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Optimal Market Design

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Author Info

  • Boone, J.
  • Goeree, J.K.

    (Tilburg University, Center for Economic Research)

Abstract

This 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 nonlinear 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 Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-25.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201025

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Web page: http://center.uvt.nl

Related research

Keywords: competition policy; dynamic markets; competition measures; Schumpeter; mechanism design;

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  1. Schmutzler, Armin, 2010. "The relation between competition and innovation -- Why is it such a mess?," CEPR Discussion Papers 7640, C.E.P.R. Discussion Papers.
  2. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
  3. Gilbert, Richard & Tom, Willard K., 2001. "Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years Later," Competition Policy Center, Working Paper Series qt8zv6b8c5, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  4. David S. Evans & Richard Schmalensee, 2002. "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries," NBER Chapters, in: Innovation Policy and the Economy, Volume 2, pages 1-50 National Bureau of Economic Research, Inc.
  5. Boone, J., 2004. "A New Way to Measure Competition," Discussion Paper 2004-004, Tilburg University, Tilburg Law and Economic Center.
  6. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers W02/04, Institute for Fiscal Studies.
  7. Ilya Segal & Michael Whinston, 2005. "Antitrust in Innovative Industries," NBER Working Papers 11525, National Bureau of Economic Research, Inc.
  8. Hahn, Robert W., 2001. "A Primer on Competition Policy and the New Economy," Working paper 266, Regulation2point0.
  9. José E. Galdón-Sánchez & James A. Schmitz Jr., 2002. "Competitive Pressure and Labor Productivity: World Iron-Ore Markets in the 1980's," American Economic Review, American Economic Association, vol. 92(4), pages 1222-1235, September.
  10. George Symeonidis, 2002. "The Effects of Competition: Cartel Policy and the Evolution of Strategy and Structure in British Industry," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262194686, January.
  11. Andrea Bassanini & Ekkehard Ernst, 2002. "Labour Market Institutions, Product Market Regulation, and Innovation: Cross-Country Evidence," OECD Economics Department Working Papers 316, OECD Publishing.
  12. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  13. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
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