nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒01‒17
twenty papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Comparing Bertrand and Cournot Outcomes in the Presence of Public Firms By Arghya Ghosh; Manipushpak Mitra
  2. Non-comparative versus Comparative Advertising as a Quality Signal By Winand Emons; Claude Fluet
  3. Location of Upstream and Downstream Industries By José Pedro Pontes
  4. Real Option Games with R&D and Learning Spillovers By Martzoukos, Spiros H; Zacharias, Eleftherios
  5. Organizing High-Tech R&D - Secrets of Successful Innovation Alliances By Elad Harison; Heli Koski
  6. Effectiveness of R&D Tax Incentives in Small and Large Enterprises in Quebec By Baghana, Rufin; Mohnen, Pierre
  7. Can open sourcing lead to inferior standards? By Kristian Koerselman
  8. Do Auctions and Forced Divestitures increase Competition? By Adriaan R. Soetevent; Marco A. Haan; Pim Heijnen
  9. Maximal Cartel Pricing and Leniency Programs By Harold Houba; Evgenia Motchenkova; Quan Wen
  10. The model of the linear city under a triangular distribution of consumers: an empirical analysis on price and location of beverage kiosks in Catania By Torrisi, Gianpiero
  11. The momentum for network separation: a guide for regulators By Ricardo Gonçalves; Álvaro Nascimento
  12. On Reputation: A Microfoundation of Contract Enforcement and Price Rigidity By Fehr, Ernst; Brown, Martin; Zehnder, Christian
  13. Prices and Market Structure: An Empirical Analysis of the Supermarket Industry in Chile By Loreto Lira; Magdalena Ugarte; Rodrigo Vergara.
  14. On the Effects of Suggested Prices in Gasoline Markets By Riemer P. Faber; Maarten C.W. Janssen
  15. The Boone-indicator: Identifying different regimes of competition for the American Sugar Refining Company 1890-1914 By Michiel van Leuvensteijn
  16. Conflict in Cross Broader Merges Effect of Firm and Market Size By Poonam Mehra
  18. Vertical Contracts between Airports and Airlines: is there a Trade-off between Welfare and Competitiveness? By Cristina Barbot
  19. Competition among Health Plans: A Two-Sided Market Approach By David Bardey; Jean-Charles Rochet
  20. R&D policy in Economies with Endogenous Growth and Non Renewable Resources By Betty Agnani; Mª José Gutiérrez; Amaia Iza

  1. By: Arghya Ghosh (School of Economics, The University of New South Wales); Manipushpak Mitra (Indian Statistical Institute)
    Abstract: We revisit the classic comparison between Bertrand and Cournot outcomes in a mixed market with private and public firms. A departure from the standard setting, i.e., one where all firms maximize profits, provides new insights. A welfare-maximizing public firm's price is strictly lower while its output is strictly higher in Cournot competition. And whereas the private firm's quantity is strictly lower in Cournot (as in the standard setting), its price can be higher or lower. Despite this ambiguity, both firms, public and private, earn strictly lower profits in Cournot. The consumer surplus is strictly higher in Cournot under a linear demand structure. All these results also hold with more than two firms under a wide range of parameterizations. The ranking reversals also hold in a richer setting with a partially privatized public firm, where the extent of privatization is endogenously determined by a welfare-maximizing government. As a by-product of our analysis, we find that in a differentiated duopoly setting, partial privatization always improves welfare in Cournot but not necessarily in Bertrand competition.
    Keywords: Bertrand; Cournot; public firms; partial privatization
    JEL: L13 H42
    Date: 2008–10
  2. By: Winand Emons; Claude Fluet
    Abstract: Two firms produce a product with a horizontal and a vertical characteristic. We call the vertical characteristic quality. The difference in the quality levels determines how the firms share the market. Firms know the quality levels, consumers do not. Under non-comparative advertising a firm may signal its own quality. Under comparative advertising firms may signal the quality differential. In both scenarios the firms may attempt to mislead at a cost. If firms advertise, in both scenarios equilibria are revealing. Under comparative advertising the firms never advertise together which they may do under non-comparative advertising.
