nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒04‒25
sixteen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Product Innovation Incentives: Monopoly vs. Competition By Marius Schwartz
  2. Market Share, R&D Cooperation, and EU Competition Policy By Richard Rubble; Bruno Versaevel
  3. In serach of lost disincentive effect from intra-industry spillovers By Stéphane Lhuillery
  4. A game theoretic model for generation capacity adequacy in electricity markets: A comparison between investment incentive mechanisms By Mohamed Haikel Khalfallah
  5. What Does it Take for an R&D Tax Incentive Policy to Be Effective? By Pierre Mohnen; Boris Lokshin
  6. Appropriability, Patents, and Rates of Innovation in Complex Products Industries By Luigi Marengo; Corrado Pasquali; Marco Valente; Giovanni Dosi
  7. Cumulative Leadership and Entry Dynamics By Bruno Versaevel
  8. Does tougher import competition foster product quality upgrading ? By Fernandes, Ana M.; Paunov, Caroline
  9. Bundling and Competition for Slots: On the Portfolio Effects of Bundling By Doh-Shin Jeon; Domenico Menicucci
  10. De-Industrialisation, Entrepreneurial Industries and Welfare By Albert G. Schweinberger; Jens Suedekum
  11. The strategic motive to sell forward: experimental evidence By José Luis Ferreira; Praveen Kujal; Stephen Rassenti
  12. Entry in Collusive Markets: An Experimental Study By Goppelsroeder, Marie
  13. A Real Options Perspective On R&D Portfolio Diversification By Bekkum, S. van; Pennings, H.P.G.; Smit, J.T.J.
  14. When is concentration beneficial? Evidence from U.S. manufacturing By Rigoberto A. López; Elena López; Carmen Liron-Espana
  15. Sunk Entry Costs, Sunk Depreciation costs, and Industry Dynamics By Adelina Gschwandtner; Val E. Lambson
  16. Does it Matter Who Has the Right to Patent: First-to-invent or First-to-file? Lessons From Canada By Shih-tse Lo; Dhanoos Sutthiphisal

  1. By: Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: Arrow (1962) showed that a secure monopolist (unconcerned with preemption) has a weaker incentive than would a competitive firm to invest in a patentable process innovation. This paper shows that the ranking can be reversed for product innovations. Only the innovator sells the new product, a differentiated substitute for the old. Under alternative market structures considered, the old product is sold only by that same firm (two-product monopoly), only by a different firm (post-innovation duopoly), or in perfect competition. In an asymmetric Hotelling model, the innovation incentive under monopoly is greater than under duopoly if and only if the new product has the higher quality, and is always greater than under perfect competition. Classification-JEL Codes: D4, L1
    Date: 2009–04–02
  2. By: Richard Rubble (EMLYON Business School - EMLYON Business School); Bruno Versaevel (EMLYON Business School - EMLYON Business School, GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: Current EU policy exempts horizontal R&D agreements from antitrust con- cerns when the combined market shares of participants are low enough. This paper argues that existing theory does not support limiting the exemption to low market shares. This is done by introducing a set of non-innovating outside ï¬rms to the standard framework to assess what link might exist between the market share of innovating ï¬rms and the product market beneï¬ts of cooperation. With R&D output choices, the market share criterion, while it rules out the most socially harmful R&D cooperation agreements, also hinders the most beneï¬cial ones. With R&D input choices, cooperation may actually be desirable in concentrated industries, and harmful in more competitive ones. If R&D cooperation does have anti-competitive effects in product markets, it seems that these are therefore best addressed by other tools than market share criteria.
    Keywords: R&D; Cooperation; Competition; Regulation
    Date: 2009
  3. By: Stéphane Lhuillery (Chaire en Economie et Management de l'Innovation, Collège du Management de la Technologie, Ecole Polytechnique Fédérale de Lausanne)
    Abstract: Standard innovation surveys do not consider incoming spillovers for non-innovative firms. The Swiss innovation surveys presented here measure the importance of competitors' knowledge for both innovating and noninnovating firms. This original feature not only enables us to accurately identify the role of incoming knowledge on R&D decisions and innovation output, but also to compare resulting data with those which standard innovation questionnaires provide. Using a panel data over four periods, we show that knowledge from rivals actually deters manufacturing firms from engaging in R&D activities. Moreover, we provide stronger evidence that intra-industry spillovers are more detrimental to innovation than that generally provided by data from standard surveys. The results suggest that the dominance of the absorptive capacity effect is more important to firms investing in R&D and that non-innovative firms rely more heavily than expected on their competitors to maintain their technological capacities.
