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on Microeconomics |
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Issue of 2009‒02‒28
twenty papers chosen by Joao Carlos Correia Leitao Technical University of Lisbon |
| By: | Praveen Kujal (Universidad Carlos III de Madrid); Juan Ruiz (Banco de España) |
| Abstract: | This paper highlights the importance of product differentiation and endogenous R&D in determining the optimal R&D policy, in a model where investment in cost reducing R&D is committed before firms compete in a differentiated-goods third-country export market. R&D is always taxed in oligopolies for high degrees of product differentiation. For lower degrees of product differentiation the duopoly is subsidized or the government remains inactive. In contrast, the monopoly is always subsidized. The government with a duopoly may be active or inactive depending on the degree of product differentiation. Thus, we may observe a reversal in the sign of the optimal R&D policy if the degree of product differentiation changes or, alternatively, if there is a change in the number of firms. Similar qualitative results hold if trade policy uses output subsidies, instead of R&D promotion. |
| Keywords: | product differentiation, strategic trade policy, policy reversals, r&d subsidies, monopoly, duopoly |
| JEL: | F12 F13 L13 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0901&r=mic |
| By: | Boone, Jan; Müller, Wieland |
| Abstract: | We consider a vertically related industry and analyze how the total harm due to a price increase upstream is distributed over downstream firms and final consumers. For this purpose, we develop a general model without making specific assumptions regarding demand, costs, or the mode of competition. We consider both the case of homogeneous and differentiated goods markets. Furthermore, we discuss data requirements and suggest explicit formulas and regression specifications that can be used to estimate the relevant terms in the harm distribution in practice, even if elevated upstream prices are rather constant over time. The latter can be achieved by considering perturbations of the demand curve. This in turn can be used to construct a supply curve for the case of imperfect competition that includes perfect competition and monopoly as special cases. Finally, we illustrate how basic intuition from the tax incidence literature carries over to the distribution of harm. |
| Keywords: | abuse of a dominant position; apportionment of harm; cartel; pass on defense; supply curve; tax incidence |
| JEL: | D43 L13 L42 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6949&r=mic |
| By: | Brekke, Kurt Richard; Cellini, Roberto; Siciliani, Luigi; Straume, Odd Rune |
| Abstract: | We investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities), using a Hotelling framework, in the presence of sluggish demand. We take a differential game approach, and derive the open-loop solution (providers commit to an optimal investment plan at the initial period) and the feedback closed-loop solution (providers move investments in response to the dynamics of the states). If the marginal cost of provision is increasing, the steady state quality is higher under the open- loop solution than under the closed-loop solution. Fiercer competition (lower transportation costs and/or less sluggish demand) leads to higher quality in both solutions, but the quality response to increased competition is weaker when players use closed-loop strategies. In both solutions, quality and demand move in opposite directions over time on the equilibrium path to the steady state. |
| Keywords: | competition; quality; Regulated markets |
| JEL: | H42 I11 I18 L13 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6938&r=mic |
| By: | Bonnet, Céline; Dubois, Pierre |
| Abstract: | A methodology is presented allowing manufacturers and retailers vertical contracting in their pricing strategies on a differentiated product market to be introduced. This contribution allows price-cost margins to be recovered from estimates of demand parameters both under linear pricing models and two part tariffs. Two types of nonlinear pricing relationships, one where resale price maintenance is used with two part tariffs contracts and one where no resale price maintenance is allowed in two part tariff contracts in particular are considered. The methodology then allows different hypotheses on contracting and pricing relationships between manufacturers and retailers in the supermarket industry to be tested using exogenous variables supposed to shift the marginal costs of production and distribution. This method is applied empirically to study the retail market bottled water in France. Our empirical evidence shows that manufacturers and retailers use nonlinear pricing contracts and in particular two part tariff contracts with resale price maintenance. Finally, using the estimation of our structural model, some simulations of counterfactual policy experiments are introduced. |
| Keywords: | collusion; competition; differentiated products; double marginalization; manufacturers; non nested tests; retailers; two part tariffs; vertical contracts; water |
| JEL: | C12 C33 L13 L81 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6918&r=mic |
| By: | Emons, Winand; Fluet, Claude |
| 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: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7109&r=mic |
| By: | David Bartolini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR) |