    Keywords: advertising; costly state falsification; signalling
    JEL: D82 K41 K42
    Date: 2008–12
  3. By: José Pedro Pontes
    Abstract: This paper studies the issue of agglomeration versus fragmentation of vertically related industries. While the downstream industry works under perfect competition, the upstream industry is a duopoly where each firm supplies a differentiated input to the competitive firms. These process the inputs under a quadratic production function entailing decreasing returns as in PENG, THISSE and WANG (2006). It is found that fragmentation occurs if the transport cost of final goods is medium to high, while the transport cost of inputs is low. Otherwise, agglomeration prevails. Multiple agglomerated equilibria are possible if the transport cost of intermediate goods is either medium or high.
    Keywords: Oligopoly; Vertically-Linked Firms; Location; Spatial Fragmentation.
    JEL: L13 R10
    Date: 2008–03
  4. By: Martzoukos, Spiros H; Zacharias, Eleftherios
    Abstract: We model pre-investment R&D decisions in the presence of spillover effects in an option pricing framework with analytic tractability. Two firms face two decisions that are solved for interdependently in a two-stage game. The first-stage decision is: what is the optimal level of coordination (optimal policy/technology choice)? The second-stage decision is: what is the optimal effort for a given level of the spillover effects and the cost of information acquisition? The framework is extended to a two-period stochastic game with (path-dependency inducing) switching costs that make strategy revisions harder. Strategy shifts are easier to observe in more volatile environments.
    Keywords: Benefit Analysis; Real Options; Coordination Games; R&D
    JEL: G31 G13
    Date: 2008–04
  5. By: Elad Harison; Heli Koski
    Abstract: ABSTRACT : We use the data compiled from the USPTO patent and patent citations concerning the patented knowledge intensive technologies in three areas : cryptography, image analysis and data processing/software. The data is restricted to those patents between the years 1980-2003 that have two or more assignees, i.e. we consider only joint patents. We find some evidence that technological or product market proximity of partners in R&D alliance matters but whether the closeness generates more or less valuable innovations depends on the technology field. Our data further suggest that the most valuable innovations are generated when there is a certain level of prior patenting experience of the individual innovation partners. Interestingly, the prior patenting experience of the pairs of firms filing the joint patent does not seem to matter. It thus seems that learning from the prior joint patenting that creates more value for innovations is rather firm-specific than alliance-specific. Our findings on prior joint patenting experience generally hint that not only strategic benefits, and those benefits related to the management of joint patenting, can be gained from the R&D alliance experience.
    Date: 2009–01–07
  6. By: Baghana, Rufin (Ministere des Finances, Quebec); Mohnen, Pierre (UNU-MERIT, Maastricht University, and CIRANO)
    Abstract: In this paper we evaluate the effectiveness of R&D tax incentives in Quebec, using manufacturing firm data from 1997 to 2003 originating from R&D surveys, annual surveys of manufactures and administrative data. The estimated price elasticity of R&D is -0.10 in the short run and -0.14 in the long run, with a slightly higher elasticities for small firms than for large firms. We show that there is a deadweight loss associated with level-based R&D tax incentives that is particularly acute for large firms. For small firms it is not sizeable enough to suppress the R&D additionality, at least not during quite a number of years after the initial tax change. Incremental R&D tax credits do not suffer from this deadweight loss and are from that perspective preferable to level-based tax incentives.
    Keywords: R&D, tax credits, tax incentives, price elasticity, research and development, manufacturing industry, Quebec, Canada
    JEL: O32 O38 H25 H50 C23
    Date: 2009
  7. By: Kristian Koerselman (Department of Economics and Statistics, bo Akademi University)
    Abstract: I investigate the effect of open source on standardization outcomes in a market with positive network externalities. In a closed source world, it seems reasonable to assume that the probability of a standard being chosen is positively correlated with its quality. Open source may weaken or invert this relationship by giving Bertrand competition losers a second chance. It however follows that though open source leads to more competition and more standardization, the chosen standard will be the same as when open source is not an option.
