nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒02‒22
nine papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Technology adoption in a differentiated duopoly: Cournot versus bertrand By Rupayan Pal
  2. Strategic Choice between Process and Product Innovation under Different Competitive Regimes By Luigi Filippini; Gianmaria Martini
  3. Ordered Search in Differentiated Markets By Zhou, Jidong
  4. R&D Cooperation in Real Option Game Analysis. By Giovanni Villani
  5. Pricing strategies in two-sided platforms: The role of sellers’ competition By María Fernanda Viecens
  6. Horizontal Mergers, Involuntary Unemployment, and Welfare By Oliver Budzinski; Jürgen-Peter Kretschmer
  7. The Effects of Product Ageing on Demand: The Case of Digital Cameras By Lou, Weifang; Prentice, David; Yin, Xiangkang
  8. The Role of R&D and Technology Diffusion in Climate Change Mitigation: New Perspectives using the WITCH Model By Valentina Bosetti; Carlo Carraro; Romain Duval; Alessandra Sgobbi; Massimo Tavoni
  9. Dynamics of Consumer Demand for New Durable Goods By Gautam Gowrisankaran; Marc Rysman

  1. By: Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: This paper compares equilibrium technology adoption in a differentiated duopoly under two alternative modes of product market competition, Cournot and Bertrand. It shows that the cost of technology has differential impact on technology adoption, that is, on cost-efficiency of the industry, under two alternative modes of product market competition. The possibility of ex post cost asymmetry between firms is higher under Bertrand competition than under Cournot competition. If the cost of technology is high, Bertrand competition leads to higher cost-efficiency than Cournot competition provided that the cost reducing effect of the technology is high. On the other hand, if the technology reduces the marginal cost of production by a very low amount, Cournot competition may lead to higher cost-efficiency than Bertrand competition.
    Keywords: Differentiated duopoly, limit-pricing, price effect, selection effect, technology adoption
    JEL: L13 L11 O31 D43
    Date: 2009–01
  2. By: Luigi Filippini (DISCE, Università Cattolica di Milano); Gianmaria Martini (Università di Bergamo)
    Abstract: This paper investigates the strategic choice between introducing a process or a product innovation in a duopoly model with vertical differentiation, comparing the outcomes in case of Bertrand and Cournot competition. It is shown that under both competitive regimes three equilibria in innovation adoption may arise: two symmetric equilibria, where firms select the same innovation type, and one asymmetric equilibrium. The competitive regime has an impact on the features of the asymmetric equilibrium, since in case of Bertrand competition, the high (low) quality firm chooses a product (process) innovation, while firms make the opposite choices in case of Cournot competition. The presence of a leapfrogging effect (only in the Cournot competitors tend to favor the introduction of a new product in comparison with the Bertrand competitors.
    Keywords: vertical differentiation, innovation adoption, process and product innovation, competitive regime.
    JEL: D43 L15 O33
    Date: 2009–01
  3. By: Zhou, Jidong
    Abstract: This paper presents an ordered search model in which consumers search both for price and product fitness. We show that there is price dispersion in equilibrium and prices rise in the order of search. The top firms in consumer search order, though charge lower prices, earn higher profits due to their larger market shares.
    Keywords: non-random search; price dispersion; product differentiation
    JEL: L13 D83 D43
    Date: 2009–02–13
  4. By: Giovanni Villani
    Abstract: Cooperative investments in R&D are a significant driving force of the modern economy. As it well-known, the R&D investments are uncertain and the strategic alliances create synergies and additional information that increase the success probabilities about R&D projects. The theory of real option games takes into account both the flexibility value of an investment opportunity and the strategic considerations. In particular way, while the non-cooperative options are exercised in the interest of the option holders' payoffs, the cooperative ones are exercised in order to maximize the total partnership value. In our model we develop an interaction between two firms that invest in R&D and we show the effects of cooperative synergies on several equilibriums. Moreover, we consider that the R&D investments are characterized by positive network externalities that induce more benefits in case of reciprocal R&D success.
    Keywords: Real Exchange Options; Cooperation games; Information Revelation; R&D investments.
    JEL: G13 C71 D80 O32
    Date: 2008–10
  5. By: María Fernanda Viecens
    Abstract: This paper offers a model of a two-sided platform to inspect how competition and prices in the seller side affect the platform’s behavior, incentives and profits. When setting prices, sellers may be constrained by one of two margins: the demand margin and the competition margin. According to the competition margin a seller sets its price equal to the marginal contribution to the users utility. However, a seller may set a lower price because it also has to take into account the demand margin: a higher price reduces the overall demand for the platform and the sellers. This central result is used to compare the efficiency of vertical integration and the private incentives to partially integrate. Several interesting insights are obtained; in particular, the model can explain the tendency of firms which operate software platforms to integrate with so-called killer applications. The paper also shows that the platform has an instrument to profitable affect sellers’ prices and to induce the margin that will bind. It is proved that the degree of competition among sellers is a crucial factor determining profitability of the platform.
