nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒05‒02
twenty-two papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. On Competition and the Strategic Management of Intellectual Property in Oligopoly By Jos Jansen
  2. On Pricing and Vertical Organization of Differentiated Products: The Case of Soybean Seed Industry By Shi, Guanming; Chavas, Jean-Paul
  3. Outsourcing induced by strategic competition By Chen, Yutian; Dubey, Pradeep; Sen, Debapriya
  4. Microfoundations for the Linear Demand Product Differentiation Model, with Applications By Stephen Martin
  5. Innovation and Market Design By Peter Cramton
  6. A theory of sharecropping: the role of price behavior and imperfect competition By Sen, Debapriya
  7. The Combined Effect of Salary Restrictions and Revenue Sharing on Club Profits, Player Salaries, and Competitive Balance By Helmut Dietl; Markus Lang; Alexander Rathke
  8. Fiscal Policy under Imperfect Competition: A Survey By Luís F. Costa and Huw Dixon
  9. Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties? By Immordino, Giovanni; Pagano, Marco; Polo, Michele
  10. Green R&D versus End-of-Pipe Emission Abatement: A Model of Directed Technical Change By Michael Rauscher
  11. Risk, Overconfidence and Production in a Competitive Equilibrium By Just, David R.; Cao, Ying; Zilberman, David
  12. Competition for attention in the information (overload) age By Anderson, Simon P; de Palma, André
  13. Optimal Product Proliferation in Monopoly: A Dynamic Analysis By L. Lambertini
  14. Technology proximity between firms and universities and technology transfer By Martin Woerter
  15. Non-Existence of Competitive Equilibria with Dynamically Inconsistent Preferences By Gabrieli, Tommaso; Ghosal, Sayantan
  16. Technology diversification, product innovations, and technology transfer By Martin Woerter
  17. Firm size and growth opportunities: a survey By A. Arrighetti; A. Ninni
  18. A Schumpeterian Growth Model with Heterogenous Firms By A. Minniti; C.P. Parello; P.S. Segerstrom
  19. Pricing Rule in a Clock Auction By Peter Cramton; Pacharasut Sujarittanonta
  20. How Does Advertising Affect Market Performance? The Case of Generic Advertising By Hamilton, Stephen F.; Richards, Timothy J.; Stiegert, Kyle W.
  21. Trade based on economies of scale under monopolistic competition: a clarification of Krugman's model By Emanuel R. Leão and Pedro R. Leão
  22. Negative Externalities and Equilibrium Existence in Competitive Markets with Adverse Selection By von Siemens, Ferdinand; Kosfeld, Michael

  1. By: Jos Jansen (Max Planck Institute for Research on Collective Goods)
    Abstract: An innovative firm chooses strategically whether to patent its process innovation or rely on secrecy. By doing so, the firm manages its rival’s beliefs about the size of the innovation, and affects the incentives in the product market. Different measures of competitive pressure in the product market have different effects on the equilibrium patenting choices of an innovative firm with unknown costs and probabilistic patent validity. Increasing the number of firms (degree of product substitutability) gives a smaller (greater) patenting incentive. Switching from Bertrand to Cournot competition gives a smaller (greater) patenting incentive if patent protection is weak (strong).
    Keywords: Bertrand and Cournot competition, oligopoly, product differentiation, entry, asymmetric information, strategic disclosure, stochastic patent, trade secret, process innovation, imitation
    JEL: D82 L13 O31 O32
    Date: 2009–04
  2. By: Shi, Guanming; Chavas, Jean-Paul
    Abstract: This paper investigates the pricing and vertical organization of differentiated products under imperfect competition. In a multiproduct context, a Cournot model is used to examine how substitution/complementarity relationships among products and vertical structures can affect the exercise of market power. This motivates a generalization of the Herfindahl-Hirschman index (termed VHHI) capturing how market concentration and vertical structures interact to influence prices of differentiated products. The analysis is applied to pricing of soybean seeds in the US over the period 2000-2007. The analysis considers two vertical structures employed by biotech firms: vertical integration and licensing. The econometric analysis finds evidence that vertical organization has significant effects on seed prices. These effects are found to vary depending on the institutional setup and the bundling of genetic material. The empirical evidence shows that complementarity and economies of scope can reduce the effects of market concentration on prices.
