nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒06‒03
seventeen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. Advertising for attention in a consumer search model By Haan, Marco A.; Moraga-Gonzalez, Jose L.
  2. Competition Policy and Property Rights By John Vickers
  3. Innovation and market dynamics in the EPO market By Sorisio, Enrico; Strøm, Steinar
  4. Price regulation and generic competition in the pharmaceutical market By Dalen, Dag Morten; Habeth, Tonje; Strøm, Steinar
  5. On general versus emission saving R&D support By Brita Bye and Karl Jacobsen
  6. On the Problem of Network Monopoly By Jolian McHardy; Michael Reynolds; Stephen Trotter
  7. Tax Competition with Heterogeneous Firms By Richard E. Baldwin; Toshihiro Okubo
  8. The Random Part in Network Evolution By Thomas Grebel
  9. Tacit Collusion over Foreign Direct Investment under Oligopoly By Collie, David R.
  10. The selection effect of two-way trade in the Melitz model: an alternative approach By Potin, Jacques
  11. Comparison of Long-Term Contracts and Vertical Integration in Decentralised Electricity Markets By Richard Meade; Seini O'Connor
  12. The structure of the optimal combined sourcing policy using capacity reservation and spot market with price uncertainty By Karl Inderfurth; Peter Kelle
  13. Non-parametric counterfactual analysis in dynamic general equilibrium By Felix KUBLER; Karl SCHMEDDERS
  14. Networks and innovation: the role of social assets in explaining firms' innovative capacity By Uwe Cantner; Elisa Conti; Andreas Meder
  15. Optimal Delegation in Nash Bargaining By Roland Kirstein
  16. Competing Auction Houses By Alexander Matros; Andriy Zapechelnyuk
  17. Standard-Setting and Knowledge Dynamics in Innovation Clusters By Julian P. Christ; André P. Slowak

  1. By: Haan, Marco A. (University of Groningen); Moraga-Gonzalez, Jose L. (University of Groningen)
    Abstract: We model the idea that when consumers search for products, they first visit the firm whose advertising is more salient. The gains a firm derives from being visited early increase in search costs, so equilibrium advertising increases as search costs rise. This may result in lower firm profits when search costs increase. We extend the basic model by allowing for firm heterogeneity in advertising costs. Firms whose advertising is more salient and therefore raise attention more easily charge lower prices in equilibrium and obtain higher profits. As advertising cost asymmetries increase, aggregate profits increase, advertising falls and welfare increases.
    Keywords: Advertising; attention; consumer search; saliency;
    JEL: D83 L13 M37
    Date: 2009–05–03
  2. By: John Vickers
    Abstract: One of the most controversial questions in current competition policy is when, if ever, should competition law require a firm with market power to share its property, notably intellectual property, with its rivals? And if supply is required, on what terms? These questions are discussed with reference to recent law cases including the EC Microsoft judgment of 2007 and the US linkLine case of 2009. The analysis focuses on whether competition law and regulation are complements or substitutes, and on incentives for investment and (sequential) innovation.
    Keywords: Property rights, refusal to supply, price squeeze, Intellectual property, Sequential innovation, Antitrust
    JEL: K21 L41 O31 O34
    Date: 2009
  3. By: Sorisio, Enrico (PharmaNess scarl; University of Turin); Strøm, Steinar (University of Oslo; The Frisch Centre, Oslo; University of Turin)
    Abstract: In this paper we study the demand and supply of erythropoietin in four Nordic countries, using an econometric model based on discrete choice and a random utility model. It measures the effect of price changes as well as the loyalty of patients and physicians to a drug. Our main aims are to estimate demand for EPO and to determine the degree of competition in this Nordic market. The main motivation for this paper is to analyze the impact of product innovation on market power and welfare, e.g. on consumer and producer surplus. The product innovation is the entry of Aranesp in the Nordic market.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; EPO
    JEL: C35 D43 I18 L11
    Date: 2009–06–04
  4. By: Dalen, Dag Morten (Handelshøyskolen BI); Habeth, Tonje (Handelshøyskolen BI); Strøm, Steinar (Department of Economics, University of Oslo)
    Abstract: In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap, termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition. Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; evaluation of yardstick based price regulation
    JEL: C35 D43 I18 L11
    Date: 2009–06–04
  5. By: Brita Bye and Karl Jacobsen (Statistics Norway)
    Abstract: We analyse welfare effects of supporting general versus emission saving technological development when carbon emissions are regulated by a carbon tax. We use a computable general equilibrium model with induced technological change (ITC). ITC is driven by two separate, economically motivated research and development (R&D) activities, one general and one emission saving specified as carbon capture and storage. We study public revenue neutral policy alternatives targeted towards general R&D and emission saving R&D. Support to general R&D is the welfare superior, independent of the level of international carbon price. However, the welfare gap between the two R&D policy alternatives is reduced if the carbon price increases.
