Essays on Microeconomic Theory and Practice

Economic theory and the empirically observed behaviour of agents are often challenging to match because of the richness of aspects that influence the acting of economic agents. Theory, on the other hand requires a limited number of clearly defined dimensions to be able to derive stringent arguments and conclusions. This work attempts to contribute to economic research by attempting both to retrace the real-life behaviour of agents, to validate and match findings against existing theory as well as to contribute to new theory. Following a long standing tradition among researchers in industrial organization, as e.g. put forward by Tirole (2003), Chapter 2 presents results from detailed case study interviews in procurement in the automotive industry, thus exploiting the broad array of aspects that any complex empirical problem has. Chapter 3 then presents a narrowly focussed econometric analysis of one particular aspect that has been identified in the previous case study interviews, based on a second survey data set. Chapter 4 discusses a theoretical work that is technically closely related to a well established model in industrial organization, Hotelling, and applies this to the international trade context. All chapters are self-contained research papers, and every chapter is followed by its bibliography and appendix. In Chapter 2, my co-authors, Florian Müller and Konrad Stahl, and I report on the results of a series of case study interviews with senior managers of suppliers as well as input procurers in the German automotive industry. With this research we attempt to fill the gap between theory building and empirical observation and testing, by introducing a case study approach in which the discussed questions are based on theory, and the context in which they are raised is specified to an extent that allows the reexamination of existent theory, and new theory building. Hypotheses to explain and to evaluate the observed interactions or to identify the need for further theoretical and empirical studies are derived. Among others, we find that the hold-up by suppliers is washed out by contractual interdependence, and in particular by repetition. On the other hand, we assess upstream innovative efforts to be inefficiently small because complementarity effects as well as effort results are not fully internalized. Further theoretical investigation related to inducing innovation and the allocation of risks in the value chain we consider especially interesting. A more detailed empirical analysis would be justified, among others, concerning the differences in contracting between varying types of procured parts and the organization of manufacturing along the value chain. Chapter 3 succeeds the case study interviews discussed in Chapter 2 and concentrates on a single aspect in automotive procurement, delegation versus centralization, based on a different, larger, and more focused set of data that was generated in a survey of the German automotive industry. This industry is characterized by several stages or tiers of production. Automotive manufacturers (OEMs) in some instances directly negotiate with sub-suppliers of their direct or tier 1 suppliers. This strategy is generally referred to as directed business in the industry. I provide evidence on the use of directed business and match the empirical evidence to the theory of delegation versus centralization. Directed business, or centralization of contracting, decreases the informational rents of the tier 1 supplier as predicted by theory. In addition, I show that directed business includes higher development effort by the OEM and (weakly) reduces incentives of the tier 1 supplier to produce sufficient quality. Chapter 4 presents a model with differentiated goods applied to the context of international trade and is a joint work with Andrey V. Ivanov. The literature related to the "innocent bystander problem'' (Krugman, 1991) predicts that when a subset of countries enters into a free trade agreement (FTA), the rest of the world suffers in welfare. We present a trade model with horizontally differentiated goods, in which in contrast to the literature, under some conditions the non-FTA-participating countries can also gain in welfare. The main drivers behind this positive result are the size asymmetry of the countries and the inability of firms to perfectly price-discriminate across countries