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 ¯nding 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 Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2010-011.
Date of creation: 2010
Date of revision:
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Web page: http://www.tilburguniversity.nl/tilec/
Other versions of this item:
- Boone, Jan & Goeree, Jacob K., 2010. "Optimal market design," CEPR Discussion Papers 7736, C.E.P.R. Discussion Papers.
- Jan Boone & Jacob K. Goeree, 2010. "Optimal market design," IEW - Working Papers 479, Institute for Empirical Research in Economics - University of Zurich.
- Boone, J. & Goeree, J.K., 2010. "Optimal Market Design," Discussion Paper 2010-25, Tilburg University, Center for Economic Research.
- D4 - Microeconomics - - Market Structure and Pricing
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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