nep-mic New Economics Papers
on Microeconomics
Issue of 2009‒10‒24
twenty-one papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Welfare Enhancing Mergers Under Product Differentiation By Tina Kao; Flavio Menezes
  2. "Hotelling's Spatial Competition Reconsidered" By Takatoshi Tabuchi
  3. Search, Design and Market Structure By Heski Bar-Isaac; Guillermo Caruana; Vicente Cuñat
  4. Competition in two-sided markets with common network externalities By Cremer, Helmuth; Bardey, David; Lozachmeur, Jean-Marie
  5. Increasing energy and resource efficiency through innovation: an explorative analysis using innovation survey data By Rennings, Klaus; Rammer, Christian
  6. Adaptive Consumption Behavior By Peter Howitt; Ömer Özak
  7. Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium By Jacob A. Bikker; Sherrill Shaffer; Laura Spierdijk
  8. The Politics of Growth: Can Lobbying Raise Growth and Welfare? By Julio, Paulo
  9. Weak IPR and Imitation in the South and International Exhaustion of Patent Rights in the North for Innovated Drugs: A Policy Game By Rajat Acharyya; Maria D.C. Garcia-Alonso
  10. A Game Theoretical View on Efficiency Wage Theories By Wesselbaum, Dennis
  11. Competitive Pressure and the Adoption of Complementary Innovations By Tobias Kretschmer; Eugenio Miravete; José Pernías
  12. An Options Pricing Approach for CO2 Allowances in the EU ETS By Beat Hintermann
  13. Estimating WTP With Uncertainty Choice Contingent Valuation By Kelvin Balcombe; Aurelia Samuel; Iain Fraser
  14. Institutions and the Scale Effect By Alex William Trew
  15. On the Introduction of Firing Costs By Steffen Ahrens; Dennis Wesselbaum
  16. Social VAT: Good or bad idea? By Fève, P.; Matheron, J.; Sahuc, J-G.
  17. How Did Macro Theory Get So Far off Track, and what Can Heterodox Macroeconomists Do to Get it Back On Track? By David Colander
  18. Self-Enforcing Climate Change Treaties: A Generalized Differential Game Approach with Applications By Pedro, de Mendonça
  19. The history of transaction cost economics and its recent developments By Lukasz, Hardt
  20. Growth and the pollution convergence hypothesis: a nonparametric approach By Carlos Ordás Criado; Simone Valente; Thanasis Stengos
  21. Sequential versus simultaneous contributions to public goods: Experimental evidence By Simon Gaechter; Daniele Nosenzo; Elke Renner; Martin Sefton

  1. By: Tina Kao; Flavio Menezes
    Abstract: This paper considers a model of duopoly with differentiated products to examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the parameter range for welfare enhancing merger widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.
    JEL: L11 L12
    Date: 2009–10
  2. By: Takatoshi Tabuchi (Faculty of Economics, University of Tokyo)
    Abstract: Oligopoly models are usually analyzed in the context of two firms anticipating that market outcomes would be qualitatively similar in the case of three or more firms. This is not an exception in the literature on Hotelling's location-then-price competition. In this paper, we show that the main findings in Hotelling's duopoly, brand bunching and the max-min principle of product differentiation no longer hold once three or more firms are allowed to enter the market. That is, oligopolists with three or more firms proliferate brands and neither maximize nor minimize product differentiation.
    Date: 2009–09
  3. By: Heski Bar-Isaac (Stern School of Business, NYU); Guillermo Caruana (CEMFI); Vicente Cuñat (London School of Economics)
    Abstract: The Internet has made consumer search much easier with consequences for competition, industry structure and product offerings. We explore these consequences in a rich but tractable model that allows for strategic design choices. We find a polarized market structure, where some firms choose designs aiming for broad-based audiences, while others target narrow niches. Such an industry structure can arise even when all firms and consumers are ex-ante identical. We perform comparative statics and show the effect of a fall in search costs on the designs, market shares, prices, and profits of different firms. In particular, a fall in search costs, through the effect on product designs, can lead to higher industry prices and profits. In characterizing sales distributions, our analysis is related to discussions of how the Internet has led to the prevalence of niche goods and the long tail and superstar phenomena.
