nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒07‒03
eighteen papers chosen by
Joao Carlos Correia Leitao
Technical University of Lisbon

  1. The Effect of Entry on R&D Investment of Leaders: Theory and Empirical Evidence By Dirk Czarnitzki; Federico Etro; Kornelius Kraft
  2. A small firm leads to curious outcomes: Social surplus, consumer surplus, and R&D activities By Toshihiro Matsumura; Noriaki Matsushima
  3. Vertical Relations in the Presence of Competitive Recycling By Liliane Karlinger
  4. Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis
  5. Starting an R&D Project under Uncertainty By Sabien Dobbelaere; Roland Iwan Luttens; Bettina Peters
  6. What role should public enterprises play in free-entry markets? By Hiroaki Ino; Toshihiro Matsumura
  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. Quantity Precommitment with Price Competition versus Quantity Precommitment with Market Clearing Prices in the Laboratory By David Goodwin; Stuart Mestelman
  9. Knowledge Structures. By Moritz Müller; Robin COWAN; Geert Duysters; Nicolas JONARD
  10. Creative Destruction and Productive Preemption By Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
  11. Advertising for Attention in a Consumer Search Model By Marco A. Haan; José Luis Moraga-González
  12. The structure and dynamics of the global network of inter-firm R&D partnerships 1989-2002 By Bojanowski, Michał; Corten, Rense; Westborck, Bastian
  13. Blue Ocean versus Competitive Strategy: Theory and Evidence By Burke, A.E.; Stel, A.J. van; Thurik, A.R.
  14. The evolution of markets and the revolution of industry: A quantitative model of England’s development, 1300-2000 By Klaus Desmet; Stephen L. Parente
  15. Heterogeneous Firms, 'Profit Shifting' FDI and International Tax Competition By Sebastian Krautheim; Tim Schmidt-Eisenlohr
  16. Network-independent partner selection and the evolution of innovation networks. By Joel BAUM; Robin COWAN; Nicolas JONARD
  17. Risk Aversion and Tacit Collusion in a Bertrand Duopoly Experiment By Lisa R. Anderson; Beth A. Freeborn; Jason P. Hulbert
  18. A Dynamic Model of Price Discrimination and Inventory Management at the Fulton Fish Market By Graddy, Kathryn; Hall, George

  1. By: Dirk Czarnitzki; Federico Etro; Kornelius Kraft
    Abstract: We develop a simple model of competition for the market that shows that, contrary to the Arrow view, endogenous entry threat in a market induces the average firm to invest less in R&D and the incumbent leader to invest more than the average firm. We test these predictions with a Tobit model based on a unique dataset and survey for the German manufacturing sector (the Mannheim Innovation Panel). In line with our predictions, endogenous entry threats perceived by the firms reduce R&D intensity for the average firm, but not for an incumbent leader. Moreover, the size of the firms and their patent stocks, proxy for the protection of IPRs, are positively related to R&D intensity. These results hold after a number of robustness tests with instrumental variables.
    Keywords: R&D, Entry, Endogenous market structures, Leadership
    JEL: O31 O32
    Date: 2009–05
  2. By: Toshihiro Matsumura; Noriaki Matsushima
    Abstract: This paper investigates an asymmetric duopoly model with a Hotelling line. We find that helping a small (minor) firm can reduce both social and consumer surplus. This makes a sharp contrast to existing works showing that helping minor firms can reduce social surplus but always improves consumer surplus. We also investigate R&D competition. We find that a minor firm may engage in R&D more intensively than a major firm in spite of economies of scale in R&D activities.
    Date: 2009–06
  3. By: Liliane Karlinger
    Abstract: This paper studies the vertical relations between a manufacturer and one or more retailers over two periods in the presence of a competitive recycling sector. In a bilateral monopoly, contracting is (generally) efficient, i.e. the manufacturer will produce the joint-profit-maximizing output. However, both competition downstream and upstream may lead to inefficient outcomes: Under retailer competition, some rent will be siphoned off by the recycling sector, and so the manufacturer will either overproduce in the second period or underproduce in the first period. If instead upstream entry occurs and full rent extraction is not possible, then the incumbent may overproduce in the pre-entry period. Vertical restraints that restore profit maximization (e.g. loyalty rebates) will harm consumers whenever the manufacturer would overproduce otherwise.
    JEL: L12 L14 L42
    Date: 2009–06
  4. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus.