    Date: 2009–02
  6. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark, Campus Esbjerg); Jürgen-Peter Kretschmer (Economic Policy Unit, Philipps-University of Marburg)
    Abstract: Standard welfare analysis of horizontal mergers usually refers to two effects: the anticompetitive market power effect reduces welfare by enabling firms to charge prices above marginal costs, whereas the procompetitive efficiency effect increases welfare by reducing the costs of production (synergies). However, demand-side effects of synergies are usually neglected. We introduce them into a standard oligopoly model of horizontal merger by assuming an (empirically supported) decrease in labour demand due to merger-specific synergies and derive welfare effects. We find that efficiency benefits from horizontal mergers are substantially decreased, if involuntary unemployment exists. However, in full employment economies, demand-side effects remain negligible. Eventually, policy conclusions for merger control are discussed.
    Keywords: horizontal mergers, involuntary unemployment, efficiency defense, oligopoly, competition
    JEL: L13 L41 J01 L16
    Date: 2009
  7. By: Lou, Weifang; Prentice, David; Yin, Xiangkang
    Abstract: The static differentiated product demand model when applied to products with rapid product turnover and declining prices, yields implausible results. One response is to explicitly model the inter-temporal choices of consumers but computational demands require restrictive assumptions on consumer heterogeneity and limits on the characteristics included in the model. We propose, instead, to supplement the static model with a control for the age that each product has been in the market. This approach is applied to the US digital camera market and we find we obtain more plausible estimates. Our results are consistent with inter-temporal price discrimination by firms. Furthermore, our results suggest that ignoring the effects of product ageing may result in substantially overestimated price elasticities and technological progress and underestimated price-cost markups.
    Keywords: Discrete Choice; Demand Dynamics; Forward-Looking Behavior; Heterogeneous Preferences.
    JEL: L0 L11 D12 D43 L63
    Date: 2008–11–03
  8. By: Valentina Bosetti; Carlo Carraro; Romain Duval; Alessandra Sgobbi; Massimo Tavoni
    Abstract: This paper uses the WITCH model, a computable general equilibrium model with endogenous technological change, to explore the impact of various climate policies on energy technology choices and the costs of stabilising greenhouse gas concentrations. Current and future expected carbon prices appear to have powerful effects on R&D spending and clean technology diffusion. Their impact on stabilisation costs depends on the nature of R&D: R&D targeted at incremental energy efficiency improvements has only limited effects, but R&D focused on the emergence of major new low-carbon technologies could lower costs drastically if successful – especially in the non-electricity sector, where such low-carbon options are scarce today. With emissions coming from multiple sources, keeping a wide range of options available matters more for stabilisation costs than improving specific technologies. Due to international knowledge spillovers, stabilisation costs could be further reduced through a complementary, global R&D policy. However, a strong price signal is always required.<P>Le rôle de la R&D and de la diffusion des technologies dans l’atténuation du changementclimatique : nouvelles perspectives à l’aide du modèle WITCH<BR>Cet article utilise le modèle WITCH, un modèle d’équilibre général calculable à progrès technique endogène, afin d’explorer l’impact de diverses politiques climatiques sur les choix de technologies énergétiques et les coûts de stabilisation des concentrations de gaz à effet de serre. Il apparaît que les prix courants et anticipés du carbone ont des effets puissants sur la dépense en R&D et la diffusion des technologies propres. Leur impact sur les coûts de stabilisation dépend de la nature de la R&D : une R&D améliorant l’efficacité énergétique de façon incrémentale a des effets limités, mais une R&D visant à l’émergence de nouvelles technologies sobres en carbone pourrait drastiquement réduire les coûts en cas de succès – notamment dans le secteur non-électrique, où de telles options sobres en carbone sont aujourd’hui rares. Les émissions provenant de sources multiples, garder un éventail d’options aussi large que possible influence davantage les coûts de stabilisation qu’améliorer certaines technologies spécifiques. Du fait des externalités internationales liées à la R&D, les coûts de stabilisation peuvent être encore réduits par une politique complémentaire de R&D mondiale. Cependant, un signal de prix fort est toujours nécessaire.
    Keywords: climate policy, energy R&D, politique climatique, R&D énergétique, fund, fonds, stabilisation costs, coûts de stabilisation
    JEL: H0 H2 H3 H4 O3 Q32 Q43 Q54
    Date: 2009–02–06
  9. By: Gautam Gowrisankaran; Marc Rysman
    Abstract: This paper specifies and estimates a dynamic model of consumer preferences for new durable goods with persistent heterogeneous consumer tastes, rational expectations about future products and repeat purchases over time. Most new consumer durable goods, particularly consumer electronics, are characterized by relatively high initial prices followed by rapid declines in prices and improvements in quality. The evolving nature of product attributes suggests the importance of modeling dynamics in estimating consumer preferences. We estimate the model on the digital camcorder industry using a panel data set on prices, sales and characteristics. We find that dynamics are a very important determinant of consumer preferences and that estimated coefficients are more plausible than with traditional static models. We use the estimates to evaluate cost-of-living indices for new consumer goods and dynamic demand elasticities.
    JEL: C23 E31 L1 L13 L68
    Date: 2009–02

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