    Keywords: open source software, FLOSS, standardization, network externalities, competition
    JEL: H41 L12 L86 L96
    Date: 2008–01
  8. By: Adriaan R. Soetevent (Amsterdam School of Economics, University of Amsterdam); Marco A. Haan (University of Groningen); Pim Heijnen (Amsterdam School of Economics, University of Amsterdam)
    Abstract: Where markets are insufficiently competitive, governments can intervene by auctioning licenses to operate or by forcing divestitures. The Dutch government has done exactly that, organizing auctions to redistribute tenancy rights for high- way gasoline stations and forcing the divestiture of outlets of four majors. We evaluate this policy experiment using panel data containing detailed price information. Accounting for non-randomness of the sites are auctioned, we find that an obligation to divest lowers prices by over 2% while the auctioning of licenses without such an obligation has no discernible effect. We find no evidence for price effects on nearby competitors.
    Keywords: Divestitures; Auctions; Entry; Policy Evaluation
    JEL: D43 D44 L11
    Date: 2008–12–08
  9. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University, Nashville (TN), USA)
    Abstract: For a general class of oligopoly models with price competition, we analyze the impact of ex-ante leniency programs in antitrust regulation on the endogenous maximal-sustainable cartel price. This impact depends upon industry characteristics including its cartel culture. Our analysis disentangles the effects of traditional antitrust regulation and the leniency program. Ex-ante leniency programs are effective if and only if these offer substantial rewards to the self-reporting firm. This is in contrast to currently employed programs that are therefore ineffective.
    Keywords: Cartel; Antitrust Policy; Antitrust Law; Antitrust regulation; Leniency program; Self-reporting; repeated game
    JEL: L41 K21 C72
    Date: 2008–12–17
  10. By: Torrisi, Gianpiero
    Abstract: This paper presents a model of oligopolistic competition under horizontal differentiation of products and a triangular distribution of consumers. The triangular distribution aims to represent a case of concentration of consumers around the central location. The main result is that a good deal of differentiation among products is achieved also under such assumption concerning the consumers’ distribution. This means that the incentive to differentiate – to some extent - prevails on the incentive to the central location, although consumers are concentrated in the central location. The analysis on an original empirical case-study is presented, concerning the choice of beverage retails in a town. The empirical evidence is consistent with the theoretical model.
    Keywords: product differentiation; Hotelling; consumers distribution; empirical analysis.
    JEL: L13 D43 C72
    Date: 2008–01
  11. By: Ricardo Gonçalves (Faculdade de Economia e Gestão - Universidade Católica Portuguesa (Porto)); Álvaro Nascimento (Faculdade de Economia e Gestão - Universidade Católica Portuguesa (Porto))
    Abstract: NGAs (Next Generation Access Networks) are a challenge to regulators and operators insofar as they require large investments, there is significant uncertainty about the ability to recover costs, and the choice of the appropriate regulatory regime is far from consensual. Regulatory authorities might want to seize the moment and reconsider the mandatory vertical separation of telecommunication firms, without jeopardizing incentives to innovation, investment and welfare. We provide a provocative but simple test for the adequacy of network separation as a regulatory remedy. We propose a decision tree procedure with four steps in order to assess whether network separation is an adequate regulatory response: [1] “Is there significant market power in the market for the provision of access services under NGAs?”; [2] “Are there few vertical complementarities between services along the supply chain?”; [3] “Is functional separation a better regulatory tool than any other alternative?”; and [4] “Is structural separation superior to functional separation?”. A positive answer to the first three questions implies that the regulator should consider functional network separation, whilst the fourth is needed for the structural alternative.
    Keywords: Telecommunications networks, Functional separation, Structural separation
    JEL: L51 L96
    Date: 2009–01
  12. By: Fehr, Ernst (University of Zurich); Brown, Martin (Swiss National Bank); Zehnder, Christian (Harvard Business School)
    Abstract: We study the impact of reputational incentives in markets characterized by moral hazard problems. Social preferences have been shown to enhance contract enforcement in these markets, while at the same time generating considerable wage and price rigidity. Reputation powerfully amplifies the positive effects of social preferences on contract enforcement by increasing contract efficiency substantially. This effect is, however, associated with a considerable bilateralisation of market interactions, suggesting that it may aggravate price rigidities. Surprisingly, reputation in fact weakens the wage and price rigidities arising from social preferences. Thus, in markets characterized by moral hazard, reputational incentives unambiguously increase mutually beneficial exchanges, reduce rents, and render markets more responsive to supply and demand shocks.
