nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒04‒05
twenty-two papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Patents versus Subsidies – A Laboratory Experiment By Donja Darai; Jens Grosser; Nadja Trhal
  2. A game theoretic model for generation capacity adequacy in electricity markets: A comparison between investment incentive mechanisms By Mohamed Haikel Khalfallah
  3. Is the French mobile phone cartel really a cartel? By Mesnard, Louis de
  4. Working with Distant Researchers – distance and content in university-industry interaction By Broström, Anders
  5. The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship By Jan Bena
  6. Conditional and Unconditional Multiple Equilibria with Strategic Complementarities By Stefania Borla; Peter Simmons
  7. More firms, more competition : is it certain? The case of the fourth operator in France's mobile telephony. By Mesnard, Louis de
  8. The Effects of Fiscal Incentives for R & D in Spain By Beatriz Corchuelo; Ester Martinez-Ros
  9. Geographic proximity and firm-university innovation linkages: evidence from Great Britain By Laura Abramovsky; Helen Simpson
  10. Beef up Your Competitor : A Model of Advertising Cooperation between Internet Search Engines By Geza Sapi; Irina Suleymanova
  11. A Survey on the Economics of Behaviour-Based Price Discrimination By Rosa Branca Esteves
  12. Cumulative Leadership and Entry Dynamics By Bruno Versaevel
  13. Finance and R&D Investments – is there a debt overhang effect on R&D investments? By Martinsson, Gustav
  14. Índice de Confiança do Empresário de Pequenos e Médios Negócios no Brasil (IC-PMN): Metodologia e Resultados Preliminares By Claro, Danny P; Júnior, José L. R.; Laban Neto, Sílvio A. & Lucci, Cíntia R. & Bolzani, Luciana C. & Carvalho, Marina D. de
  15. Open Innovation in firms located in an intermediate technology developed country By Mariana Lopes; Aurora A.C. Teixeira
  16. Industry-university S&T transfers: what can we learn from Belgian CIS-2 data? By CAPRON, Henri; CINCERA, Michèle
  17. Why flexible boundaries help a firm deal with evolving demand By Willem H Boshoff
  18. Returns on R&D investment: A comprehensive survey on the magnitude and evaluation methodologies By Andreia Cardoso; Aurora A.C. Teixeira
  19. Introdução à teoria do consumidor By Vieira, Pedro Cosme da Costa
  20. Bank Competition and Firm Growth in the Enlarged European Union By Gábor Pellényi; Tamás Borkó
  21. Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties? By Giovanni Immordino; Marco Pagano; Michele Polo
  22. Technological change, financial innovation, and diffusion in banking By W. Scott Frame; Lawrence J. White

  1. By: Donja Darai (Socioeconomic Institute, University of Zurich); Jens Grosser (Departments of Political Science and Economics, Florida State University); Nadja Trhal (Economics Department, University of Cologne)
    Abstract: This paper studies the effects of patents and subsidies on R&D investment decisions. The theoretical framework is a two-stage game consisting of an investment and a market stage. In equilibrium, both patents and subsidies induce the same amount of R&D investment, which is higher than the investment without governmental incentives. In the first stage, the firms can invest in a stochastic R&D project which might lead to a reduction of the marginal production costs and in the second stage, the firms face price competition. Both stages of the game are implemented in a laboratory experiment and the obtained results support the theoretical predictions. Patents and subsidies increase investment in R&D and the observed amounts of investment in the patent and subsidy treatment do not differ significantly across both instruments. However, we observe overinvestment in all three treatments. Observed prices in the market stage converge to equilibrium price levels.
    Keywords: R&D investment, oligopoly, patents, subsidies, experiment
    JEL: C90 L13 O31
    Date: 2009–03
  2. By: Mohamed Haikel Khalfallah (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this paper we study the problem of long-term capacity adequacy in electricity markets. We implement a dynamic model in which operators compete for investment and electricity production under imperfect Cournot competition. The main aim of this work is tocompare three investment incentive mechanisms: reliability options, forward capacity market - which are both market-based - and capacity payments. Apart from the oligopoly case, we also analyze collusion and monopoly cases. Stochastic dynamic programming is used to deal with the stochastic environment of the market (future demand) and mixed complementarityproblem formulation is employed to find a solution to this game. The main finding of this study is that market-based mechanisms would be the most cost-efficient mechanism for assuring long-term system adequacy and encouraging earlier and adequate new investments in the system. Moreover, generators would exert market power when introducing capacity payments. Finally, compared with a Cournot oligopoly, collusion and monopolistic situations lead to more installed capacities with market-based mechanisms and increase end-users' payments.