    Date: 2009–09
  4. By: Cremer, Helmuth; Bardey, David; Lozachmeur, Jean-Marie
    Abstract: We study competition in two sided markets with common network externality rather than with the standard inter-group e¤ects. This type of externality occurs when both groups bene…t, possibly with di¤erent intensities, from an increase in the size of one group and from a decrease in the size of the other. We explain why common externality is relevant for the health and education sectors. We focus on the symmetric equilibrium and show that when the externality itself satis…es an homogeneity condition then platforms’ pro…ts and price structure have some speci…c properties. Our results reveal how the rents coming from network externalities are shifted by platforms from one side to other, according to the homogeneity degree. In the speci…c but realistic case where the common network externality is homogeneous of degree zero, platform’s pro…t do not depend on the intensity of the (common) network externality. This is in sharp contrast to conventional results stating that the presence of network externalities in a two-sided market structure increases the intensity of competition when the externality is positive (and decreases it when the externality is negative). Prices are a¤ected but in such a way that platforms only transfer rents from consumers to providers
    Date: 2009–10–15
  5. By: Rennings, Klaus; Rammer, Christian
    Abstract: Energy and resource efficiency innovations (EREIs) are often seen as win-win opportunities for both the economic and the environmental performance of firms. It is thus worth asking how the innovation activities and performance of firms with regard to energy and resource efficiency look like: Do EREI firms follow distinct innovation strategies? Do EREIs spur or limit innovation success? And what are the particular features of EREI firms compared to conventional innovators? Using German innovation data, we find that EREIs are determined by a larger set of technology-push and market-pull factors. On the supply side, R&D budgets, research infrastructure and networking with other firms are important factors of influence, while on the demand side increased productivity and cost reductions are decisive, as well as improved product quality. On the other hand, EREIs are complex activities which also need regulatory incentives. Although EREIs are not more successful compared to conventional innovations, they contribute substantially to the economic success of firms.
    Keywords: Resource efficiency,energy efficiency,environmental innovations,innovation surveys
    JEL: Q01 Q55 O31 O33
    Date: 2009
  6. By: Peter Howitt; Ömer Özak
    Abstract: This paper proposes and studies a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure, which, although sophisticated, places few informational or computational demands on the consumer. We show that under a variety of settings, our procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.
    JEL: E21 C63
    Date: 2009–10
  7. By: Jacob A. Bikker; Sherrill Shaffer; Laura Spierdijk
    Abstract: The Panzar-Rosse model has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during 1986-2004.
    Date: 2009–10
  8. By: Julio, Paulo
    Abstract: This paper aims at analyzing the eects of lobbying over economic growth and primarily welfare. We model explicitly the interaction be- tween policy-makers and rms in a setup where the latter undertakes political contributions to the former in exchange for more restrictive market regulations which induce exit and enhance the protability of the market. In a sectorial equilibrium, despite stimulating growth, lobbying restricts the market structure and reduces welfare when com- pared to the free-entry outcome. However, once general equilibrium considerations are taken into account, we nd that lobbying may im- prove welfare over a welfare maximizing free-entry equilibrium, by means of an expansion in aggregate demand. This introduces a new paradigm in the literature about the eects of lobbying over economic performance. JEL codes: D72, L13, O31
    Date: 2009
  9. By: Rajat Acharyya; Maria D.C. Garcia-Alonso
    Abstract: We consider a policy game between a high-income country hosting a drug innovator and a low-income country hosting a drug imitator. The low-income country chooses whether to enforce an International Patent Regime (strict IPR) or not (weak IPR) and the high-income country chooses whether to allow parallel imports (PI) of on-patent drugs or market based discrimination (MBD). We show that, for a moderately high imitation cost, both (Strict IPR, Parallel Imports) and (Weak IPR, MBD) emerge as the Subgame Perfect Nash Equilibrium (SPNE) policy choices. For relatively smaller imitation costs, (Weak IPR, MBD) is the unique SPNE policy choice. The welfare properties reveal that although innovation may be higher at the (Strict IPR, PI), the market coverage and national welfare of the low-income country, and the total welfare are all lower. This opens up the efficiency issue of implementing TRIPS and at the same time allowing international exhaustion of patent rights.