    Keywords: Applied general equilibrium; Endogenous growth; Research and Development; Directed technological change; Carbon policy
    JEL: C68 E62 H32 O38 O41
    Date: 2009–05
  6. By: Jolian McHardy (Department of Economics, The University of Sheffield); Michael Reynolds; Stephen Trotter
    Abstract: We introduce a new regulatory concept: the independent profit-maximising agent, as a model for regulating a network monopoly. The agent sets prices on cross-network goods taking either a complete, or arbitrarily small, share of the associated profit. We examine welfare and profits with and without each agent type under both network monopoly and network duopoly. We show that splitting up the network monopoly (creating network duopoly) may be inferior for both firm(s) and society compared with a network monopoly "regulated" by an agent and that society always prefers any of the four agent regimes over network monopoly and network duopoly.
    Keywords: Network, Monopoly, Agent
    JEL: D43 L13 R48
    Date: 2009–03
  7. By: Richard E. Baldwin (Graduate Institute, Geneva); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper studies tax competition in a setting that allows for agglomeration economies and heterogeneous firms. We find that the Nash equilibrium involves the large country charging a higher tax than the small nation, with this rate being too low from a social point of view. Tighter integration of markets leads to an intensification of competition, a drop in Nash tax rates, and a narrowing of the gap. Since large, productive firms are naturally more sensitive to tax difference in our model, large firms are the crux of tax competition in our model. This also means that tax competition has consequences for the average productivity of the big and small nations' industry; by lowering tax rates, the small nation can attract high-productivity firms.
    Keywords: Firm heterogeneity, Nash equilibrium tax, Stackelberg equilibrium tax, collusion, average productivity
    JEL: H32 P16
    Date: 2009–03
  8. By: Thomas Grebel (Economics Department, University of Jena)
    Abstract: Economic behavior strives for efficiency. Therefore, also evolving network structures should be a result of such a goal-oriented behavior. Traditionally, networks were assumed to be only temporary phenomena, since the prevailing organizational forms that comply with the efficiency postulate are either firms or markets. Having a goal in mind, however, does not incur a set of unique choices of action, especially in situations under high uncertainty when engaging in invention networks. Consequently, there is no uniqueness in network structures. There is a random part in network evolution driven by generic mechanisms. A percolation model is used to model the generic development of invention networks. A Monte-Carlo simulation underlines the expectable patterns of network evolution. Moreover, it is tried to align the generic part of the story to the operant level where entrepreneurial behavior and market selection takes over the dominant role in network formation.
    Keywords: R&D cooperation, percolation theory, knowledge diffusion, networks
    JEL: A10 B10 B21 B25 B41 B52 C15 D85 I10 O10 O33
    Date: 2009–05–25
  9. By: Collie, David R. (Cardiff Business School)
    Abstract: A two-country model of the FDI versus export decisions of firms is analysed. The analysis considers both the Cournot duopoly and the Bertrand duopoly models with differentiated products. It is shown that the static game is often a prisoners' dilemma where both firms are worse off when they both undertake FDI. To avoid the prisoners' dilemma, in an infinitely-repeated game, the firms can collude over their FDI versus export decisions. Then, a reduction in trade costs may lead firms to switch from exporting to undertaking FDI when trade costs are relatively high. Also, collusion over FDI may increase welfare.
    Keywords: Collusion; Trade Liberalisation; Foreign Direct Investment; Cournot Oligopoly; Bertrand Oligopoly; Infinitely-Repeated Game
    JEL: F12 F23 L13 L41
    Date: 2009–06
  10. By: Potin, Jacques (ESSEC Business School)
    Abstract: This paper studies the influential Melitz model of trade with heterogeneous firms using an alternative, intuitive approach. Contrary to what is often argued, it is an increase in product market competition that drives the bad firms out: with two-way trade, entry by foreign firms is not compensated by a “sufficient” reduction in the mass of surviving firms. To illustrate this, we decompose the total effect of trade in two partial effects: a domestic-profit-reducing effect due to foreign market penetration by the most productive firms; an average-profit-reducing effect due to the payment of the fixed export costs. We also provide the new prediction that trade generally leads to (weakly) less entry in the industry. This clarifies key interpretation issues in a prolific literature.