    Keywords: Electricity markets; capacity adequacy; dynamic programming; Nash-Cournot model; mixed complementarity problem
    Date: 2009
  3. By: Mesnard, Louis de (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: France Telecom (FT), SFR and Bouygues Telecom (BT) have been fined by France’s Conseil de la Concurrence (CC) for organizing a mobile phone cartel with stable market shares (one-half, one-third and one-sixth respectively) and for directly exchanging commercial information. While not contesting the legal decision, it is argued here that the economic reasoning is flawed. 1) As the CC made much of the firms’ stable market shares, we have first followed this line of reasoning by considering that the market shares are quotas under uniform costs. Even if there is a general incentive to form a monopolistic cartel, BT was too small for it to be worth its while to join it; it is not necessary to exchange information directly to coordinate market shares and prices effectively; all partial cartels are unlikely. 2) We then considered that the non-uniform market shares are explained by the costs in Cournot competition which can be deduced from the observed market shares by assuming that the costs are kept the same when switching from Cournot competition to any form of cartel. We deduced that market shares cannot be other than stable and non-uniform; any monopoly is unlikely to come about, because FT has negative incentives to form a monopolistic cartel; no partial cartels of two operators are viable because at least one member would lose out. The paper also shows that Stackelberg competition is unlikely as well as Bertrand-Edgeworth competition. In conclusion, Cournot competition is the only arrangement that guarantees no losses to all operators.
    Keywords: Cartel; Mobile phone; Mobile telephony; GSM; Conseil de la Concurrence;ARCEP ; Cournot ; Stackelberg
    JEL: L13 L41 L96 D43 K21
    Date: 2009
  4. By: Broström, Anders (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: This paper studies the role of geographic proximity for interaction on R&D, by exploring the special case of university-industry contacts. While numerous studies find that geographic proximity facilitates spillover effects between university and industry by utilising evidence from e.g. patenting and publishing activities, the geographical dimension is largely understudied in studies that report evidence from direct interaction. To explore when geographical proximity matters for university-industry interaction, a series of interviews with R&D managers in Swedish engineering firms is conducted. These interviews suggest that linkages in geographical proximity are more likely to generate impulses to innovation and create significant learning effects at the firm. Similarly, geographic proximate interaction is more likely to successfully contribute to R&D projects with short time to market. For long-term R&D projects, geographic proximity is generally seen as a less critical factor. A survey to 425 R&D managers in Swedish engineering firms provides evidence that supports these hypotheses.
    Keywords: R&D collaboration; innovation collaboration; university; technology transfer
    JEL: L21 L23 O32
    Date: 2009–03–25
  5. 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.
    Date: 2009–03
  6. By: Stefania Borla; Peter Simmons
    Abstract: We take a general model of externalities matching the Cooper & John framework with identical agents. If each agent's payoff depends on a parameter interpreted as the favourableness of the environment, we explore how the number of Nash equilibria varies with this parameter, especially in the cases in which the reaction curves are either concave or convex. In many examples the environmental conditions are themselves endogenous because either market or regulatory forces interact with agents' Nash equilibrium actions. This gives the idea of a simultaneous equilibrium in the environment and players' symmetric actions. We analyse how this generalised equilibrium behaves as a function of some additional parameters conditioning the environmental response to players actions. We show that generally there is a fold bifurcation in these equilibria. We illustrate the principles with two examples from industrial economics (cost spillovers between firms and demand spillovers under imperfect competition).
    Keywords: cost spillovers, Nash and Market equilibrium, coordination failure.
