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 Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 479.
Date of creation: Feb 2010
Date of revision:
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, Jan & Goeree, Jacob K., 2010. "Optimal market design," CEPR Discussion Papers 7736, C.E.P.R. Discussion Papers.
- Boone, J. & Goeree, J.K., 2010. "Optimal Market Design," Discussion Paper 2010-011, Tilburg University, Tilburg Law and Economic Center.
- D4 - Microeconomics - - Market Structure and Pricing
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-13 (All new papers)
- NEP-COM-2010-03-13 (Industrial Competition)
- NEP-CTA-2010-03-13 (Contract Theory & Applications)
- NEP-INO-2010-03-13 (Innovation)
- NEP-REG-2010-03-13 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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