    Keywords: Firm Heterogeneity; Intra-industry Trade; Selection
    JEL: F10 F12
    Date: 2009–04
  11. By: Richard Meade; Seini O'Connor
    Abstract: Decentralised electricity systems require effective price and quantity risk management mechanisms, but the nature of such systems poses particular problems for satisfying those requirements. Among these problems are investment hold-up risks rooted in the competition facing both electricity retailers and large industrial firms. Additional problems include those of load profile, information and bargaining mismatches between generators and customers. Significantly, hold-up risks exist not only between retailers and generators, but also affect (e.g. fuel) suppliers upstream of generators. Contracts are one means of addressing such problems, and represent a particular improvement on spot market trading alone. However, we argue that market contracting in electricity systems is a costly approach to addressing hold-up and related problems, and that internal organisation (i.e. vertical integration) is a more efficient alternative, minimising the overall costs of market contracting and ownership. Not only does integration internalise wholesale market risks and market power costs to the integrated firm, thereby reducing their importance, it also reduces the need for and efficacy of regulation to constrain generator market power. It furthermore thins contract markets, reducing the threat of generator hold-up from competitive retail entry, and otherwise supports generation investment and hence supply security. While the reinstatement or retention of retail franchise areas is one possible solution to the problems of contracting, it is arguably unnecessary if there are other system features (such as transmission constraints) impeding retail entry. This is particularly so in systems involving vertical integration, although even then policy makers are confronted with a trade-off between promoting retail competition and facilitating generation investment and supply security, requiring judgement as to the optimal degree of retail market power. While vertical integration is a more natural and self-sustaining solution to electricity sector problems, it too is only a partial solution, leaving complementary roles for spot and long-term contract markets.
    Keywords: electricity, electricity markets, market contracting, spot market trading, vertical integration
    Date: 2009–02–25
  12. By: Karl Inderfurth (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Peter Kelle (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This contribution focuses on the cost-effective management of the combined use of two procurement options: the short-term option is given by a spot-market with random price, whereas the long-term alternative is characterized by a multi period capacity reservation contract with fixed purchase price, reservation level and capacity reservation cost. Considering a multiperiod problem with stochastic demand, the structure of the optimal combined purchasing policy is derived using stochastic dynamic programming.
    Keywords: Capacity reservation, spot market, purchasing policy, supply contracts, stochastic inventory control
    Date: 2009–01
  13. By: Felix KUBLER (University of Zurich and Swiss Finance Institute); Karl SCHMEDDERS (University of Zurich and Swiss Finance Institute)
    Abstract: In this paper we examine non-parametric restrictions on counterfactual analysis in a dynamic stochastic general equilibrium model. Under the assumption of time-separable expected utility and complete markets all equilibria in this model are stationary. The Arrow-Debreu prices uniquely reveal the probabilities and discount factor. The equilibrium correspondence, de¯ned as the map from endowments to stationary (probability-free) state prices, is identical to the equilibrium correspondence in a standard Arrow-Debreu exchange economy with additively separable utility. We examine possible restriction on this correspondence and give necessary as well as sufficient conditions on profiles of individual endowments that ensure that associated equilibrium prices cannot be arbitrary. Although restrictions on possible price changes often exist, we show that results from a representative-agent economy usually do not carry over to a setting with heterogeneous agents.
    Keywords: Dynamic general equilibrium, non-parametric analysis, observable restrictions
    JEL: D50 G10
  14. By: Uwe Cantner (Friedrich Schiller University Jena, Department of Economics and Business Adminstration); Elisa Conti (IULM University, Department of Economics and Marketing); Andreas Meder (Graduate College EIC, Friedrich Schiller University Jena and Thuringian Ministry of Economic Affairs)
    Abstract: The claim of a positive association between a firm's social assets and its innovative capacity is a widely debated topic in the literature. Although controversial, such an argument has informed recent innovation policy across Germany, increasingly directed to cluster formation. In the light of the growing attention and financial efforts that cluster-based innovation policies are receiving, it is worth answering two main questions. First, are firms with a relatively high level of social capital likely to be more innovative? Second, do companies pursuing innovation in partnership innovate more? This paper empirically answers these questions by exploring a cross-sectoral sample of 248 firms based in the Jena region. On the one hand, the extent to which a firm is integrated in its community life does not contribute to an explanation of its innovative performance. On the other hand, directed cooperation with the specific goal of innovating shows a positive impact on innovative performance. However, the correlation between the extent of the network of co-innovators and firms' innovative capacity presents an inverted U-shaped relation: there is a threshold in the number of co-innovators justified by the costs of innovating by interacting. A policy lesson can be drawn from these findings: cluster-based policies are to be treated with caution as firms face costs of networking and not merely benefits.
    Keywords: innovation, social capital, innovation network, innovation cooperation, cluster-based policy.
