Essays in Applied Microeconomics

Michael Kunin

Date of defense: Jun 7, 2004

Dissertation Committee:
Gérard Roland - University of California, chair
Andreas Ortmann - CERGE-EI
Avner Shaked - University of Bonn
Kresimir Zigic - CERGE-EI

Abstract:

This dissertation, titled “Essays in Applied Microeconomics,” consists of three papers. The topics dealt with in the dissertation, apart from belonging to the field of applied microeconomics, have yet another common feature. In each essay, the story is based on or stems from interaction between developed and transition/less developed countries. In the first paper, there is vertically differentiated competition between high-quality goods from a developed country and low-quality goods from a less developed country. The second paper is motivated by the enlargement of the European Union and NATO, in which Central European transition countries join these clubs of developed nations. In the third paper, a software producer from a developed country decides on whether and when to enter a less developed country's market in the presence of copyright infringement.

The first paper, “Strategic Trade Policy and Vertical Product Differentiation: Intra-industry trade between developed and developing countries,” is a joint work with Krešimir Žigić. In this paper, we analyse the effects of simple strategic trade policy in a duopoly with vertical product differentiation where firms from both a developed and less developed country compete in both qualities and prices in the domestic market. The developed country's firm has lower marginal efficiency in production of quality than its counterpart in the less developed country. We concentrate on the case when the domestic market is in a less developed country and when it possesses the characteristics of a “natural duopoly.” We analyse under which conditions welfare maximising trade policy in the form of tariffs can lead to so-called quality reversal, when an initially low-quality domestic firm jumps up the quality ladder in anticipation of the optimal tariff. Then we contrast our findings with related results in the relevant trade literature.

In the second paper, “Sequencing of Club Enlargement: ‘Big bang,’ ‘gradualism,’ and internal reform,” I analyse in an incomplete contract framework how a club chooses its enlargement strategy in the presence of congestion. The club faces two waves of applicants. The applicants are homogeneous within each wave but differ in their conformity to the club's standards across waves. For each wave, the club chooses between an early entry offer, when the club can enforce the applicant's reform, and a late entry offer, when the applicant has to reform itself in order to be admitted. In addition, the club undertakes its own internal reform that, if successful, can eliminate congestion. I show that the club uses the “gradualism” approach when the waves substantially differ in their conformity to the club's standards, and the “big bang” approach otherwise. Moreover, the club never admits a less advanced wave before a more advanced one.

In the third paper, “Why do Software Manufacturers Tolerate Piracy in Transition and Less Developed Countries? A theoretical model,” I design a model to provide an explanation as to why software manufacturers from developed countries tolerate widespread copyright infringement in less developed countries and often even offer local versions of their products. In a two-period framework, I show that if network externalities are present and an improvement in copyright enforcement is expected, then it is profitable for the software manufacturer to enter the market even if it incurs losses in the beginning when the copyright enforcement is weak.