    Keywords: Oligopoly; Managerial delegation; Endogenous contracts
    JEL: D43 L21
    Date: 2009–06–15
  5. By: Sabien Dobbelaere (VU University Amsterdam); Roland Iwan Luttens (SHERPPA, Ghent University, and CORE, Université Catholique de Louvain); Bettina Peters (Centre for European Economic Research (ZEW))
    Abstract: We study a two-stage R&D project with an abandonment option. Two types of uncertainty influence the decision to start R&D. Demand uncertainty is modelled as a lottery between a proportional increase and decrease in demand. Technical uncertainty is modelled as a lottery between a decrease and increase in the cost to continue R&D. We relate differences in uncertainty to differences in risk premia. We deduct testable hypotheses on the basis of which we empirically analyze the impact of uncertainty on the decision to start an R&D project. Using data for about 4000 German firms in manufacturing and services (CIS IV), our model predictions are strongly confirmed.
    Keywords: Investment under uncertainty; R&D; demand uncertainty; technical uncertainty; entry threat
    JEL: D21 D81 L12 O31
    Date: 2009–05–15
  6. By: Hiroaki Ino (Kwansei Gakuin University); Toshihiro Matsumura (University of Tokyo)
    Abstract: We investigate a desirable role of public enterprise in mixed oligopoly in free-entry markets. We compare the following three cases: (i) a public firm produces before private firms (public leadership), (ii) all firms produce simultaneously (Cournot), (iii) a public firm produces after private firms (private leadership). We find that private leadership is best and public leadership is worst, in contrast to the cases without entries and exits of private firms. We also investigate the welfare implication of privatization. We find that some important results shown by existing works do not hold under private leadership.
    Keywords: free-entry market, Stackelberg, Cournot, mixed oligopoly, commitment
    JEL: H42 L13
    Date: 2009–06
  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: 2009–06
  8. By: David Goodwin; Stuart Mestelman
    Abstract: The paper reports the results of 39 laboratory duopoly markets for which pricing institution and participant experience are treatments. Cournot (C) duopolies (quantity precommitment and a price determined to clear the market) are contrasted with Kreps-Scheinkman (KS) duopolies (quantity precommitment and posted prices). Inexperienced participants in KS markets have much more difficulty selecting capacities consistent with the theoretical predictions than do those in C markets. With experience, the differences disappear.
    Keywords: Duopoly; Laboratory experiment; Quantity precommitment; Posted prices; Price competition; Market-clearing prices; Experience
    JEL: C92 D43 L13
    Date: 2009–06
  9. By: Moritz Müller; Robin COWAN; Geert Duysters; Nicolas JONARD
    Abstract: This paper investigates how technological distance between firms affects their network of R&D alliances. Our theoretic model assumes that the benefit of an alliance between two firms is given by their technological distance. This benefit-distance relationship determines the ego-network of each firm as well as the overall network structure. Empirical relevance is confirmed for the bio-pharmaceutical industry. Although we find that the network structure is largely explained by firm size, technological distance determines the positioning of firms in the network.
    Keywords: technological distance, research alliance, network formation, pharmaceutical industry.
    Date: 2009
  10. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Svensson, Roger (Research Institute of Industrial Economics (IFN))
    Abstract: We develop a theory of commercialization mode (entry or sale) of entrepreneurial inventions into oligopoly, and show that an invention of higher quality is more likely to be sold (or licensed) to an incumbent due to strategic product market effects on the sales price. Moreover, preemptive acquisitions by incumbents are shown to stimulate the process of creative destruction by increasing the entrepreneurial effort allocated to high-quality invention projects. Using detailed data on patents granted to small firms and individuals, we find evidence that high-quality inventions are often sold, and that they are sold under bidding competition.
    Keywords: Acquisitions; Entrepreneurship; Innovation; Start-ups; Patent; Ownership; Quality
    JEL: G24 L10 L20 M13 O30
    Date: 2009–06–10
  11. By: Marco A. Haan (University of Groningen); José Luis Moraga-González (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.
    Keywords: Advertising; attention; consumer search; saliency
    JEL: D83 L13 M37
    Date: 2009–04–16
  12. By: Bojanowski, Michał; Corten, Rense; Westborck, Bastian
    Abstract: This paper examines the structure and dynamics of the global network of inter-firm research and development (R&D) partnerships using longitudinal data for 1989--2002. We contribute to a recent literature that has attributed patterns and changes in the network to major political and technological developments, but which has omitted the structure in the underlying firm population. Two often made claims are that R&D collaboration is important in nowadays fierce competitive environment, but that the importance of international partnerships has declined over time. We integrate data on firms and alliances and confront both hypotheses with our data and a novel set of methods, which enable to control for structure in the firm population.