    Keywords: intra-industry spillovers, absorption, innovation survey
    JEL: O31 C35 C81
    Date: 2009–03
  4. By: Mohamed Haikel Khalfallah (University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France)
    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 to compare 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 complementarity problem 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
    JEL: C61 C68 C73 D58 L13 Q41
    Date: 2009
  5. By: Pierre Mohnen; Boris Lokshin
    Abstract: While in 1996, 12 OECD countries offered R&D tax incentives, in 2008 this number increased to 21. Most countries have opted for level-based instead of incremental R&D tax incentives. This paper takes a critical look at how the effectiveness of R&D tax incentives has been assessed in recent evaluations. Whether based on structural models estimating a price elasticity of R&D or on treatment evaluation methods, most studies estimate the cost effectiveness ratio or additionality. If the cost effectiveness ratio is greater than 1, or firms do more R&D than before, the policy is considered to be effective. A more proper net welfare evaluation of this policy should also include administration, compliance and transfer costs, the marginal burden of taxation, as well R&D externalities and the indirect effects on innovation and productivity.<br> The net welfare gain is shown to be sensitive to a certain number of parameters that are not always estimated with great precision. In particular, the transfer cost or deadweight loss associated with level-based tax incentives is shown to depend on the size of the firm, or more precisely its ex-ante R&D level. We report on the success of a past policy changes in the Netherlands and simulate the effect of various parameter changes in the existing Dutch R&D tax incentive scheme. We show that introducing marginal changes in the schemes’s parameters has little impact of increased R&D spending. The policy is more effective for small firms than for large firms. We end with a discussion of the pros and cons of level-based versus incremental R&D tax incentives. <P>Alors qu’en 1996, 12 pays de l’OECD offraient des crédits d’impôt recherche, en 2008 ils furent au nombre de 21. La plupart des pays optent pour des crédits d’impôt en volume et non en accroissement. Nous jetons un regard critique sur la façon dont l’efficacité des incitations à la R-D a été évaluée jusqu’ici. Que ce soit sur la base de modèles structurels qui estiment une élasticité-prix à la recherche ou à partir de méthodes d’évaluation de traitement, la plupart des études testent l’existence d’un effet d’additionalité. Si les entreprises font plus qu’un dollar de recherche par dollar de crédit d’impôt, la politique est considérée comme efficace. Une analyse coût-bénéfice plus globale qui inclurait également les coûts de gestion publique et privée des crédits d’impôt, les coûts additionnels dus à la taxation, les externalités de la recherche et les effets de celle-ci sur l’innovation et la productivité, serait plus appropriée.<br> Le bénéfice social net qui ressort d’une telle analyse est sensible à des estimations par ailleurs assez imprécises de certains de ces effets. Nous montrons que la perte sèche liée aux crédits d’impôt recherche en volume dépend du niveau de R-D exécutée avant l’entrée en vigueur des crédits d’impôt. Nous examinons l’efficacité de la politique des crédits d’impôt recherche aux Pays-Bas. Nous montrons notamment que des changements marginaux dans certains paramètres de cette politique n’ont qu’un impact limité sur les dépenses privées de recherche des entreprises. Cette politique est plus efficace pour les petites entreprises que pour les grandes. Nous terminons en pesant le pour et le contre d’une politique de crédits d’impôt en volume comparée à une politique en accroissement.
    Keywords: R&D tax credits; policy evaluation; cost-benefit analysis, crédits d’impôt recherche; évaluation de politiques; analyse coût-bénéfice.
    Date: 2009–04–01
  6. By: Luigi Marengo; Corrado Pasquali; Marco Valente; Giovanni Dosi
    Abstract: The economic theory of intellectual property rights is based on a rather narrow view of both competition and technological knowledge. We suggest some ways of enriching this framework with a more empirically grounded view of both and, by means of a simulation model, we analyze the impact of different property right regimes on the dynamics of a complex product industry, that is an industry where products are complex multi-component objects and competition takes place mainly through differentiation and component innovation. We show that, as the complexity of the product spaces increases, stronger patent regimes yield lower rates of innovation, lower product quality and lower consumers' welfare. localized ones.