    Keywords: Vertical structures, pricing, imperfect competition, seed, biotechnology, Demand and Price Analysis, Industrial Organization, L13, L4, L65,
    Date: 2009–04
  3. By: Chen, Yutian; Dubey, Pradeep; Sen, Debapriya
    Abstract: We show that intermediate goods can be sourced to firms on the "outside" (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that "inside" firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.
    Keywords: Intermediate goods; outsourcing; Cournot duopoly; Stackelberg duopoly
    JEL: L11 L13 D43
    Date: 2009–04–24
  4. By: Stephen Martin
    Abstract: This paper shows (1) that the Spence-Dixit-Vives model of linear demand for differentiated varieties is implied if supplies of substitutes reduce individual consumers' reservation prices as indicated in the paper, (2) that for the micro-foundation-based version SDV demand and endogenous sunk costs, the equilibrium number of varieties is independent of the number of consumers in the market and the marginal cost of a variety of unit quality, and (3) that with endogenous sunk cost, if demand does not expand with the number of varieties (as in the SDV model), the equilibrium number of varieties is unchanged, but equilibrium qualities and quantities purchased are less, all else equal.
    Keywords: product differentiation, micro foundations, oligopoly, Cournot, endogenous sunk cost
    JEL: L11 L13
    Date: 2009–03
  5. By: Peter Cramton (Economics Department, University of Maryland)
    Abstract: Market design plays an essential role in promoting innovation. I examine emission allowance auctions, airport slot auctions, spectrum auctions, and electricity markets, and demonstrate how the market design can encourage innovation. Improved pricing information is one source of innovation. Enhancing competition is another driver of innovation seen in all of the applications. Market design fosters innovation in other ways as well by addressing other potential market failures.
    Keywords: Auctions, market design, innovation
    JEL: D44
    Date: 2009
  6. By: Sen, Debapriya
    Abstract: This paper proposes a theory of sharecropping on the basis of price behavior in agriculture and imperfectly competitive nature of rural product markets. We consider a contractual setting between one landlord and one tenant with seasonal variation of price, where the tenant receives a low price for his output while the landlord can sell his output at a higher price by incurring a cost of storage. We consider two different classes of contracts: (i) tenancy contracts and (ii) crop-buying contracts. It is shown that sharecropping is the optimal form within tenancy contracts and it also dominates crop-buying contracts provided the price variation is not too large. Then we consider interlinked contracts that have both tenancy and crop-buying elements and show that there are multiple optimal interlinked contracts. Finally, proposing an equilibrium refinement that incorporates imperfect competition in the rural product market, it is shown that the unique contract that is robust to this refinement results in sharecropping.
    Keywords: Sharecropping; price variation; imperfect competition; tenancy contracts; crop-buying contracts; interlinkage; the epsilon-agent
    JEL: D23 J43 O17 D02 Q15 O12
    Date: 2009–04–24
  7. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Alexander Rathke (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: This article provides a standard "Fort and Quirk"-style model of a professional team sports league and analyzes the combined effect of salary restrictions (caps and floors) and revenue-sharing arrangements. It shows that the invariance proposition does not hold even under Walrasian conjectures if revenue sharing is combined with either a salary cap or a salary floor. In leagues with a binding salary cap for large clubs but no binding salary floor for small clubs, revenue sharing will decrease the competitive balance and increase club profits. Moreover, a salary cap produces a more balanced league and decreases the cost per unit of talent. The effect of a more restrictive salary cap on the profits of the small clubs is positive, whereas the effects on the profits of the large clubs as well as on aggregate profits are ambiguous. In leagues with a binding salary floor for the small clubs but no binding salary cap for the large clubs, revenue sharing will increase the competitive balance. Moreover, revenue sharing will decrease (increase) the profits of large (small) clubs. Implementing a more restrictive salary floor produces a less balanced league and increases the cost per unit of talent. Furthermore, a salary floor will result in lower profits for all clubs.