    JEL: C62 C72 D43 D62
    Date: 2009–03
  7. By: Mesnard, Louis de (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: The French government plans to authorize a fourth operator to enter the country’s mobile phone market alongside Orange, SFR and Bouygues Telecom. While the French government sees this as a way to foster competition, this paper predicts the move will prove a disappointment. Three points are examined. 1) If the operators are in four-way Cournot competition, minimizing the total profit fails to maximize the consumer surplus and the total surplus; the most realistic price fall is only of 1.11% compared to three-way Cournot competition. 2) The overall incentives for forming a monopoly are positive; when the fourth operator’s costs are high, there will be no move from a three-way Cournot competition to a monopolistic cartel of four because Orange experiences negative incentives; there will be no move from a monopolistic cartel of three to a monopolistic cartel of four. 3) Moving from fourway Cournot competition to a partial cartel formed by Orange, SFR and Bouygues Telecom is unlikely; when the fourth operator enters a market dominated by the monopolistic cartel of Orange, SFR and Bouygues Telecom, these three operators will not continue forming a cartel; excluding the fourth operator from the monopolistic cartel of four is also losing; the cartel formed by SFR, Bouygues Telecom and the fourth operator is never credible either.
    Keywords: Cartel; Mobile phone; Mobile telephony; Fourth operator; GSM; 3G.
    JEL: L13 L41 L96 D43
    Date: 2009
  8. By: Beatriz Corchuelo; Ester Martinez-Ros
    Abstract: This paper explores the effect of fiscal incentives for R&D on innovation. Spain is considered one of the most generous countries in the OECD in fiscal treatment of R&D, yet our data reveal that tax incentives are little known and, especially, seldom used by firms. Restricting our empirical analysis to those firms that do report knowing about such incentives, we investigate the average effect of tax incentives on innovation, using both nonparametric methods (matching estimators) and parametric methods (Heckman’s two-step selection model with instrumental variables). First, we find that large firms, especially those that implement innovations, are more likely to use the tax incentives, while small and medium enterprises (SMEs) encounter some obstacles to using them. Secondly, the average effect of the policy is positive, but significant only in large firms. Our main conclusion is that tax incentives increase innovative activities by large and high-tech sector firms, but may be used only randomly by SMEs
    Keywords: R&D fiscal incentives, Matching methods
    JEL: O31 H25 H32
    Date: 2009–03
  9. By: Laura Abramovsky (Institute for Fiscal Studies); Helen Simpson (Institute for Fiscal Studies and CMPO, Bristol)
    Abstract: <p><p>We investigate evidence for spatially mediated knowledge transfer from university research. We examine whether firms locate their R&D labs near universities, and whether those that do are more likely to co-operate with, or source knowledge from universities. We find that pharmaceutical firms locate R&D near to frontier chemistry research departments, consistent with accessing localised knowledge spillovers, but also linked to the presence of science parks. In industries such as chemicals and vehicles there is less evidence of immediate co-location, but those innovative firms that do locate near to relevant research departments are more likely to engage with universities.</p></p>
    Keywords: Innovation, geography, spillovers, public research
    JEL: O3 R11 R13 I23
    Date: 2009–01
  10. By: Geza Sapi; Irina Suleymanova
    Abstract: We propose a duopoly model of competition between internet search engines endowed with different technologies and study the effects of an agreement where the more advanced firm shares its technology with the inferior one. We show that the superior firm enters the agreement only if it results in a large enough increase in demand for advertising space at the competing .rm and a relatively small improvement of the competitor's search quality. Although the superior firm gains market share, the agreement is beneficial for the inferior firm, as the later firm's additional revenues from a higher advertising demand outweigh its losses due to a smaller user pool. The cooperation is likely to be in line with the advertisers' interests and to be detrimental to users' welfare.
    Keywords: Search Engine, Two-Sided Market, Advertising, Strategic Complements, Technology
    JEL: L13 L24 L86 M37
    Date: 2009
  11. By: Rosa Branca Esteves (Universidade do Minho - NIPE)
    Abstract: Economists have long been interested in understanding the profit, consumer surplus and welfare effects of an ancient marketing strategy: Price Discrimination. While it is not new that firms try frequently to segment customers in order to price discriminate, what has dramatically changed, with recent advances in information technologies, is the quality of consumer-specific data now available in many markets and how this information has been used by firms for price discrimination purposes. Specifically, thanks to information technology it is nowadays increasingly feasible for sellers to segment customers on the basis of their purchasing histories and to price discriminate accordingly. This form of price discrimination has been named in the literature as Behaviour-Based Price Discrimination (BBPD). For a long time economists have been concerned in understanding the economic effects of price discrimination in monopolistic markets. However, because imperfect competition is undoubtedly the most common economic setting, recent research on the field has been concerned with the following issues. Firstly, how are profit, consumer surplus and welfare affected when firms practice some form of price discrimination in imperfectly competitive markets? Secondly, in which circumstances may competitive firms have an incentive to price discriminate or rather to avoid it? As we will see, conclusions regarding the profit and welfare effects of price discrimination are strongly dependent upon the form of price discrimination, which in turn depends upon the form of consumer heterogeneity and the different instruments available for price discrimination. Basically, the aim of this survey is to clarify the two aforementioned issues in imperfectly competitive markets.