    Keywords: patents; appropriability of innovation; complex product industries; industrial dynamics
    JEL: O31 O34 L11
    Date: 2009–04–07
  7. By: Bruno Versaevel (EMLYON Business School, Ecully, F-69134 and University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France)
    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 a Stackelberg 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 the follower. 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
    JEL: C73 D43 D92 L13
    Date: 2009
  8. By: Fernandes, Ana M.; Paunov, Caroline
    Abstract: Over the past two decades, globalization, and more specifically the increased exposure to competition from low-price producers in China and India, has created a new economic environment for other emerging economies. The most advantageous way for manufacturing firms in those economies to position themselves in domestic and international markets is to offer upgraded and differentiated rather than"mundane"labor-intensive products. This paper investigates whether increased competitive pressure from imports forces firms to improve the quality of their products. The econometric analysis relies on a rich dataset of Chilean manufacturing plants and their products. Product quality is measured with unit values (average prices) and industry-level transport costs are used as an exogenous measure of import competition. The authors find a positive and robust effect of import competition on product quality. This effect is found to be particularly strong for non-exporting plants. The results also show that increased import competition from less advanced economies is the major cause for the positive impact on quality upgrading. The overall evidence points to the benefits of trade openness for product innovation but demonstrates at the same time that competitive pressure alone will not enable local plants to catch up with leading world producers.
    Keywords: Transport Economics Policy&Planning,Markets and Market Access,Economic Theory&Research,Water and Industry,Access to Markets
    Date: 2009–04–01
  9. By: Doh-Shin Jeon; Domenico Menicucci
    Abstract: We consider competition among n sellers when each of them sells a portfolio of distinct products to a buyer having limited slots (or shelf space). We study how bundling affects competition for slots. When the buyer has k number of slots, efficiency requires the slots to be allocated to the best k products among all products. We first find that without bundling, equilibrium often does not exist and hence the outcome is often inefficient. Bundling changes competition between individual prod- ucts into competition between portfolios and reduces competition from rival products. Therefore, each seller has an incentive to bundle his products. Furthermore, under bundling, an efficient equilibrium always exists. In particular, in the case of Digital goods, all equilibria are efficient if firms do not use slotting contracts. However, inefficient equilibria can exist if firms use slotting contracts. In the case of physical goods, pure bundling also can generate inefficient equilibria. Finally, we identify portfolio effects of bundling and analyze the consequences on horizontal merger.
    Keywords: Bundling, Portfolios, Slots (or Shelf Space), Pure Bundling, Slotting Contracts
    JEL: D4 K21 L13 L41 L82
    Date: 2009–02
  10. By: Albert G. Schweinberger; Jens Suedekum
    Abstract: We develop a two-sector general equilibrium model with monopolistic competition featuring nonhomothetic production and a variable demand elasticity for the manufactured goods. An increase in the relative price of manufacturing varieties can lead to a decline in total industrial output in our framework, i.e., to de-industrialisation.The two key mechanisms behind this surprising result are that the founding of firms requires skilled labour as a fixed input requirement, and that the price increase can raise the profit margin in the manufacturing industry and thereby induce firm entry. When the manufacturing sector mainly adjusts at the extensive margin,we refer to this industry as being entrepreneurial. Due to the fixed input requirement entry reduces the effective endowment of skilled labour available for production.This reduces industrial output owing to a novel generalized version of the Rybczynski effect. De-industrialisation occurs if that effect is sufficiently large in comparison with the standard output price effect for a given number of firms. Furthermore we prove the counterintuitive result that de-industrialisation implies a fall in the output per firm and under plausible conditions a rise in welfare. Our results shed new light on the current debates about possible causes of premature de-industrialisation and its welfare effects.