    Keywords: Team sports leagues, invariance proposition, competitive balance, revenue sharing, salary cap, salary floor
    JEL: C72 L11 L83
    Date: 2009
  8. By: Luís F. Costa and Huw Dixon
    Abstract: This paper surveys the link between imperfect competition and the e¤ects of fiscal policy on output, employment and welfare. We examine static and dynamic models, with and without entry under a variety of assumptions using a common analytical framework. We find that in general there is a robust relationship between the fiscal multiplier and welfare, the tantalizing possibility of Pareto improving fiscal policy is much more elusive. In general, the mechanisms are supply side, and so welfare improving policy, whilst possible, is not a general result. Key words: Fiscal Policy; Imperfect Competition.
    JEL: E62
    Date: 2009–03
  9. By: Immordino, Giovanni; Pagano, Marco; Polo, Michele
    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: authorization; deterrence; innovation; liability for harm; safety regulation
    JEL: D73 K21 K42 L51
    Date: 2009–04
  10. By: Michael Rauscher (University of Rostock)
    Abstract: The paper looks at a model of directed technical change in an environmental-economics context. Firms can do conventional or "green" R&D or they can abate emissions at the end of pipe. The paper has two main foci. On the one hand, it investigates the impact of environmental regulation on the allocation of resources to conventional R&D, green R&D, and end- of-pipe abatement. On the other hand, it addresses the question whether stricter emission standards should be used to support green R&D and/or economic growth.
    Keywords: economic growth and the environment, directed technical change
    JEL: Q55 O41
    Date: 2009
  11. By: Just, David R.; Cao, Ying; Zilberman, David
    Abstract: Previous studies have found underestimation of risk, or overconfidence, to be pervasive. In this paper, we model overconfidence as a reduction in perceived variance. We generalize the analysis of Sandmo and examine the effects of competition on firms displaying overconfidence. Cases for both competitive equilibrium and imperfect competition are investigated. We show that overconfidence may strictly dominate rationality in a competitive market by leading risk averse producers to invest greater amounts and produce more. This leads to a higher average profit, and greater variance of profits, leaving the producer a greater probability of surviving competitive pressures. Despite the greater variance of profits, if enough producers underestimate their risk, they should collectively drive more rational decision makers from the market. Our results suggest that overconfidence may be as important a determinant of market behavior as diminishing marginal utility of wealth.
    Keywords: Overconfidence, Misperception, Production, Competition, Production Economics, Risk and Uncertainty,
    Date: 2009
  12. By: Anderson, Simon P; de Palma, André
    Abstract: Limited consumer attention limits product market competition: prices are stochastically lower the more attention is paid. Ads compete to be the lowest price with other ads from the same sector and they compete for attention with ads from other sectors: equilibrium sector ad shares under free entry follow a CES form. When a sector gets more attractive, its advertising expands: others lose ad market share but may increase in absolute terms if sufficiently attractive. The "information hump" shows highest ad levels for intermediate attention levels when there is a decent enough chance of getting the message across and also of not being undercut by a cheaper offer. The Information Age takes off when the number of sectors grows, but total ad volume reaches an upper limit. Overall, advertising is excessive, though the allocation across sectors is optimal. Nonetheless, both large sectors and small ones can be blamed for misallocation of ads in using up scarce attention.
