Optimal market design
AbstractThis paper introduces three methodological advances to study the optimal design of static and dynamic markets. First, we apply a mechanism design approach to characterize all incentive-compatible market equilibria. Second, we conduct a normative analysis, i.e. we evaluate alternative competition and innovation policies from a welfare perspective. Third, we introduce a reliable way to measure competition in dynamic markets with non-linear pricing. We illustrate the usefulness of our approach in several ways. We reproduce the empirical finding that innovation levels are higher in markets with lower price-cost margins, yet such markets are not necessarily more competitive. Indeed, we prove the Schumpeterian conjecture that more dynamic markets characterized by higher levels of innovation should be less competitive. Furthermore, we demonstrate how our approach can be used to determine the optimal combination of market regulation and innovation policies such as R&D subsidies or a weakening of the patent system. Finally, we show that optimal markets are characterized by strictly positive price-cost margins.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7736.
Date of creation: Mar 2010
Date of revision:
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Other versions of this item:
- Boone, J. & Goeree, J.K., 2010. "Optimal Market Design," Discussion Paper 2010-25, Tilburg University, Center for Economic Research.
- Boone, J. & Goeree, J.K., 2010. "Optimal Market Design," Discussion Paper 2010-011, Tilburg University, Tilburg Law and Economic Center.
- Jan Boone & Jacob K. Goeree, 2010. "Optimal market design," IEW - Working Papers 479, Institute for Empirical Research in Economics - University of Zurich.
- K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
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