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on Microeconomics |
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Issue of 2009‒03‒07
fourteen papers chosen by Joao Carlos Correia Leitao Technical University of Lisbon |
| By: | Anna Stepanova |
| Abstract: | In a two-stage R&D game of process innovation, we investigate the effect of exogenously changing R&D spillovers and market concentration on the equilibrium level of effective cost reduction, total output, profits and social welfare. Interpreting spillover as a measure of patent protection, we find that weaker patent protection results in less R&D. We also show that firms prefer weaker patent protection, but social welfare is maximized for higher levels of patent protection. In terms of market concentration we show that firm profits decrease with increasing numbers of firms. Social welfare is typically maximized under oligopoly with the optimal number of firms depending on the level of spillover and efficiency of R&D investment. |
| Keywords: | oligopoly; R&D; competition; spillover process; cost reduction; market concentration |
| JEL: | C72 L13 O31 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0901&r=mic |
| By: | Christina Matzke; Benedikt Wirth |
| Abstract: | We analyze the strategic behavior of firms when demand is determined by a rule of thumb behavior of consumers. We assume consumer dynamics where individual consumers follow simple behavioral decision rules governed by imitation and habit as suggested in consumer research. On this basis, we investigate monopoly and competition between firms, described via an open-loop differential game which in this setting is equivalent to but analytically more convenient than a closed-loop system. We derive a Nash equilibrium and examine the influence of advertising. We show for the monopoly case that a reduction of the space of all price paths in time to the space of time-constant prices is sensible since the latter in general contains Nash equilibria. We prove that the equilibrium price of the weakest active firm tends to marginal cost as the number of (non-identical) firms grows. Our model is consistent with observed market behavior such as product life cycles. |
| Keywords: | bounded rationality, social learning, population game, differential game, product life cycle, monopoly, competition, pricing, advertising |
| JEL: | C61 C62 C79 L11 L21 M31 M37 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse3_2009&r=mic |
| By: | Jan Bena |
| Abstract: | Using a dynamic model of a step-by-step innovation race between financially constrained firms, I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence: The competition-innovation relationship has an inverted-U shape in less financially developed systems relative to the benchmark pattern observed in countries with highly developed financial systems. Innovation-enhancing policies implemented through competition reforms ought to be complemented by promoting financial development. |
| Keywords: | Innovation, R&D, Competition, Financial constraints, Credit rationing. |
| JEL: | G15 G31 L13 O31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp377&r=mic |
| By: | Aghion, Philippe; Van Reenen, John; Zingales, Luigi |
| Abstract: | We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection. |
| Keywords: | career concerns; Innovation; Institutional Ownership; productivity; R&D |
| JEL: | G20 G32 O31 O32 O33 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7195&r=mic |
| By: | Tasnádi, Attila |
| Abstract: | We consider a possible game-theoretic foundation of Forchheimer's model of dominant-firm price leadership based on quantity-setting games with one large firm and many small firms. If the large firm is the exogenously given first mover, we obtain Forchheimer's model. We also investigate whether the large firm can emerge as a first mover of a timing game. |
| Keywords: | Forchheimer; Dominant firm; Price leadership |
| JEL: | L13 D43 |
| Date: | 2009–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13612&r=mic |
| By: | Dulleck, Uwe (Queensland University of Technology); Rudolf, Kerschbamer (University of Innsbruck and CEPR); Matthias, Sutter (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.<p> |
| Keywords: | Credence goods; Experiment; Liability; Verifiability; Reputation; Competition |
| JEL: | C72 C91 D40 D82 |
| Date: | 2009–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0348&r=mic |
| By: | David Newbery |
| Abstract: | The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship. |
| Keywords: | Residual Supply Index, Cournot equilibrium, Lerner Index, electricity markets, market power |
| JEL: | D43 K21 L94 |
| Date: | 2009–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:rsc:rsceui:2009/03&r=mic |
| By: | Lederman, Daniel |
| Abstract: | It is so widely recognized that innovation is a key driver of economic growth that it is cliché to say so. This article studies product innovation by firms with data from 68 countries, covering more than 25,000 firms in eight manufacturing sectors. The author assesses the predictions of inter-disciplinary research on innovation by firms. The econometric evidence suggests that globalization and local knowledge increase the likelihood that firms will introduce new products. By contrast, domestic regulatory impediments to competition are not robustly correlated with product innovation. |
| Keywords: | E-Business,Innovation,Microfinance,Education for Development (superceded),Statistical&Mathematical Sciences |
| Date: | 2009–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4840&r=mic |
| By: | Romana L. Autrey (Harvard Business School, Accounting and Management Unit); Francesco Bova (Rotman School of Management, University of Toronto) |
| Abstract: | Gray markets arise when a manufacturer's products are sold outside of its authorized channels, for instance when goods designated for a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase internal transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that when a gray market competitor is present, the optimal price for internal transfers exceeds marginal cost, but decreases in the competitiveness of the domestic economy. Moreover, we illustrate that gray markets may cause unintended social welfare consequences when domestic governments mandate the use of arm's length transfer prices between international subsidiaries. Specifically, a shift to arm's length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically. Under certain circumstances, the domestic welfare destruction arising from this erosion dominates the domestic welfare gains that accompany a shift to arm's length transfer pricing. Finally, the analysis illustrates that in a gray market setting, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it. |