    Keywords: Patent protection; TRIPS; innovation; imitation; Parallel Imports; Pharmaceuticals
    JEL: D4 L1 I1
    Date: 2009–10
  10. By: Wesselbaum, Dennis
    Abstract: The efficiency wage theory developed by Akerlof (1982) assumes observability of effort and the ability of firm and worker to commit on their effort/wage decisions. We show that, from a game theoretical point of view, we have to understand the firm/worker relationship as a repeated Prisoner's dilemma. Therefore, cooperation is per se not a (subgame perfect) Nash equilibrium and hence the Akerlof (1982) theory is based upon an implicit assumption of cooperation, which can not be implemented w.l.o.g.. In addition, we find that this approach is a special case of the Shapiro and Stiglitz (1984) approach and hence unify the two approaches.
    Keywords: Efficiency Wage; Prisoner's Dilemma; Repeated Game; Subgame Perfect Nash Equilibrium.
    JEL: J41 C73 C72
    Date: 2009–10
  11. By: Tobias Kretschmer (Institute for Communication Economics, LMU Munich); Eugenio Miravete (Department of Economics, University of Texas at Austin); José Pernías (Department of Economics, Universidad Jaume I de Castellón)
    Abstract: Liberalization of the European automobile distribution system in 2002 limits the ability of manufacturers to impose vertical restraints, leading to a substantial restructuring of the industry and increasing the competitive pressure among dealers. We estimate an equilibrium model of profit maximization to evaluate how dealers change their innovation strategies with this regime change. Using French data we evaluate the existence of complementarities among adoptions of innovations and the scale of production. We conclude that as firms expand their scale of production they concentrate their effort in one type of innovation only. Results are robust to the existence of unobserved heterogeneity.
    Keywords: Competitive Pressure, Complementarity, Product and Process Innovation
    JEL: C35 L86 O31
    Date: 2009–09
  12. By: Beat Hintermann (Center for Energy Policy and Economics CEPE, Department of Managment, Technology and Economics, ETH Zurich, Switzerland)
    Abstract: If firms are unable to fully control their emissions, the cap in a permit market may be exceeded. Using stochastic aggregate emissions as the underlying I derive an options pricing formula that expresses the permit price as a function of the penalty for noncompliance and the probability of a binding cap. I apply my model to the EU ETS, where rapid market setup made it difficult for firms to adjust their production technology in time for phase 1. The model fits the data well, implying that the permit price was driven by firms hedging against stochastic emissions rather than marginal abatement costs.
    Keywords: Permit markets, air pollution, climate change, CO2, options pricing, EU ETS
    JEL: G12 G14 G18 Q52 Q53 Q54
    Date: 2009–06
  13. By: Kelvin Balcombe; Aurelia Samuel; Iain Fraser
    Abstract: A method for treating Contingent Valuation data obtained from a polychotomous response format designed to accommodate respondent uncertainty is developed. The parameters that determine the probability of indefinite responses are estimated and used to truncate utility distributions within a structural model. The likelihood function for this model is derived, along with the posterior distributions that can be used for estimation within a Bayesian Monte Carlo Markov Chain framework. We use this model to examine two data sets and test a number of model related hypotheses. Our results are consistent with those from the psychology literature relating to uncertain response: a ‘probable no’ is more likely to suggest a defiite no, than a ‘probable yes’ is likely to suggest a definite yes. We also find that ’don’t know’ responses are context dependent. Comparing the performance of the methods developed in this paper with the ordered Probit which has been previously used in the literature with this type of data we find our methods outperform the ordered Probit for one of the data sets used.