    Keywords: advertising distribution; consumer attention; economics of attention; information age; information filtering; price dispersion; size distribution of firms
    JEL: D11 D60 I0 L13
    Date: 2009–04
  13. By: L. Lambertini
    Date: 2008–10
  14. By: Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper investigates the technological orientation of firms and universities and their propensity to have knowledge and technology transfer (KTT) activities. This study looks at the technological potential for KTT and how it is used, emphasizing differences between smaller and larger firms. To this end we collected information about the technology activities of firms (patent statistics) and the technology activities of universities. Furthermore we used survey data on technology transfer activities. We combined the three datasets and found – especially for smaller firms – that great technology proximity fosters transfer activities with different universities (case 1). The same is true, if proximity is low and expertise is considerable at universities in the respective technology field (case 2). In both cases additional transfer potential exists. In the second case firms engage in transfer activities in order to update and modifying their knowledge base and as a consequence improve “competitiveness” in certain technology fields. Furthermore firms show a tendency to diversify their contacts with universities in order to avoid knowledge lock-in.
    Keywords: Innovation, Knowledge and Technology Transfer, Technology Proximity, Universities, Firms
    Date: 2009–04
  15. By: Gabrieli, Tommaso (Department of Economics, City University London and Institute of Economic Policy Catholic University of Milan); Ghosal, Sayantan (Department of Economics, University of Warwick)
    Abstract: This paper shows the robust non existence of competitive equilibria even in a simple three period representative agent economy with dynamically inconsistent preferences. We distinguish between a sophisticated and naive representative agent. Even when underlying preferences are monotone and convex, we show by example that the induced preferences, at given prices, of the sophisticated representative agent over choices in first period markets are both non convex and satiated. Therefore, even allowing for negative prices, the market clearing allocation is not contained in the convex hull of demand. Finally, with a naive representative agent, we show that perfect foresight is incompatible with market clearing and individual optimization at given prices.
    Keywords: dynamically inconsistent preferences ; competitive equilibrium ; existence ; satiation ; non convexity
    JEL: D50 D91
    Date: 2009
  16. By: Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper investigates the relationship between technology specialization and innovation performance of firms emphasizing technology transfer activities with universities as an important knowledge source in order to attenuate the opportunity costs of technological specialization. Based on an econometric analysis combining patent data and survey data on technology transfer activities of firms it was found that technology transfer is positively related with the sales share of innovative products. Following the “technology trajectory (path)” increases the probability of an above average innovation performance. Taking into account the combined effects of transfer activities and technological specialization and in this way approximating the idea that transfer activities enable a firm to be specialized and keep the knowledge base broad and upto-date, we detect a significant positive relationship between the combined effect (transfer and specialization) and the innovation performance of a firm. Smaller firms tend to benefit more from the combination of technology specialization and transfer activities with universities compared to larger firms.
    Keywords: Innovation, Knowledge and Technology Transfer, Specialization, Diversification, Firms History
    Date: 2009–04
  17. By: A. Arrighetti; A. Ninni
    Abstract: The qualifying aspect of the ongoing changes in firm growth processes seems to be the increased heterogeneity of size and a trend towards a broader fluctuation in average size. Exogenous factors (market size, demand trends, technological innovations, higher competition) determine a different impact on firms will to increase their own size, while endogenous variables play a greater role than in the past. The outcome is represented by a growth pattern that characterises some firms, but not all of them. Growth appear to be an asymmetric phenomenon, involving selectively but not casually a subgroup of firms. In the present paper it is hypothesized that growth stems from the asymmetric distribution of internalized resources (both material and immaterial), allowing some firms (regardless of the original size) to enter evolutionary paths that others don’t want or simply can’t enter.