| Abstract: | A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the socially optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and a specilc rule of cartel formation. Then we extend the analysis to the case of N symmetric firms and a generic rule of coalition formation. Finally, we consider;the case of asymmetric firms and show that our results still hold for an industry;populated by one Stackelberg leader and two followers. |
| Keywords: | Antitrust policy, Coalition formation, Collusive cartels |
| JEL: | C70 L40 L41 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:19&r=mic |
| By: | Bekkers, Eddy; Francois, Joseph |
| Abstract: | We develop a model with endogeneity in key features of industrial structure linked to heterogeneous cost structures under Cournot competition. We use the model to explore issues related to cross-country differences in industry structure and the impact of globalization on markups and pricing, concentration, and productivity. The model nests two workhorse trade models, the Brander & Krugman reciprocal dumping model and the Ricardian technology-based trade model, as special cases. We examine both free entry and limited entry (free exit) cases. The model generates clear testable predictions on the probability of zero trade flows and the pattern of export prices, and on cross-country and industry variations in industrial structure controlling for openness. Market prices decline as a result of trade liberalization, the least productive firms get squeezed out of the market, exporting firms gain market share, and more firms become trade oriented. In addition, depending on the strength of underlying cost heterogeneity, falling prices are consistent with both increasing and falling industry concentration following episodes of integration. Welfare rises with trade liberalization, unless trade costs decline from a prohibitive level in the short run free exit case. Variation across industries and markets in markups, concentration, and pricing structures is otherwise a function of market size and the variation in cost heterogeneity across industries. |
| Keywords: | Composition effects of trade liberalization; Cournot competition; Industry structure and firm heterogeneity |
| JEL: | F12 L11 L13 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6956&r=mic |
| By: | Schmidt, Klaus M. |
| 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: | complementary patents; IP rights; licensing; patent pool; standards; vertical integration |
| JEL: | K11 L15 L24 O31 O32 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7005&r=mic |
| By: | Vives, Xavier |
| Abstract: | A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness. |
| Keywords: | adverse selection; collusion; competitiveness; imperfect competition; rational expectations; welfare |
| JEL: | D44 D82 L13 L94 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6960&r=mic |
| By: | Siddiqi, Hammad |
| Abstract: | Mullainathan, Schwartzstein, & Shleifer [Quarterly Journal of Economics, May 2008] put forward a model of coarse thinking. The essential idea behind coarse thinking is that agents put situations into categories and then apply the same model of inference to all situations in a given category. We extend the argument to strategies in a game-theoretic setting and propose the following: Agents split the choice-space into categories in comparison with salient choices and then choose each option in a given category with equal probability. We provide an alternative explanation for the puzzling results obtained in a Bertrand competition experiment as reported in Abbink & Brandts [Games and Economic Behavior, 63, 2008] |
| Keywords: | Laboratory experiments; Oligopoly; Price competition; Co-ordination games; Coarse Thinking |
| JEL: | L13 C90 D83 D43 C72 |
| Date: | 2009–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13516&r=mic |
| By: | Antonio Cabrales; Piero Gottardi |
| Abstract: | In this paper we study, within a formal model, market environments where information is costly to acquire and is of use also to potential competitors. Agents may then sell, or buy, reports over the information acquired and choose the trades in the market on the basis of what they learnt. Reports are unverifiable - cheap talk messages - hence the quality of the information transmitted depends on the conflicts of interest faced by the senders. We find that, in equilibrium, information is acquired when its costs are not too high and in that case it is also sold, though reports are typically noisy. Also, the market for information tends to be a monopoly, and there is inefficiency given by underinvestment in information acquisition. Regulatory interventions in the form of firewalls, limiting the access to the sale of information to agents uninterested in trading the underlying object, only make the inefficiency worse. Efficiency can be attained with a monopolist selling differentiated information, provided entry is blocked. The above findings hold when information has a prevalent horizontal differentiation component. When the vertical differentiation element is more important firewalls can in fact be beneficial. |
| Keywords: | Information sale, Cheap talk, Conflicts of interest, Information Acquisition, Firewalls, Market efficiency |
| JEL: | D83 C72 G14 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/11&r=mic |
| By: | Sällström, Susanna |