    Keywords: Reputation; Reciprocity; Relational Contracts; Price Rigidity; Wage Rigidity
    JEL: C90 D82 E24 J30 J41
    Date: 2008–07–01
  13. By: Loreto Lira; Magdalena Ugarte; Rodrigo Vergara. (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: This paper investigates empirically the relationship between market structure and consumer prices in the supermarket industry in Chile. A panel of monthly data from 16 cities in the period January 1998–September 2006 was used. It was found that the more concentrated the industry is in a city, the higher the prices, while the participation of major national chains in cities tends to lower prices. Moreover, the dominant local chain was found to behave differently depending on whether or not one of the national chains was present in the city. <br><br>Finally, we find that prices rise when a national chain acquires another chain and both were previously in a city (inmerge) while if only one of the two was present (outmerge), prices fall.
    Keywords: Prices, retail, market structure.
    JEL: L11 L81
    Date: 2008
  14. By: Riemer P. Faber (Erasmus School of Economics, Erasmus University Rotterdam); Maarten C.W. Janssen (University of Vienna, and Erasmus School of Economics, Erasmus University Rotterdam)
    Abstract: This article analyzes the role of suggested prices in the Dutch retail market for gasoline. Suggested prices are announced by large oil companies with the suggestion that retailers follow them. There are at least two competing rationales for the existence of suggested prices: they may either help retailers translate changes in international gasoline spot market prices into retail prices, or they may coordinate retail prices. We show that there is, next to the international spot market prices, additional information in suggested prices that explains retail prices. Therefore, we conclude that suggested prices help to coordinate retail prices.
    Keywords: gasoline markets; collusion; price setting; suggested prices
    JEL: L11 L42 L65
    Date: 2008–12–01
  15. By: Michiel van Leuvensteijn
    Abstract: Boone (2008) introduces a new theory based measure of competition, the so-called Boone-indicator. The indicator is based on the relationship between performance, in terms of profits, and efficiency, measured as marginal costs. Whether the indicator is able to correctly measure competition in practice is an unanswered question yet. In this paper, I provide empirical evidence that the Boone-indicator appropriately is measuring levels of competition. To this purpose, I follow a seminal paper by Genesove and Mullin (1998) where they show that the elasticity-adjusted Lerner index is able to identify regimes of price wars from nonprice wars by comparing the outcomes of this index with independent reports on the regimes of competition for the American sugar industry for the period 1890-1914. Using their data, I construct a proxy for profits. I calculate both the elasticity-adjusted Lerner index as the Boone-indicator for a single firm, the American Sugar Refining Company. Using the same data, I am able to demonstrate empirically that the Boone-indicator is better able to identify the different regimes of competition than the elasticity-adjusted Lerner index. The Boone-indicator, therefore, adds value to the insights provided by the elasticity-adjusted Lerner index. Several robustness checks are performed that show that the results are insensitive for alterations in the profit proxy.
    Keywords: competition, measures of competition, sugar industry
    JEL: D43 L13
    Date: 2008–12
  16. By: Poonam Mehra
    Abstract: This paper tries to analyze the interrelationship between possibilities of conflict in cross border mergers and acquisitions and firm and market characteristics in a two country three firm model. The interaction of asymmetry in firm and market size with the distribution of firms across countries and its effect on the possibilities of conflict is also analysed.