    Date: 2009
  12. By: Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper investigates the combined impact of a first-mover advantage and of firms' limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as aStackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firms' equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play `a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of thefollower. It also increases the distance between the firms' respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads.
    Keywords: Real options; Preemption; First-mover advantage; Mobility
    Date: 2009
  13. By: Martinsson, Gustav (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The motivation of this paper is the rather naive approach to debt as a financing source of R&D investment in the empirical investment literature. I focus on long-term relational debt based on its appealing contractual properties and discover a debt overhang effect for the relationship between additional long-term debt and R&D investment. I augment an error correction accelerator-profit specification to include changes in long-term debt as a transitory determinant of R&D investment as has been done with internal finance previously. Firms with previous period debt levels around 0.60 display a positive relationship between additional long-term debt and R&D investment.
    Keywords: Econometrics; Financial Economics; Financial Markets; R&D; Financing Constraints
    JEL: C01 O16 O30
    Date: 2009–03–25
  14. By: Claro, Danny P; Júnior, José L. R.; Laban Neto, Sílvio A. & Lucci, Cíntia R. & Bolzani, Luciana C. & Carvalho, Marina D. de
    Date: 2009–10
  15. By: Mariana Lopes (Faculdade de Economia, Universidade do Porto); Aurora A.C. Teixeira (INESC Porto; CEFUP, Faculdade de Economia, Universidade do Porto)
    Abstract: Open Innovation is a flow of inputs and outputs of knowledge and technology which favours, at the firm level, the acceleration of the innovation process, as well as the establishment and penetration of firms in new markets. This type of innovation incorporates technological innovation from internal and external sources, as well as different ways to access markets. The empirical studies in the area reveal that there is a significant bias in favour of countries of technological frontier, such as the United States, Finland, the Netherlands, Germany or Sweden. The present study aims at covering this gap in literature by examining firms in a country of intermediate technology development – Portugal. Based on 70 innovative firms located in Portugal we found that open innovation is only partially diffused throughout these firms. In addition, open innovation is more widespread in terms of external absorption of knowledge/ technology rather than in terms of knowledge/technology transfer. This result may indicate lack of awareness about the economic potential of making available to third parties the technologies internally created. This may require a different approach to organization/management of R&D, in particular, and of innovation, in general.
    Keywords: Open Innovation; Intermediate technology development; Portugal.
    JEL: O32
    Date: 2009–03
  16. By: CAPRON, Henri; CINCERA, Michèle
    Keywords: industiy-university collaborations; innovation; Belgian CIS-2
  17. By: Willem H Boshoff (Department of Economics, University of Stellenbosch)
    Abstract: Recent work on the architecture of the firm suggests that firms may adopt flexible boundaries in response to a hostile environment. Flexible boundaries involve a dynamic organizational setup, where the firm draws its boundaries along the value chain in different ways for its different clients, enabling the firm to enter new intermediate markets in addition to its traditional end-markets. In particular, research suggests that a flexible boundary structure offers a strategic advantage to firms in mature industries facing increased competition and declining profit levels. This paper investigates an alternative rationale for the adoption of flexible boundaries by studying the role of demand-side views. In an era of increasing pressure for corporate social responsibility, clients are increasingly concerned about the roles and identities of different players in the value chain serving them. Consequently, firms may have to consider these value chain views when drawing their boundaries. This paper argues that the firm may accommodate variety in these demand-side views using flexible boundaries. The paper studies the impact of demand-side views on firm boundaries through an in-depth case study of a small South African firm. The setting is quite different from traditional studies focusing on US or European manufacturing and technology firms, but vividly illustrates a case where demand-side factors dominate supply-side considerations in the decision to adopt flexible boundaries.