| Abstract: | Models of product differentiation typically assume a demand for variety. This paper derives the demand for variety in a model where a representative consumer chooses how many specialised varieties to purchase for the pursuit of different activities. In contrast with previous models this generates a demand for variety that is price and income elastic. In applications to monopoly and duopoly I find that whilst a duopoly will choose efficient characteristics it will offer too many specialised varieties, whereas a monopoly will either offer excessively specialised varieties or too few specialised varieties on the assumption of no fixed costs of variety. |
| Keywords: | general purpose goods; product differentiation; specialised goods; variety |
| JEL: | D31 D42 D43 L11 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7187&r=mic |
| By: | Andrew Burke (Cranfield University, UK); André van Stel (University of Amsterdam) |
| Abstract: | The main contribution of entrepreneurship theory to economics is to provide an account of market performance in disequilibrium but little empirical research has examined firm entry and exit in this context. We redress this by modelling the interrelationship between firm entry and exit in disequilibrium. Introducing a new methodology we investigate whether this interrelationship differs between market ‘undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that equilibrium-restoring mechanisms are faster in over than in undershoots. The results imply that in undershoots a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshoots competition induced by new firms (in particular strong displacement) helps restore equilibrium. |
| Keywords: | entry; exit; equilibrium; industrial organization; undershooting; overshooting |
| JEL: | B50 J01 L00 L1 L26 |
| Date: | 2009–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090005&r=mic |
| By: | Cleeren, Kathleen; Dekimpe, Marnik G.; Gielens, Katrijn; Verboven, Frank |
| Abstract: | The price-aggressive discount format, popularized by chains such as Aldi and Lidl, is very successful in most Western economies. Its success is a major source of concern for traditional supermarkets. Discounters not only have a direct effect on supermarkets’ market shares, they also exert considerable pressure to improve operational efficiency and/or to decrease prices. We use an empirical entry model to study the degree of intra- and inter-format competition between discounters and supermarkets. Information on the competitive impact of new entrants is derived from the observed entry decisions of supermarkets and discounters in a large cross-section of local markets, after controlling for a number of local market characteristics. In our modeling framework, we endogenize the retailers’ entry decisions, and allow for asymmetric intra- and inter-format competitive effects in a flexible way. We apply our modeling approach to the German grocery industry, where the discount format has stabilized after two decades of continued growth. We find evidence of intense competition within both the supermarket and discounter format, although competition between supermarkets is found to be more severe. Most importantly, discounters only start to affect the profitability of conventional supermarkets from the third entrant onwards. This may explain why many retailers rush to add a discount chain to their portfolio: early entrants may benefit from the growth of the discount-prone segment without cannibalizing the profits of their more conventional supermarket stores. |
| Keywords: | empirical entry models; hard discounters; supermarket competition |
| JEL: | L10 M30 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6964&r=mic |
| By: | Okubo, Toshihiro; Picard, Pierre M; Thisse, Jacques-François |
| Abstract: | The aim of this paper is to study the spatial selection of firms once it is recognized that heterogeneous firms typically choose different locations in respond to market integration of regions having different sizes. Specifically, we show that decreasing trade costs leads to the gradual agglomeration of efficient firms in the large region because these firms are able to survive in a more competitive environment. In contrast, high-cost firms seek protection against competition from the efficient firms by establishing themselves in the small region. However, when the spatial separation of markets ceases to be a sufficient protection against competition from the low-cost firms, high-cost firms also choose to set up in the larger market where they have access to a bigger pool of consumers. This leads to the following prediction: the relationship between economic integration and interregional productivity differences first increases and then decreases with market integration. |
| Keywords: | firm heterogeneity; spatial selection; trade liberalization |
| JEL: | F12 H22 H87 R12 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6978&r=mic |
| By: | Courty, Pascal; Pagliero, Mario |
| Abstract: | Concert tickets can either be sold at a single price or at different prices to reflect the various levels of seating categories available. Here we consider how two product characteristics (the artist’s age and venue capacity) influence the likelihood that pop music concert tickets will be sold at different prices. We argue that valuation heterogeneity, and thus the returns to using price discrimination, are higher for older artists and in larger venues. We test this hypothesis in a large dataset of concerts. By singling out variations in the two characteristics that are exogenous to the decision to price discriminate, we show that these characteristics have a large and significant impact on the use of price discrimination. |
