Optimal Market Design

Institute for Empirical Research in Economics, University of Zurich Working Paper No. 479

TILEC Discussion Paper No. 2010-011

CentER Discussion Paper Series No. 2010-25

31 Pages Posted: 3 Mar 2010 Last revised: 18 Mar 2010

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Jacob K. Goeree

University of Zurich

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2010

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 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.

JEL Classification: D4, L51

Suggested Citation

Boone, Jan and Goeree, Jacob K., Optimal Market Design (February 28, 2010). Institute for Empirical Research in Economics, University of Zurich Working Paper No. 479, TILEC Discussion Paper No. 2010-011, CentER Discussion Paper Series No. 2010-25, Available at SSRN: https://ssrn.com/abstract=1562550 or http://dx.doi.org/10.2139/ssrn.1562550

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Jacob K. Goeree

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/jgoeree.html

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