Collaboration, peer review and open source software

Open source software development may be superior to proprietary development because the open source organizational form naturally minimizes transactions costs associated with privately distributed information. This manifests itself in the ability of open source communities to encourage critical peer review and the sharing of ideas. When these activities are important, the open source organizational form may do better than a proprietary organizational form. My results suggest why open source is particularly powerful when maintainability of software is critical, and also suggest that the founder of a software project may be more likely to choose open source if there is an existing dominant proprietary software project.     

Pragmatism, not ideology: Historical perspectives on IBM’s adoption of open-source software

We track IBM’s approach to software production and commercialization between 1950 and the present. We find that in the 1950s IBM followed what today would be called an open-source model – its software source code was open, free of charge, and written collaboratively with its users. By the mid 1980s, all of these attributes had been reversed – IBM’s software was closed source, sold or leased independently of hardware sales, and written without the collaboration of its users. More recently, the company has been in a state of transition, achieving a balance between free, open-source software and proprietary software that still generates 20% of its revenues. We interpret these radical swings in light of the substantial changes that have taken place since the 1950s in the costs and benefits of open source, bundled, and collaborative software vis-à-vis the alternatives.     

网络效应、动态定价与电脑软件的最佳升级时机

电脑软件存在的网络效应使得厂商定价策略发生一定的变化。本文运用动态最优化理论,分析电脑软件厂商的定价策略和最优更版时机。发现厂商通常会以先低于边际成本的价格定价,然后逐渐提高软件的价格,与不具有网络效应的产品的边际成本定价有一定差异;厂商在升级旧版软件时,存在最佳时机,过早或者过迟推出新版软件都将导致利润损失。     

TALKING,SEARCHING, AND PRICING*

I study the implications of interpersonal communication for incentives for consumers to acquire information and firms’ pricing behavior. Firms market a homogeneous product and choose its price; consumers acquire price information at some cost to themselves. Also, each consumer accesses the information acquired by a sample of other consumers—interpersonal communication. An exogenous increase in the level of interpersonal communication decreases the information that consumers acquire, and, when search costs are low, firms price less aggressively. In an extension, consumers may choose to invest in interpersonal communication at some cost. A decrease in the costs of interpersonal communication decreases firms’ competition.     

The optimal pricing of computer software and other products with high switching costs

The paper studies the determinants of the optimum prices of computer programs and their upgrades. It is based on the notion that because of the human capital invested in the use of a computer program by its user, this product has high switching costs, and on the finding that pirates are responsible for generating over 80% of new software sales. A model to maximize the present value of the program to the program house is constructed to determine the optimal prices of initial programs and for those upgrading their programs. It is shown that an upward shift of the demand function of upgrades leads to an increase in the optimum price of upgrades and to a decline in that of initial copies. However, and upward shift of the demand function of initial copies increases their optimal price without affecting that of upgrades. The price of upgrades is higher, the smaller (greater) the absolute value of the derivative of the initial copy demand with respect to the upgrade price (its own price), the smaller the number of pirates purchasing their initial legitimate copies and, normally, the later they do it. The prices of these goods often move in opposite directions despite the fact that the goods can best be characterized as complements. Copy-protection is generally not optimal with standard programs having competing unprotected products, and it is normally optimal to use a drug pusher's strategy in pricing and in other respects: get the user hooked and cash in on the upgrades.     

Half a Century of Public Software Institutions: Open Source as a Solution to Hold‐Up Problem

We argue that the intrinsic inefficiency of proprietary software has historically created a space for alternative institutions that provide software as a public good. We discuss several sources of such inefficiency, focusing on one that has not been described in the literature: the underinvestment due to fear of hold‐up. An inefficient hold‐up occurs when a user of software must make complementary investments, when the return on such investments depends on future cooperation of the software vendor, and when contracting about a future relationship with the software vendor is not feasible. We also consider how the nature of the production function of software makes software cheaper to develop when the code is open to the end users. Our framework explains why open source dominates certain sectors of the software industry (e.g., programming languages), while being almost non existent in some other sectors (e.g., computer games). We then use our discussion of efficiency to examine the history of institutions for provision of public software from the early collaborative projects of the 1950s to the modern “open source” software institutions. We look at how such institutions have created a sustainable coalition for provision of software as a public good by organizing diverse individual incentives, both altruistic and profit‐seeking, providing open source products of tremendous commercial importance, which have come to dominate certain segments of the software industry.     

Skilled–unskilled wage inequality,product variety,public input and increasing returns: A static general equilibrium analysis

The paper develops a four sector small open economy model with two traded final good sectors, a public intermediate good producing sector and a nontraded good sector producing varieties of intermediate goods. There are three primary factors: capital, skilled labour and unskilled labour. Industrial sector producing a traded good uses capital, intermediate goods and skilled labour as inputs. Intermediate goods producing sector also uses capital and skilled labour. Public input producing sector and the agricultural sector producing the other traded good use capital and unskilled labour as inputs. It is shown that, if production technologies are the same for the agricultural sector and the public input producing sector and if the scale elasticity of output is very low, then an increase in capital stock (unskilled labour endowment) raises (lowers) the skilled–unskilled wage ratio. However, an increase in skilled labour endowment does not produce any unambiguous effect. On the other hand, an increase in the tax rate on industrial output and/or an increase in the price of the agricultural product, armed with the same set of assumptions, lowers the skilled–unskilled wage ratio.     

