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This paper introduces three methodological advances to study the optimal design of static and dynamic markets. First, the authors apply a mechanism design approach to characterize all incentive-compatible market equilibria. Second, they conduct a normative analysis, i.e. They evaluate alternative competition and innovation policies from a welfare perspective. Third, they introduce a reliable way to measure competition in dynamic markets with non-linear pricing. They illustrate the usefulness of the approach in several ways. They reproduce the empirical finding that innovation levels are higher in markets with lower price-cost margins, yet such markets are not necessarily more competitive.
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