    Keywords: Firm Growth, Size Distribution, Gibrat’s Law, Industrial Dynamics, Human Capital, Intangible Assets, Industrial Policy
    JEL: L11 L25
    Date: 2009
  18. By: A. Minniti; C.P. Parello; P.S. Segerstrom
    Date: 2008–10
  19. By: Peter Cramton (Economics Department, University of Maryland); Pacharasut Sujarittanonta
    Abstract: We analyze a discrete clock auction with lowest-accepted bid (LAB) pricing and provisional winners, as adopted by India for its 3G spectrum auction. In a perfect Bayesian equilibrium, the provisional winner shades her bid while provisional losers do not. Such differential shading leads to inefficiency. The size of the inefficiency declines with smaller bid increments. An auction with highest-rejected bid (HRB) pricing and exit bids is strategically simple, has no bid shading, and is fully efficient. In addition, it has higher revenues than the LAB auction, assuming profit maximizing bidders. The bid shading in the LAB auction exposes bidders to the possibility of losing the auction at a price below the bidder's value. Thus, fear of losing may cause bidders in the LAB auction to bid more aggressively than predicted assuming profit-maximizing bidders. We extend the model by adding an anticipated loser's regret to the payoff function. Revenue from the LAB auction yields higher expected revenue than the HRB auction when bidders' fear of losing at profitable prices is sufficiently strong. This would provide one explanation why India, with an expressed objective of revenue maximization, adopted the LAB auction for its upcoming 3G spectrum auction, rather than the seemingly superior HRB auction.
    Keywords: Auctions, clock auctions, spectrum auctions, behavioral economics, market design
    JEL: D44 C78 L96
    Date: 2009
  20. By: Hamilton, Stephen F.; Richards, Timothy J.; Stiegert, Kyle W.
    Abstract: The effect of advertising on market performance has been a long-standing debate. Advertising that increases the dispersion of consumersâ valuations for advertised goods raises the market power of firms, while advertising that decreases the dispersion of consumersâ valuations leads to narrower price-cost margins and superior performance in markets for advertised goods. Numerous challenges confound the empirical identification of advertising effects on market performance. This paper proposes a simple method that relies on the revealed preferences of firms participating in generic advertising programs. Generic advertising programs provide a unique window through which to observe advertising effects on market performance, because changes in the dispersion of consumersâ valuations systematically redistributes rents among firms according to observable characteristics on producer size. We examine producer attitudes towards generic advertising in the âBeef. Itâs Whatâs for Dinnerâ campaign of the U.S. Beef Checkoff program and find the likelihood a producer favors an expansion of the advertising program increases in operating scale. This finding is consistent with advertising effects that have led to a decrease in the dispersion of consumersâ valuations for beef products and a commensurate increase in market performance.
    Keywords: Advertising, Oligopoly, Marketing, L1, M37,
    Date: 2009
  21. By: Emanuel R. Leão and Pedro R. Leão
    Abstract: Although a major contribution to trade theory, Krugman’s 1979 demonstration that ‘trade can arise and lead to mutual gains even when countries are similar’ fails to make explicit the economic mechanisms that lead up to this result. The current paper attempts to fill this gap by addressing several questions that are implicit in Krugman’s demonstration but which he does not explicitly analyze: - What is the effect of trade upon the demand curve faced by the typical firm in each nation? - How do firms react to the change in the demand curves they face, and what is the short-term outcome of their behaviour? - Why do some firms fail? - What is the role of the failure of firms in the adjustment to the final free trade equilibrium?
    Keywords: Krugman, intra-industry trade, economies of scale, monopolistic competition.
    JEL: F12
    Date: 2009–03
  22. By: von Siemens, Ferdinand (University of Amsterdam); Kosfeld, Michael (University of Frankfurt)
    Abstract: Rothschild and Stiglitz (1976) show that there need not exist a competitive equilibrium in markets with adverse selection. Building on their framework we demonstrate that externalities between agents − an agent's utility upon accepting a contract depends on the average type attracted by the respective principal − can solve the equilibrium existence problem, even when the size of the externalities is arbitrarily small. Our result highlights the degree of control a principal has over the attractiveness of his contracts as an important feature for equilibrium existence, thereby offering a new perspective on existing theories of competition in markets with adverse selection.
    Keywords: asymmetric information, competition, adverse selection, externality
    JEL: D82 D86
    Date: 2009–04

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