| Keywords: | transfer pricing, gray markets, regulation |
| JEL: | D43 F23 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:09-098&r=mic |
| By: | Luca Zamparelli |
| Abstract: | This paper develops a growth model combining elements of endogenous growth and induced innovation literatures. In a standard induced innovation model firms select at no cost innovations from an innovation possibilities frontier describing the trade-off between increasing capital or labor productivity. The model proposed allows firms to choose not only the direction but also the size of innovation by representing the innovation possibilities through a cost function of capital and labor augmenting innovations. By so doing, it provides a micro-foundation both of the intensity and of the direction of technical change. The policy analysis implies that an increase in subsidies to R&D as opposed to capital accumulation raises per capita steady state growth, employment rate and wage share. |
| Keywords: | Induced innovation, endogenous growth, direction of technical change |
| JEL: | O31 O33 O40 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:dsc:wpaper:4&r=mic |
| By: | André van Stel; Roy Thurik; Dennis Fok; Andrew Burke |
| Abstract: | The relation between profits and the number of firms in a market is one of the essential topics in the field of industrial organization. Usually, the relation is modeled in an error-correction framework where profits and/or the number of firms respond to out-of-equilibrium situations. In an out-of-equilibrium situation one or both of these variables deviate from some long-term sustainable level. These models predict that in situations of equilibrium, the number of firms does not change and hence, entry equals exit. Moreover, in equilibrium entry and exit are expected to be equal to zero. These predictions are at odds with real life observations showing that entry and exit levels are significantly positive in all markets of substantial size. Moreover, entry and exitlevels often differ drastically. In this paper we develop a new model for the relation between profit levels and the number of firms by specifying not only an equation for the equilibrium level of profits in a market but also equations for the equilibrium levels of entry and exit. In our empirical application we show that our entry and exit equations satisfy usual error-correction conditions. We also find that a one-time positive shock to entry or profits has a small but permanent positive effect on both the number of firms and total industry profits. |
| Date: | 2009–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200907&r=mic |
| By: | Wilson, Chris M |
| Abstract: | Despite the existence of two vast literatures, very little is known about the potential differences or interactions between search and switching costs. This paper demonstrates the benefits of examining the two frictions in unison. First, the paper shows how subtle distinctions between the two costs can provide important differences in their effects upon consumer behaviour and market prices. In many cases, policymakers may prefer to reduce search costs rather than switching costs. Second, the paper illustrates a simple methodology for estimating the magnitude of both costs while demonstrating the potential bias that can arise from a single-cost approach. |
| Keywords: | Search costs; Switching Costs; Market Friction |
| JEL: | L10 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13672&r=mic |
| By: | Trenton Smith; Hayley Chouinard; Philip Wandschneider (School of Economic Sciences, Washington State University) |
| Abstract: | In many ways, the modern market for food exemplifies the economist’s conception of perfect competition, with many buyers, many sellers, and a robust and dynamic marketplace. But over the course of the last century, the U.S. has witnessed a dramatic shift away from traditional diets and toward a diet comprised primarily of processed brand-name foods with deleterious long-term health effects. This, in turn, has generated increasingly urgent calls for policy interventions aimed at improving the quality of the American diet. In this paper, we ask whether the current state of affairs represents a market failure, and—if so—what might be done about it. We review evidence that most of the nutritional deficiencies associated with today’s processed foods were unknown to nutrition science at the time these products were introduced, promoted, and adopted by American consumers. Today more is known about the nutritional implications of various processing technologies, but a number of forces—including consumer habits, costly information, and the market power associated with both existing brands and scale economies—are working in concert to maintain the status quo. We argue that while the current brand-based industrial food system (adopted and maintained historically as a means of preventing competition from small producers) has its advantages, the time may have come to consider expanding the system of quality grading employed in commodity markets into the retail market for food. |
| Keywords: | credence goods, history, food policy, certification |
| JEL: | D23 D83 I18 Q18 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:tgsmith-5&r=mic |
| By: | André van Stel; Mickey Folkeringa; Sierdjan Koster |
| Abstract: | We investigate the impact of start-up rates on a measure of competition among incumbent firms called mobility. Interactions between new and incumbent firms play an important role in the process of economic growth. While recent literature suggests that competition among incumbent firms is caused by (lagged) start-up rates, this relation has not yet been tested using a direct measure of competition among incumbent firms. In the present paper we estimate a regression model, at the region-sector level for the Netherlands, where the mobility rate is explained by (lagged) startup rates and control variables. Using data for 40 regions and five sectors over the period 1993-2006 we find that the impact of start-ups on mobility varies by sector. In particular, we find a strong positive relation between start-up rates and mobility rates for industry sectors (manufacturing and construction) but a much smaller effect for services sectors. These results suggest there are differences in the types of entry between sectors and in the roles start-ups play in different sectors. |
| Date: | 2009–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200905&r=mic |