    Keywords: Respondent uncertainty; multiple bound contingent valuation; Bayesian MCMC
    JEL: C35 I18 Q5
    Date: 2009–10
  14. By: Alex William Trew
    Abstract: Endogenous growth models that imply a relationship between scale and growth are commonly refuted on the basis of empirical evidence. A focus on the extent of the market as opposed to the scale of the country has led recent studies to reconsider the role that scale plays when by conditioning on measures of openness. We develop a variant of a simple learning by doing model with endogenous market extent to include a role for institutions in determining the strength -- and direction -- of the scale effect. Using cross-country data, we find a significant interaction between property rights institutions and long-run growth: In countries with poor property rights institutions, scale is positively related with income per capita; where property rights institutions are good, higher scale is associated with lower per capita incomes. We find no evidence of such role for contracting institutions.
    Keywords: Scale and growth, learning by doing, institutions.
    JEL: O11 O40 O43
    Date: 2009–09
  15. By: Steffen Ahrens; Dennis Wesselbaum
    Abstract: This paper provides a survey of the recent literature about firing costs and discusses the transmission channels of firing costs in a partial equilibrium context. In addition, we expand our analysis two types of firing costs in a New Keynesian model with purely endogenous separations. We further distinguish between the effects resulting from respecting and non-respecting the bonding critique. We find that the two types of firing costs do not show significant differences. However, respecting the bonding critique enhances the overall performance of the model
    Keywords: Beveridge Curve, Endogenous Separations, Firing Costs
    JEL: E24 E32 J64
    Date: 2009–10
  16. By: Fève, P.; Matheron, J.; Sahuc, J-G.
    Abstract: The quantitative and dynamic consequence of a social VAT reform, i.e. a fiscal reform consisting in substituting VAT for social contributions, is assessed using two general equilibrium models. The first one is a Walrasian model with no other frictions than distortionary taxation of labor and capital incomes and consumption. The second one introduces in addition matching frictions in the labor market. Two alternative financing schemes are considered for the practical details of implementing the social VAT. In all cases, the fiscal reform turns out to generate a small, positive long--run effect on aggregate variables and yields a modest welfare gain. In the no--friction model, this welfare gain is substantially reduced when the reform is pre--announced six quarters prior to implementation. The effect of such a pre-announced reform are smaller when labor market frictions are taken into account.
    Keywords: social VAT, DGE, pre-announced fiscal reform.
    JEL: E10 E20 G12
    Date: 2009
  17. By: David Colander
    Abstract: This paper argues that the ideas that win out in economics are not necessarily those that a representative researcher would choose, but are rather the emergent result of the competition of ideas in which system replicator dynamics dominate. This means that those ideas that fit the analytic technology available to researchers at the time dominate, while “better” ideas that do not offer advancement to researchers lose out. This paper spells out that view. It differentiates a consumer’s understanding of theory from a producer’s understanding of theory, and argues that a consumer’s understanding of theory is often better suited to applied policy than is a producer’s understanding of theory. Because the replicator dynamics of the economics profession does not reward people for acquiring a consumer’s understanding of theory, that understanding is often neglected. Heterodox economists often have a better consumer’s understanding of theory than do mainstream economists but because they do not prepare students to be successful in economic institutional environment, their views do not receive the hearing they should in the profession. The paper offers a number of suggestions for heterodox European macro economists for competing and shaping the economic institutional environment.