    Keywords: Inter-firm collaboration; R\&D partnerships; International technology transfer; Social network analysis
    JEL: L14 O32
    Date: 2009–05–07
  13. By: Burke, A.E.; Stel, A.J. van; Thurik, A.R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Blue ocean strategy seeks to turn strategic management on its head by replacing ‘competitive advantage’ with ‘value innovation’ as the primary goal where firms must create consumer demand and exploit untapped markets. Empirical analysis has been focused on case study evidence and so lacks generality to resolve the debate. We provide a methodological synthesis of the theories enabling us to bring statistical evidence to the debate. Our analysis finds that blue ocean and competitive strategies overlap and managers do not face a discrete either/or decision between each strategy. Our evidence for the Dutch retail industry indicates that blue ocean strategy has prevailed as a dominant long term viable strategy.
    Keywords: blue ocean strategy;competitive advantage;innovation;entrepreneurial discovery;retailing
    Date: 2009–05–29
  14. By: Klaus Desmet (Universidad Carlos III de Madrid); Stephen L. Parente (University of Illinois)
    Abstract: This paper argues that an economy\'s transition from Malthusian stagnation to modern growth requires markets to reach a critical size, and competition to reach a critical level of intensity. By allowing an economy to produce a greater variety of goods, a larger market makes goods more substitutable, raising the price elasticity of demand, and lowering mark-ups. Firms must then become larger to break even, which facilitates amortizing the fixed costs of innovation. We demonstrate our theory in a dynamic general equilibrium model calibrated to England\'s long-run development and explore how various factors affect the timing of takeoff.
    Keywords: competition; industrial revolution; innovation; market revolution; unified growth theory
    JEL: N33 O14 O33 O41
    Date: 2009–05–25
  15. By: Sebastian Krautheim; Tim Schmidt-Eisenlohr
    Abstract: We develop a stylized model of international tax competition between a large country and a tax haven. In the large country, firms in a monopolistically competitive industry generate positive profits which can be taxed by the government. Firms have heterogeneous productivity levels and can choose to undertake `profit shifting' FDI in order to benefit from lower tax rates abroad. We find that economies with a low degree of firm heterogeneity and a high degree of monopolistic market power are less affected by international tax competition. They face lower out flows of the tax base and can set higher tax rates.
    Keywords: heterogeneous firms, monopolistic competition, tax competition, tax havens
    JEL: F23 H25 H87
    Date: 2009
  16. By: Joel BAUM; Robin COWAN; Nicolas JONARD
    Abstract: Empirical research on strategic alliances has focused on the idea that alliance partners are selected on the basis of social capital considerations. In this paper we emphasize instead the role of complementary knowledge stocks (broadly defined) in partner selection, arguing not only that knowledge complementarity should not be overlooked, but that it may be the true causal force behind alliance formation. To marshal evidence on this point, we design a simple model of partner selection in which firms ally for the purpose of learning and innovating, and in doing so create an industry network. We abstract completely from network-based structural and strategic motives for partner selection and focus instead on the idea that firms’ knowledge bases must “fit” in order for joint leaning and innovation to be possible, and thus for an alliance to be feasible. The striking result is that while containing no social capital considerations, this simple model replicates the firm conduct, network structure, and contingent effects of network position on performance observed and discussed in the empirical literature.
    Date: 2009
  17. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Beth A. Freeborn (Department of Economics, College of William and Mary); Jason P. Hulbert (Department of Economics, College of William and Mary)
    Abstract: We investigate the relationship between collusive behavior in Bertrand oligopoly experiments and subject heterogeneity in risk preferences. We find that risk aversion is positively associated with tacit collusion when the goods are complements, but find no evidence of collusive behavior when the goods are substitutes. Furthermore, risk aversion is associated with lower prices with complement goods, but does not impact pricing behavior with substitute goods. In both treatments, we find that subjects tend to follow the price change of the other seller. In the complements treatment, however, this tendency increases with the degree of risk aversion.
    Keywords: Bertrand duopoly, risk aversion, collusion, experiment
    JEL: C9 L1
    Date: 2009–06–11
  18. By: Graddy, Kathryn; Hall, George
    Abstract: We estimate a dynamic profit-maximization model of a fish wholesaler who can observe consumer characteristics, set individual prices, and thus engage in third-degree price discrimination. Simulated prices and quantities from the model exhibit the key features observed in a set of high quality transaction-level data on fish sales collected at the Fulton fish market. The model’s predictions are then compared to the case in which the dealer must post a single price to all customers. We find the cost to the dealer of posting a uniform price to be extremely small.
    Keywords: dynamic programming; fish; indirect inference; price discrimination; yield management
    JEL: C15 D21 D4 L1 L81
    Date: 2009–06

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