nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒03‒22
thirteen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Market Sharing and Price Leadership By Farm, Ante
  2. Trip chaining: Who wins who loses? By André De Palma; Fay Dunkerley; Stef Proost
  3. Anti-Competitive Effects of resale-Below-Cost Laws By Marie-Laure Allain; Claire Chambolle
  4. Strategic Information Disclosure and Competition for an Imperfectly Protected Innovation By Jos Jansen
  5. Patent Scope and Technology Choice By Färnstrand Damsgaard, Erika
  6. The Entrepreneurial Adjustment Process in Disequilibrium: Entry and Exit when Markets Under and Over Shoot By Andrew Burke; Andre van Stel
  7. The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition By Uwe Dulleck; Rudolf Kerschbamer; Matthias Sutter
  8. A Theory of Corporate Social Responsibility in Oligopolistic Markets By Claudia Alves; Luís Santos-Pinto
  9. Globalization and Innovation in Emerging Markets By Yuriy Gorodnichenko; Jan Svejnar; Katherine Terrell
  10. Pricing, Investments and Mergers with Intertemporal Capacity Constraints By Charalambos Christou; Rossitsa Kotseva; Nikolaos Vettas
  11. Product Variety, Price Elasticity of Demand and Fixed Cost in Spatial Models By Yiquan Gu; Tobias Wenzel
  12. Self-Confidence and Timing of Entry By Tiago Pires; Luís Santos-Pinto
  13. Promoting clean technologies under imperfect competition By Théophile T. Azomahou; Raouf Boucekkine; Phu Nguyen-Vanc

  1. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: This paper proposes an alternative to the traditional model of supply and demand in markets where consumers take prices as given. Within the framework of “no side payments and partial preplay communication” firms are assumed to decide non-cooperatively on production and marketing while the market price is set by a competitive price leader, i.e. a firm preferring the lowest market price. Predictions include excess supply and a revenuemaximizing market price in markets where production precedes sales. In markets where sales precede production competitive price leadership predicts monopoly pricing but not necessarily monopoly profits if firms are “sufficiently similar”, while the presence of firms with high costs or low capacities will make it possible for the price leader, in some circumstances, to increase its market share and also its profits by reducing its price. And the threat of costly competition for market shares may reduce the market price even for identical firms.
    Keywords: Pricing; oligopoly; price leadership; market sharing
    JEL: L13
    Date: 2009–03–12
  2. By: André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - Ecole Normale Supérieure de Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Fay Dunkerley (Center for Economic Studies - CES - KU Leuven - CES - KU Leuven); Stef Proost (Center for Economic Studies - CES - KU Leuven - CES - KU Leuven)
    Abstract: This paper studies how trip chaining (combining commuting and shopping or commuting and child care) affects market competition: in particular, pricing and the equilibrium number of firms as well as welfare. We use a monopolistic competition framework, where firms sell differentiated products as well as offering differentiated jobs to households, who are all located at some distance from the firms. The symmetric equilibria with and without the option of trip chaining are compared. We show analytically that introducing the trip chaining option reduces the profit margin of the firms in the short run, but increases welfare. The welfare gains are, however, smaller than the transport cost savings. In the free-entry long run equilibrium, the number of firms decreases but welfare is higher. A numerical illustration gives orders of magnitude of the different effects.
    Keywords: trip chaining ; discrete choice model ; imperfect competition ; wage and price competition
    Date: 2008–11
  3. By: Marie-Laure Allain (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Claire Chambolle (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA - LORIA)
    Abstract: We show that resale-below-cost laws enable producers to impose industry-wide price-floors to retailers. This mechanism suppresses downstream competition but also and more surprisingly dampens upstream competition, leading to higher prices and lower welfare. Price-floor may be more profitable for producers than resale price maintenance contracts and, when a resale price maintenance restraint may have ambiguous effect on welfare, price-floors are always welfare damaging. Retailers' buyer power appears as a key for a price-floor to work out.
    Keywords: Price-floor, Resale Price Maintenance, Buyer Power, Competition
    Date: 2009–03–11
  4. By: Jos Jansen (Max Planck Institute for Research on Collective Goods)
    Abstract: The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free-rider effect in the competition for the innovation that countervails the familiar business-stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms.profits and the probability of innovation.
    Keywords: R&D competition, innovation, spillovers, information disclosure, strategic substitutes, free-rider effect, externality
    JEL: D82 D83 L23 O31 O32
    Date: 2009–02
  5. By: Färnstrand Damsgaard, Erika (Research Institute of Industrial Economics (IFN))
    Abstract: This paper analyzes the effect of an increase in patent scope on R&D and innovation. It presents a model where patent scope affects an entrant firm's technology choice and thereby creates a trade-off between R&D investments and wasteful duplication of R&D. The model predicts that an increase in patent scope can increase the probability of innovation if the incumbent’s profit increase from innovation is large and the patented technology has a small advantage over the alternative technology. However, when the model is extended to Stackelberg competition or licensing, the benefit of a broad patent scope to a large extent disappears.
    Keywords: Innovation; Patents; Patent policy; Licensing
    JEL: K20 L51
    Date: 2009–03–03
  6. By: Andrew Burke; Andre van Stel
    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
  7. By: Uwe Dulleck (QUT); Rudolf Kerschbamer (University of Innsbruck); Matthias Sutter (University of Innsbruck and University of Gothenburg)
    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.