    Keywords: Boundaries, Architecture, Vertical integration, Supply chain, Institutional choice, Subcontracting
    JEL: D23 L10 L14 L22 L24
    Date: 2009
  18. By: Andreia Cardoso (UITT; INESC Porto); Aurora A.C. Teixeira (INESC Porto, CEFUP, Faculdade de Economia, Universidade do Porto)
    Abstract: As technology and innovation seem to be contingent upon each other a great deal of attention has been given to the importance of assessing the contribution of R&D investment to firm and industry performance and, ultimately, to the economic performance of countries and regions. In industrialised societies not only private but also public agents have allocated increasing amounts of their resources to R&D activities, often considered the key path to innovativeness. At the same time, due to advances in empirical research, increasingly more focused on the micro (firms) rather than on the macro (country) level, old myths about the relationship between R&D, innovation and success began to fall down. Firstly, the idea that innovation is much broader than R&D has gained large support and has made it possible to identify other sources of innovation, beyond excellence in R&D, which had been largely hidden or neglected. As result, perceptions about small firms - or the so-called low-tech industries, which either do not carry out any significant R&D activities or are likely to perform them outside formal classifications - started to change. Secondly, the idea that more R&D investment is always automatically bond to success - whatever criteria one may choose to define success – has become nothing more than a utopia. In this paper we carry out an analysis of the literature on the magnitude and evaluation of R&D, and, possibly, of innovation. We identify the methodologies used and analyse to what extent the magnitude of (eventual) R&D returns is dependent on the methodology pursued and the level of analysis - firms (micro), industry (meso), and regions/countries (macro) - considered. We conclude that methodological approaches and levels of analysis determine, to a certain extent, the type of results obtained and, thus, variances between them.
    Keywords: Innovations and R&D indicators; Methodologies; Macro, meso and micro levels; R&D payoff
    Date: 2009–03
  19. By: Vieira, Pedro Cosme da Costa
    Abstract: This textbook supports undergraduate microeconomics students. In Chapter 1, it presents the market as three Laws of Nature: i) that supply function is the result from the decision of the sellers, ii) that demand function is the result from the decisions of buyers; iii) that the market balance the decisions of buyers with that of sellers. This chapter motivates chapter 2, which rationalizes the existence of the demand function from the Consumer Theory that assumes that consumers maximize a utility function under the income restriction and market prices.
    Keywords: Indifference curve; income restriction; utility maximization
    JEL: A22 D11
    Date: 2009–03–24
  20. By: Gábor Pellényi; Tamás Borkó
    Abstract: We examine the impact of bank competition and institutional factors on net firm entry in a sample of European manufacturing industries over the 1995-2006 period. Taking into account industry differences in the need for external finance, we find that bank competition helps firm entry. In addition, better institutions - especially legal structure and property rights - also have a positive impact, particularly through a better functioning financial system.
    Keywords: market structure, banks, market entry, manufacturing, financial development
    JEL: D4 G21 L11 L60 O16
    Date: 2009
  21. By: Giovanni Immordino (Università di Salerno and CSEF); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Michele Polo (Università Bocconi di Milano, IGIER and CSEF)
    Abstract: We analyze optimal policy design when firms' research activity may lead to socially harmful innovations. Public intervention, affecting the expected profitability of innovation, may both thwart the incentives to undertake research (average deterrence) and guide the use to which innovation is put (marginal deterrence). We show that public intervention should become increasingly stringent as the probability of social harm increases, switching first from laissez-faire to a penalty regime, then to a lenient authorization regime, and finally to a strict one. In contrast, absent innovative activity, regulation should rely only on authorizations, and laissez-faire is never optimal. Therefore, in innovative industries regulation should be softer.
    Keywords: innovation, liability for harm, safety regulation, authorization
    JEL: D73 K21 K42 L51
    Date: 2009–03–25
  22. By: W. Scott Frame; Lawrence J. White
    Abstract: This paper discusses the technological change and financial innovation that commercial banking has experienced during the past twenty-five years. The paper first describes the role of the financial system in economies and how technological change and financial innovation can improve social welfare. We then survey the literature relating to several specific financial innovations, which we define as new products or services, production processes, or organizational forms. We find that the past quarter century has been a period of substantial change in terms of banking products, services, and production technologies. Moreover, while much effort has been devoted to understanding the characteristics of users and adopters of financial innovations and the attendant welfare implications, we still know little about how and why financial innovations are initially developed. incompl s
    Keywords: technological change, financial innovation, banking CL HG2567 A4A5
    Date: 2009

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