    JEL: O33 L14 R5
    Date: 2009–06–02
  15. By: Roland Kirstein (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: When appointing a representative in negotiations, the principal can o er his agent a offer contract that promises a percentage of the bargaining result, and a bonus payment result (or penalty) if bargaining fails. Conventional wisdom of contract theory seems to suggest that the share should be as great as possible to provide proper incentives for a risk-neutral agent, while the bonus should be small or even negative. Drawing on the symmetric Nash bargaining solution, this paper argues that the optimal share is rather small, whereas the optimal bonus is rather large.
    Keywords: Endogenous threat points, marginal valuation, strategic moves
    JEL: C78 M52
    Date: 2009–01
  16. By: Alexander Matros (University of Pittsburgh); Andriy Zapechelnyuk (University of Bonn and Kyiv School of Economics)
    Abstract: We consider a model where sellers make repeated attempts to sell an object via two competing auction houses. An auction house that attracts a seller runs a Vickrey auction among a random sample of buyers and collects two fees: a listing fee and, if the object is sold, a closing fee. We characterize equilibria and show that two equilibrium outcomes are possible: a (contestable) monopoly, and a market segmentation between the two competitors.
    Keywords: Competing auctions, mediator, listing fee, closing fee
    JEL: C73 D44 D82
    Date: 2009–04
  17. By: Julian P. Christ (Universität Hohenheim); André P. Slowak (Universität Hohenheim)
    Abstract: Extensive research has been conducted on how firms and regions take advantage of spatially concentrated assets, and also why history matters to regional specialisation patterns. In brief, it seems that innovation clusters as a distinctive regional entity in international business and the geography of innovation are of increasing importance in STI policy, innovation systems and competitiveness studies. Recently, more and more research has contributed to an evolutionary perspective on collaboration in clusters. Nonetheless, the field of cluster or regional innovation systems remains a multidisciplinary field where the state of the art is determined by the individual perspective (key concepts could, for example, be industrial districts, innovative clusters with reference to OECD, regional knowledge production, milieus & sticky knowledge, regional lock-ins & path dependencies, learning regions or sectoral innovation systems). According to our analysis, the research gap lies in both quantitative, comparative surveys and in-depth concepts of knowledge dynamics and cluster evolution. Therefore this paper emphasises the unchallenged in-depth characteristics of knowledge utilisation within a cluster’s collaborative innovation activities. More precisely, it deals with knowledge dynamics in terms of matching different agents´ knowledge stocks via knowledge flows, common technology specification (standard-setting), and knowledge spillovers. The means of open innovation and system boundaries for spatially concentrated agents in terms of knowledge opportunities and the capabilities of each agent await clarification. Therefore, our study conceptualises the interplay between firm- and cluster-level activities and externalities for knowledge accumulation but also for the specification of technology. It remains particularly unclear how, why and by whom knowledge is aligned and ascribed to a specific sectoral innovation system. Empirically, this study contributes with several descriptive calculations of indices, e.g. knowledge stocks, GINI coefficients, Herfindahl indices, and Revealed Patent Advantage (RPA), which clearly underline a high spatial concentration of both mechanical engineering and biotechnology within a European NUTS2 sample for the last two decades. Conceptually, our paper matches the geography of innovation literature, innovation system theory, and new ideas related to the economics of standards. Therefore, it sheds light on the interplay between knowledge flows and externalities of cluster-specific populations and the agents’ use of such knowledge, which is concentrated in space. We find that knowledge creation and standard-setting are cross-fertilising each other: although the spatial concentration of assets and high-skilled labour provides new opportunities to the firm, each firm’s knowledge stocks need to be contextualised. The context in terms of ‘use case’ and ‘knowledge biography’ makes technologies (as represented in knowledge stocks) available for collaboration, but also clarifies relevance and ownership, in particular intellectual property concerns. Owing to this approach we propose a conceptualisation which contains both areas with inter- and intra-cluster focus. This proposal additionally concludes that spatial and technological proximity benefits standard-setting in high-tech and low-tech industries in very different ways. More precisely, the versatile tension between knowledge stocks, their evolution, and technical specification & implementation requires the conceptualisation and analysis of a non-linear process of standard-setting. Particularly, the use case of technologies is essential. Related to this approach, clusters strongly support the establishment of technology use cases in embryonic high-tech industries. Low-tech industries in contrast rather depend on approved knowledge stocks, whose dynamics provide better and fast accessible knowledge inputs within low-tech clusters.
    Keywords: innovation clusters, standard-setting, knowledge externalities and flows, knowledge alignment, mechanical engineering, biotechnology
    JEL: D89 L22 M20 O32
    Date: 2009–01

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