have a competitive advantage? Using administrative data from the state of Georgia, this paper investigates the incidence of undocumented worker employment across firms and how it affects firm survival. Firms are found to engage in herding behavior, being more likely to employ undocumented workers if competitors do. Rivals' undocumented employment harms firms' ability to survive while firms' own undocumented employment strongly enhances their survival prospects. This finding suggests that firms enjoy cost savings from employing lower-paid undocumented at workers wages less than their marginal revenue product. The herding behavior and competitive effects are found to be much weaker in geographically broad product markets, where firms have the option to shift labor-intensive production out of state or abroad. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-28&r=mic |
| By: | Gay, Brigitte |
| Abstract: | Today a plethora of inter-company alliances exists. Firms have networked value chains, disclosing consequently their strategy, which assets are internalized or externalized, and their ability to cope with fast change. The picture of all interfirm alliances in high tech sectors is that of an unstable complex network, or macrostructure, that evolves quickly and into which firms are differently entwined. Structural metrics borrowed from network research in sociology such as centrality and constraint (or lack of “structural holes”) can be used to assess dynamically a firm’s position in the macro structure and therefore the market: does the firm occupy a dominant or dominated position in an industry? How do its partners and competitors perform? Drawing also from recent theories on complex networks developed by statistical physicists, we show that firms are embedded in dynamic complex networks that have a ‘scale-free’ format, with only a few firms or “hubs” controlling the system, as well as a cohesive or ‘small-world’ structure. This small-world structure, which allows rapid diffusion of innovation along very short paths, also constrains firms continuously and can lead to a fast reversal of their position on the market. Taking as an example a major sector of the biopharmaceutical industry, this study offers insights for managers to assess effectively their environment and navigate under constant pressure within these ever-changing networks. |
| Keywords: | Innovation; alliances; structural holes; centrality; complex networks; small world |
| JEL: | L65 L14 L24 O3 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12525&r=mic |
| By: | Daniel Levy; Georg Müller; Haipeng (Allan) Chen; Mark Bergen; Shantanu Dutta |
| Abstract: | The Thanksgiving-Christmas holiday period is a major sales period for US retailers. Due to higher store traffic, tasks such as restocking shelves, handling customers’ questions and inquiries, running cash registers, cleaning, and bagging, become more urgent during holidays. As a result, the holiday-period opportunity cost of price adjustment may increase dramatically for retail stores, which should lead to greater price rigidity during holidays. We test this prediction using weekly retail scanner price data from a major Midwestern supermarket chain. We find that indeed, prices are more rigid during holiday periods than non-holiday periods. We argue that this rigidity is best explained by higher price adjustment costs the retailers face during the holiday periods. Our data provides a natural experiment for studying variation in price rigidity because most aspects of market environment such as market structure, industry concentration, the nature of long-term relationships, contractual arrangements, etc., do not vary between holiday and non-holiday periods. We, therefore, are able to rule out these commonly used alternative explanations for the price rigidity. |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0802&r=mic |
| By: | Masters, William A.; Delbecq, Benoit |
| Abstract: | "This paper describes how governments and philanthropic donors could drive innovation through a new kind of technology contest. We begin by reviewing the history of technology prizes, which operate alongside private intellectual property rights and public R&D to accelerate and guide productivity growth towards otherwise-neglected social goals. Proportional “prize rewards” would modify the traditional winner-take-all approach, by dividing available funds among multiple winners in proportion to measured achievement. This approach would provide a royalty-like payment for incremental success. The paper provides concludes with a specific example for how such prizes could be implemented to reward and help scale up successful innovations in African agriculture, through payments to innovators in proportion to the value created by their technologies after adoption. " from authors' abstract |
| Keywords: | Productivity growth, Technology adoption, intellectual property, Agricultural R&D, Innovation, |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:835&r=mic |
| By: | Oliver Hart; Bengt Holmstrom |
| Abstract: | The existing literature on firms, based on incomplete contracts and property rights, emphasizes that the ownership of assets - and thereby firm boundaries - is determined in such a way as to encourage relationship-specific investments by the appropriate parties. It is generally accepted that this approach applies to owner-managed firms better than to large companies. In this paper, we attempt to broaden the scope of the property rights approach by developing a simple model with three key ingredients: (a) decision rights can be transferred ex ante through ownership, (b) managers (and possibly workers) enjoy private benefits that are non-transferable, and (c) owners can divert a firm's profit. In our basic model decisions are ex post non-contractible; in an extension we use the idea that contracts are reference points to relax this assumption. We show that firm boundaries matter. Nonintegrated firms fail to account for the external effects that their decisions have on other firms. An integrated firm can internalize such externalities, but it does not put enough weight on the private benefits of managers and workers. We explore this tradeoff in a model that focuses on the difficulties companies face in cooperating through the market if the benefits from cooperation are unevenly divided; therefore, they may sometimes end up merging. We show that the assumption that contracts are reference points introduces a friction that permits an analysis of delegation. |
| JEL: | D23 L23 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14613&r=mic |
| By: | Luis Cabral; Zhu Wang |
| Abstract: | We develop a “passive learning” model of firm entry by spin-off: firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a lowproductivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-off (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding “covenant not to compete” laws |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-15&r=mic |
| By: | James McAndrews; Zhu Wang |
| Abstract: | This paper provides a new theory for two-sided payment card markets by positing better microfoundations. Adopting payment cards by consumers and merchants requires a fixed cost, but yields lower marginal costs of making payments. Considering this together with the heterogeneity of consumer income and merchant size, our theory derives card adoption and usage pattern consistent with cross-section and time-series evidence. Our analyses also help explain the observed card pricing pattern, particularly the rising merchant (interchange) fees over time. This is because a private card network, besides internalizing the two-sided market externality, has the incentive to inflate the card transaction value. We show that privately determined card pricing, adoption and usage tend to deviate from the social optimum, and imposing a ceiling on interchange fees may improve consumer welfare. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp08-12&r=mic |