    Date: 2009–11
  18. By: Pedro, de Mendonça
    Abstract: Based on recent proposals on non cooperative dynamic games for analysing climate negotiation outcomes, such as Dutta and Radner (2004, 2006a), we generalize a specific framework for modelling differential games of this type and describe the set of conditions for the existence of closed loop dynamics and its relation to adaptive evolutionary dynamics. We then show that the Dutta and Radner (2004, 2006a) discrete time dynamic setup is a specific case of that generalization and describe the dynamics both analytically and numerically for closed loop feedback and perfect state patterns. Our discussion is completed with the introduction of a cooperative differential framework for welfare analysis purposes, within our non cooperative proposal for climate negotiations.
    Keywords: Differential Game Theory; Environmental Economics; Evolutionary Dynamics; Climate Change Treaties
    JEL: Q56 C61 C73 C72
    Date: 2009–11
  19. By: Lukasz, Hardt
    Abstract: The emergence of transaction cost economics (TCE) in the early 1970s with Oliver Williamson’s successful reconciliation of the so called neoclassical approach with Herbert Simon’s organizational theory can be considered an important part of the first cognitive turn in economics. The development of TCE until the late 1980s was particularly marked by treating the firm as an avoider of negative frictions, i.e., of transaction costs. However, since the 1990s TCE has been enriched by various approaches stressing the role of the firm in creating positive value, e.g., the literature on modularity. Hence, a second cognitive turn has taken place: the firm is no longer only seen as an avoider of negative costs but also as a creator of positive knowledge.
    Keywords: transaction cost economics; Oliver Williamson; theory of the firm; modularity literature; cognitive turn
    JEL: D21 D23 B21 B31
    Date: 2009
  20. By: Carlos Ordás Criado (Center for Energy Policy and Economics CEPE, Department of Managment, Technology and Economics, ETH Zurich, Switzerland); Simone Valente (Center of Economic Research CER, Department of Managment, Technology and Economics, ETH Zurich, Switzerland); Thanasis Stengos (Department of Economics, University of Guelph, Guelph, ON, Canada)
    Abstract: The pollution-convergence hypothesis is formalized in a neoclassical growth model with optimal emissions reduction: pollution growth rates are positively correlated with output growth (scale effect) but negatively correlated with emission levels (defensive effect). This dynamic law is empirically tested for two major and regulated air pollutants - nitrogen oxides (NOX) and sulfur oxides (SOX) - with a panel of 25 European countries spanning over years 1980-2005. Traditional parametric models are rejected by the data. However, more flexible regression techniques - semiparametric additive specifications and fully nonparametric regressions with discrete and continuous factors - confirm the existence of the predicted positive and defensive effects. By analyzing the spatial distributions of per capita emissions, we also show that cross-country pollution gaps have decreased over the period for both pollutants and within the Eastern as well as the Western European areas. A Markov modeling approach predicts further cross-country absolute convergence, in particular for SOX. The latter results hold in the presence of spatial non-convergence in per capita income levels within both regions.
    Keywords: Air pollution, convergence, economic growth, mixed nonparametric regressions, distribution dynamics
    JEL: C14 C23 Q53
    Date: 2009–09
  21. By: Simon Gaechter (University of Nottingham); Daniele Nosenzo (University of Nottingham); Elke Renner (University of Nottingham); Martin Sefton (University of Nottingham)
    Abstract: We report an experiment comparing sequential and simultaneous contributions to a public good in a quasi-linear two-person setting. In one parameterization we find that overall provision is lower under sequential than simultaneous contributions, as predicted, but the distribution of contributions is not as extreme as predicted and first movers do not attain their predicted firstmover advantage. In another parameterization we again find that the distribution of contributions is not as predicted when the first mover is predicted to free ride, but we find strong support for equilibrium predictions when the second mover is predicted to free ride. These results can be explained by second movers' willingness to punish first movers who free ride, and unwillingness to reward first movers who contribute.
    Keywords: Public Goods; Voluntary Contributions; Sequential Moves; Experiment
    JEL: C92 H41
    Date: 2009–09

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