| Keywords: | Price discrimination; profit maximization; second degree price discrimination |
| JEL: | D42 L82 Z11 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7143&r=mic |
| By: | James R. Lincoln |
| Abstract: | This paper examines the changing process of strategic alliance formation in the Japanese electronics industry between 1985 and 1998. With data on 128 Japanese electronics/electrical machinery makers, we use a dyad panel regression methodology to address a series of hypotheses drawn from embeddedness and strong/weak tie theory on how keiretsu and prior alliance networks have constrained partner choice in new R&D and nonR&D alliances. We argue and find that the keiretsu effect is smaller on R&D than nonR&D alliances, and that this is truer of the “weaker-tie” horizontal keiretsu than the “stronger-tie” vertical keiretsu. Dividing our time series into four periods (1984-88, 89-90, 91-94, 95-98), however, reveals some important variations in the keiretsu role over time. The horizontal and vertical keiretsu effects on R&D alliances had vanished by 1991-94 (the post-bubble recession era), but they continued in the nonR&D case, in part, we believe, because these provided a means of reducing costs and capacity in a stringent macroeconomic environment. Following previous strategic alliance research, we further examine how the prior alliance network conditioned strategic alliance formation in Japanese electronics and how those patterns varied over time. The data suggest that, as the strategic alliance founding process became “disembedded” from Japan’s legacy keiretsu networks, it was driven increasingly by prior direct and indirect alliance ties. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2008-18&r=mic |
| By: | Van Beers, Cees; Dekker, Ronald |
| Abstract: | This aim of this paper is twofold. First it examines the determinants of acquisitions and divestitures of Dutch firms in the period 1996-2004. Second, it investigates the impact of acquisitions and divestitures on the firm’s innovative output performance. An econometric model is specified and estimated with Community Innovation Survey data for the Netherlands in the period 1996-2004. The main findings of this study are as follows. First, innovating firms are significantly more involved in acquisition activities than non-innovating firms, which suggests that acquisitions are a strategy to gain access to new technologies or knowledge. Second, lack of knowledge as a barrier to innovate increases the chance of acquiring assets of other firms although not significantly. Lack of finance as a barrier to innovate increases significantly the chance of divesting assets. Third, acquisitions motivated by knowledge barriers in the innovation process affect the probability of positive innovative sales positively while acquisitions motivated by other reasons than innovation barriers affect this probability negatively. No effect of knowledge barriers induced acquisitions on the level of the innovative sales could be found. |
| Keywords: | Innovation; performance; mergers; acquisitions; divestitures; strategy. |
| JEL: | L10 D40 |
| Date: | 2009–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13464&r=mic |
| By: | Robert S. Pindyck |
| Abstract: | In merger analysis and other antitrust settings, risk is often cited as a potential barrier to entry. But there is little consensus as to the kinds of risk that matter - systematic versus non-systematic and industry-wide versus firm-specific - and the mechanisms through which they affect entry. I show how and to what extent different kinds of risk magnify the deterrent effect of exogenous sunk costs of entry, and thereby affect industry dynamics, concentration, and equilibrium market prices. To do this, I develop a measure of the "full," i.e., risk-adjusted, sunk cost of entry. I show that for reasonable parameter values, the full sunk cost is far larger than the direct measure of sunk cost typically used to analyze markets. |
| JEL: | D43 L10 L40 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14755&r=mic |
| By: | Hirukawa, Masayuki; Ueda, Masako |
| Abstract: | For the sample period of 1965-1992, Kortum and Lerner (2000) find that venture capital (VC) investments have a positive impact on patent count at industry level, and this impact is larger than that of R&D expenditures. We confirm that this positive impact continued to be present and became even stronger in late 90s during which VC industry experienced an unprecedented growth. We then proceed to study if this positive impact of VC is also present on productivity growth, which is a measure of innovation alternative to patent count. Unlike the impact on patent count, we do not find that VC investment affects total factor productivity growth. We do find that VC investment is positively associated with labor productivity but this positive impact is originated from the technology substitution from labor to other productive inputs such as energy and material. Therefore, our finding suggests that, at industry level, VC investment increases the patent propensity but may not necessarily improve the productive efficiency. Various interpretations are offered why this may be the case. |
| Keywords: | Factor Substitution; Innovation; Patent; Productivity; Venture Capital |
| JEL: | D24 G24 O31 O32 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7089&r=mic |