    Keywords: Entrepreneurial industries, monopolistic competition, de-industrialisation, welfare effects
    JEL: F12 D43
    Date: 2009–03
  11. By: José Luis Ferreira; Praveen Kujal; Stephen Rassenti
    Abstract: We test the strategic motive to sell forward in experimental Cournot duopoly and quadropoly environments with either a finite (exogenous close) or an infinite (endogenous close) number of forward markets. In the exogenous close case experienced subjects do not avail themselves of the forward markets and production mostly occurs in the spot market phase. In a forward market duopoly experienced subjects achieve nearly the monopoly output level. For the quadropoly output levels are more competitive and are near the Cournot Nash equilibrium. In both cases output produced is much less than the Allaz-Vila (1993) prediction. The results with inexperienced subjects, however, are in line with theory and as reported in Le-Coq and Orzen (2006). We implement the case of infinitely many forward periods using the endogenous close rule. In this case the results both for a forward market duopoly and quadropoly are much more competitive both with inexperienced and experienced subjects. Unlike the exogenous stopping rule, under the endogenous rule subjects sell forward in the forward markets and find it hard to coordinate their actions.
    Date: 2009–03
  12. By: Goppelsroeder, Marie
    Abstract: In this paper we present an experiment in which we test the effects of sequential entry on the stability of collusion in oligopoly markets. Theoretical as well as experimental research suggests that a larger number of firms in an industry makes collusion harder to sustain. In this study, we explore to what extent collusion can be upheld with exogenous entry when groups start off small and when it is common knowledge that the entrant is informed about the history of her group prior to entry. We find that collusion is indeed easier to sustain in the latter case than in groups starting large. We conjecture that an implicit coordination problem is resolved more easily in a smaller group and that coordination, once it has been established, can be transferred to the enlarged group by means of a common code of conduct. Moreover, the results suggest that entrants emulate the behavior of their group upon entry.
    Keywords: Collusion; Entry; Experiments
    JEL: L13 C92 C72 L40
    Date: 2009–03–24
  13. By: Bekkum, S. van; Pennings, H.P.G.; Smit, J.T.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper shows that the conditionality of investment decisions in R&D has a critical impact on portfolio risk, and implies that traditional diversification strategies should be reevaluated when a portfolio is constructed. Real option theory argues that research projects have conditional or option-like risk and return properties, and are different from unconditional projects. Although the risk of a portfolio always depends on the correlation between projects, a portfolio of conditional R&D projects with real option characteristics has a fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, diversification only slightly reduces portfolio risk. When projects are positively correlated, however, diversification proves more effective than conventional tools predict.
    Keywords: real options;portfolio analysis;research & development
    Date: 2009–04–03
  14. By: Rigoberto A. López (Department of Agricultural and Resource Economics, University of Conneticut.); Elena López (Departamento de Fundamentos de Economía e H.E. , Universidad de Alcalá.); Carmen Liron-Espana (System Planning, ISO-NE.)
    Abstract: This article estimates the impact of industrial concentration on market power and cost and then links the ensuing welfare changes to market structure characteristics using a sample of 232 U.S. manufacturing industries. Empirical results indicate that further increases in concentration would enhance welfare in 70% of the industries due to widespread efficiency gains, although these would generally not be passed on to consumers. From a social standpoint, further concentration is more likely to be beneficial in industries with economies of size, high export intensity, which are engaged in consumer-oriented goods, face larger markets, and have low or moderate levels of initial concentration.
    Keywords: Concentration, Welfare, Economies of size, Market power, Manufacturing.
    JEL: L11 L60 D43 D61 F12
    Date: 2009
  15. By: Adelina Gschwandtner; Val E. Lambson
    Abstract: Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory.
    JEL: L00
    Date: 2009–03
  16. By: Shih-tse Lo; Dhanoos Sutthiphisal
    Abstract: A switch to a first-to-file patent regime from its first-to-invent system has become imminent for the U.S. To learn about probable effects of such a policy change, we examine a similar switch that occurred in Canada in 1989. We find that the switch failed to stimulate Canadian R&D efforts. Nor did it have any effects on overall patenting. However, the reforms had a small adverse effect on domestic-oriented industries and skewed the ownership structure of patented inventions towards large corporations, away from independent inventors and small businesses. These findings challenge the merits of adopting a first-to-file patent regime.
    JEL: O3
    Date: 2009–04

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