    Date: 2009–03–02
  8. By: Claudia Alves; Luís Santos-Pinto
    Abstract: This paper provides a theory of corporate social responsibility in imperfectly competitive markets. We consider a two-stage game where consumers have a preference from buying goods from firms that do CSR and where firms first decide simultaneously the amount per unit sold to give to social causes and then choose quantities. We find that firms will do CSR when products are complements but might not do it when products are substitutes. We characterize how contributions to social causes depend on costs of production and on the degree of product differentiation. Finally, we show that CSR increases quantities, prices and profits.
    Keywords: corporate social responsibility; oligopoly; market outcomes
    JEL: D21 D43 D64 M14
    Date: 2008–10
  9. By: Yuriy Gorodnichenko (University of Michigan); Jan Svejnar (University of Michigan); Katherine Terrell (University of Michigan)
    Abstract: Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 transition economies, we test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms' efforts to raise their capability (innovate) by upgrading their technology or the quality of their product/service, taking into account firm heterogeneity. We find competition has a negative effect on innovation, especially for firms further from the frontier, and that the supply chain of multinational enterprises and international trade are important channels for domestic firm innovation. We do not find support for the inverted U effect of competition on innovation. There is weak evidence that firms in a more pro-business environment invest more in innovation and are more likely to display the inverted U relationship between competition and innovation.
    Keywords: emerging markets, globalization, innovation
    Date: 2008–04
  10. By: Charalambos Christou (Department of Economics, University of Macedonia); Rossitsa Kotseva (Department of Economics, University of Cyprus); Nikolaos Vettas (Department of Economics, Athens University of Economics and Business)
    Abstract: On tWe set up a duopoly model with dynamic capacity constraints under demand uncertainty. We endogenize the investment decisions of the ?rms, examine their intertemporal pricing behavior, their incentives to merge, as well as the welfare implications of a merger. Whereas under known and constant demand the high capacity ?rm lets its low capacity rival sell out, under demand uncertainty we obtain a rich set of sales patterns. Each unit of available capacity has an option value (or opportunity cost), which depends on both ?rms? capacities, the current demand and the remaining horizon. This option value may be higher when the ?rms act non-cooperatively compared to the case when they merge to form a monopoly. Trade surplus may be higher when a merger takes place, as capacity is more e? ciently managed over time. The prospect of a merger also leads to higher investment levels, as each ?rm wishes to appropriate a higher share of the total surplus. For some levels of the capacity installment cost, a merger that turns the duopoly into a monopoly is welfare improving.
    Keywords: dynamic oligopoly, price competition, capacity constraints, inventories, mergers.
    JEL: D43 L13 L22
    Date: 2009–03
  11. By: Yiquan Gu; Tobias Wenzel
    Abstract: This paper explores the implications of price-dependent demand in spatial models of product differentiation.We introduce consumers with a quasi-linear utility function in the framework of the Salop (1979) model.We show that the so-called excess entry theorem relies critically on the assumption of completely inelastic demand. Our model is able to produce excessive, insufficient, or optimal product variety.A proof for the existence and uniqueness of symmetric equilibrium when price elasticity of demand is increasing in price is also provided.
    Keywords: Demand elasticity, spatial models, excess entry theorem
    JEL: L11 L13
    Date: 2009–03
  12. By: Tiago Pires; Luís Santos-Pinto
    Abstract: This paper analyzes the impact of overconfidence on the timing of entry in markets, profits, and welfare. To do that the paper uses an endogenous timing model where (i) players have private information about costs and (ii) one player is overconfident and the other is rational. The paper shows that for moderate levels of self-confidence there is a unique cost-dependent equilibrium where the overconfident player has a higher ex-ante probability of entering the market before the rational player. In this equilibrium self-confidence reduces the profits of the rational player but can increase the profits of the overconfident player provided that cost asymmetries are small. Finally, we show that overconfidence reduces welfare, except when cost asymmetries are very small.
    Keywords: endogenous timing; entry; overconfidence
    JEL: A12 C72 D43 D82 L10
    Date: 2008–10
  13. By: Théophile T. Azomahou; Raouf Boucekkine; Phu Nguyen-Vanc
    Abstract: We develop a general equilibrium multi-sector vintage capital model with energy-saving technological progress and an explicit energy market to study the impact of investment subsidies on investment and output. Energy and capital are assumed to be complementary in the production process. New machines are less energy consuming and scrapping is endogenous. The intermediate inputs sector is modelled à la Dixit-Stiglitz (1977). Two polar market structures are considered for the energy market, free entry and natural monopoly. The impact of imperfect competition on the outcomes of the decentralized equilibria are deeply characterized. We identify an original paradox: adoption subsidies may induce a larger investment into cleaner technologies either under free entry or natural monopoly. However, larger diffusion rates do not necessarily mean lower energy consumption at equilibrium, which may explain certain empirical puzzles.
    Keywords: Energy-saving technological progress; vintage capital; market imperfections; natural monopoly; investment subsidies
    JEL: O40 E22 Q40
    Date: 2009–02

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