    Keywords: mergers, economy, domestic, conflict, cross broader, model, asymmetry, market size, countries, distribution, firms, market size
    Date: 2009
  17. By: Andrés Álvarez; Diana Guevara; Juan Pablo García; Edwin López
    Abstract: This paper is part of a larger research project on the evolution of the Perfect Competition concept in a historical perspective. We try to follow the changes this concept has gone through from the different alternative views during the so–called “Marginal Revolution” towards the consolidation of the price–taker hypothesis. Some recent theoretical developments have underlined the importance of giving up the hypothesis of price taking agents.1 These developments plead for a different conception of the theoretical functioning of the market. This implies to model a perfectly competitive market based on strategic behaviour rather than using the traditional Walrasian conception of agents. These works intend avoiding the common trend in economic theory where imperfect competition is ncreasingly taking the place of perfect competition as the general framework because of, as has been stated by Arrow (1959), if we accept the price–taker hypothesis as the equivalent of perfect competition we have no other alternative than to introduce the Walrasian auctioneer. This ’pessimistic view’ on perfect competition pushes Arrow to postulate that in order to give a more realistic interpretation of economic reality (without the fiction of the centralizing auctioneer) we need to build imperfect competition models. The only difference with the basic Walrasian competitive model being the abandonment of the hypothesis of price–taker agents.
    Date: 2009–01–13
  18. By: Cristina Barbot (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: Airports and airlines have been increasingly establishing vertical contracts, which have a wide variety of forms. These contracts have important implications for policy issues, namely for regulation and price discrimination legislation. In this paper we develop a model to analyse the effects of three types of vertical contracts, in what regards welfare, pro-competitiveness and the scope for regulation. We find that two types of contracts are anti-competitive, and that in all of them consumers are better-off, though in one of them within conditions regarding operational efficiency. We also conclude that regulation may (or may not) improve welfare depending on the type of contract and that price capping has different effects according to the facility the price of which is capped. Moreover, we find that these agreement’s effects exhibit a trade-off between pro-competitiveness and welfare and between price discrimination and welfare.
    Keywords: vertical contracts, regulation, airports, airlines.
    JEL: R48 L93
    Date: 2009–01
  19. By: David Bardey; Jean-Charles Rochet
    Abstract: Classical analysis of health insurance markets often focuses on adverse selection, which creates a direct externality between the enrollees of the same health plan: under an imperfect risk adjustment, the higher the risks of my co-enrollees, the higher my cost of insurance. This has lead to the view that restricting the diversity of accessible physicians may be good for policyholders, in a context where competition between health plans can lead to a "death spiral" for the less restrictive plan. This paper defends the opposite view that diversity might pay, because of the indirect externality between policyholders and physicians. By attracting higher risks, the less restrictive plan may also guarantee a higher level of activity to its physicians, and therefore negotiate with them a lower fee-for-service rate. By explicitly modeling the two sides of the market for health (policyholders and physicians), we are able to …find examples in which competition between health plans gives a higher pro…fit to the less restrictive plan.
    Date: 2009–01–08
  20. By: Betty Agnani (Universidad de Granada); Mª José Gutiérrez (Universidad del País Vasco); Amaia Iza (Universidad del País Vasco)
    Abstract: The aim of this paper is to analyze how active R&D policies affect the growth rate of an economy with endogenous growth and non-renewable resources. We know from Scholz and Ziemens (1999) and Groth (2006) that in infinitely lived agents (ILA) economies, any active R&D policy increases the growth rate of the economy. To see if this result also appears in economies with finite lifetime agents, we developed an endogenous growth overlapping generations (OLG) economy à la Diamond which uses non-renewable resources as essential inputs in final good’s production. We show analytically that any R&D policy that reduces the use of natural resources implies a raise in the growth rate of the economy. Numerically we show that in economies with low intertemporal elasticity of substitution (IES), active R&D policies lead the economy to increase the depletion of non-renewable resources. Nevertheless, we find that active R&D policies always imply increases in the endogenous growth rate, in both scenarios. Furthermore, when the IES coefficient is lower (greater) than one, active R&D policies affect the growth rate of the economy in the ILA more (less) than in OLG economies.
    Keywords: Crecimiento endógeno, I+D, recursos no renovables, sendas de crecimiento, estable,endogenous growth, R&D, non-renewable resources, overlapping generations, infinitely lived agents, balanced growth path.
    JEL: O13 O40 Q32
    Date: 2008

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