On Intertemporal Subsidy-Free Prices and Economic Depreciation: Constrained Market Pricing Revisited

The constrained market pricing approach to regulating monopolies maintains that prices should be subsidy-free, lying between the often expansive bounds of stand alone and incremental costs. For a simple two-good/two-period model of a monopolist subject to a zero profit constraint, it is shown that subsidy-free prices are those which rise to the amortized opportunity cost of the currently optimal asset configuration required to meet both current and future demand, providing—in some circumstances—justification for accelerated depreciation. Such intertemporal subsidy-free prices recognize that the stand alone cost of existing assets to current consumers depends on the value of those assets to future consumers. Hence, if a feasible resale price for the fixed costs of capacity exists within or between periods, then intertemporal stand alone costs and intertemporal incremental costs are driven to equality.     

ENTRY AND QUALITY SIGNALLING WHEN ONLY SOME CONSUMERS ARE INFORMED OF THE ENTRANT'S QUALITY

This paper focuses on competition between an incumbent and an entrant when only the entrant's quality is unknown to (some) consumers. The incumbent may or may not know the entrant's quality. The model reveals a separating equilibrium where the entrant's high price signals its high quality when the proportion of informed consumers is at some intermediate value. The case in which the incumbent knows the entrant's quality generates two additional equilibria. When the proportion of informed consumers is large enough, firms choose their prices as in the complete information case. The entrant's high price in combination with the incumbent's low price signals the entrant's high quality. When the proportion of informed consumers is at some intermediate value, the incumbent's high price signals the entrant's low quality, while its low price signals the entrant's high quality. Interestingly, we find that entry may be facilitated with informational product differentiation.     

Rethinking real-time electricity pricing

Most US consumers are charged a near-constant retail price for electricity, despite substantial hourly variation in the wholesale market price. This paper evaluates the first program to expose residential consumers to hourly real-time pricing (RTP). I find that enrolled households are statistically significantly price elastic and that consumers responded by conserving energy during peak hours, but remarkably did not increase average consumption during off-peak times. The program increased consumer surplus by $10 per household per year. While this is only one to two percent of electricity costs, it illustrates a potential additional benefit from investment in retail Smart Grid applications, including the advanced electricity meters required to observe a household’s hourly consumption.     

A Uniform Price Auction for Conservation Easements in the Canadian Prairies

This paper describes the application of a uniform price auction with a hidden reserve price in a field project aimed at discovering Canadian landowners’ willingness to accept compensation for placing conservation easements on their lands. This is the only project of this kind in Canada to date, and one of the few worldwide. The paper discusses the design of the auction, describes its implementation, and presents its results. The bids received in the auction conformed with known factors affecting opportunity costs and willingness to accept. The information from this auction was successful in guiding a long-term easement procurement program.     

TRADE IMPACTS ON SKILL ACQUISITION VIA VARIETY EXPANSION*

We show that trade enhances skill formation through gains from trade via variety expansion à la Krugman. Although workers are identical as unskilled labour, they differ in productivity as skilled labour. Workers become skilled by incurring training costs. By introducing these settings into a trade model with monopolistic competition, we show that, although trade makes all agents better off, its effect is stronger for skilled than unskilled workers, which stimulates skill acquisition. As a result of less productive workers becoming skilled, the wage dispersion among skilled workers increases.     

Does possessing an installed base induce a proprietary software producer to act aggressively or mildly in pricing and intrinsic quality provision?

This paper investigates competition between open-source software (OSS) and proprietary software (PS) which possesses an installed base. We find that an increase in PS installed base does not necessarily induce the PS producer to increase price or reduce intrinsic quality. Specifically, if OSS is weakly (moderately) compatible with PS, then an increase in PS installed base induces the PS producer to invest less (more) in intrinsic quality. Regarding the price of PS, if OSS is highly compatible with PS possessing a large installed base, then an increase in installed base induces the PS producer to sell products for a lower price.     

ASYMMETRIC INFORMATION AND EXCHANGE OF INFORMATION ABOUT PRODUCT DIFFERENTIATION

We introduce asymmetric information about consumers’ transportation costs (i.e., the degree of product differentiation) in the model of Hotelling. When transportation costs are high, both firms have lower profits with asymmetric information than with perfect information. Contrarily, if transportation costs are low, both firms may prefer the asymmetric information scenario (the informed firm always prefers the informational advantage, while the uninformed firm may or may not prefer to remain uninformed). Information exchange is ex‐ante advantageous for both firms, but ex‐post damaging if transportation costs turn out to be low. If the information is unverifiable, the informed firm does not represent a reliable source of information, since it always prefers to announce that transportation costs are high and there is no contract that induces truthful revelation.     

Third-degree price discrimination,quality choice,and welfare

Employing an endogenous quality choice model, we reconsider the effect on welfare of monopolistic third-degree price discrimination. We prove that price discrimination always enhances welfare, mainly because the quality improvement owing to price discrimination increases consumer surplus. Moreover, we show that third-degree price discrimination benefits all parties, including consumers in the higher priced market if the preference differences between markets are sufficiently large.     

Cost-axiomatic regulatory pricing

The axioms of the Shapley value and semi-values of non-atomic games can be taken as the starting point for axioms on the relation between costs and prices of a regulated multiproduct monopoly. The price mechanisms that result from this system of axioms are called cost- axiomatic prices. This paper shows the applicability of such pricing to all cases of regulatory constraints that require revenue to be a given percentage of costs (including cost-plus regulation, break-even pricing or Amtrak's 50% clause). Moreover, we show that all such price mechanisms, including a fairly general system of taxation or subsidization of consumers, are demand compatible if cost-axiomatic pricing leads to deficits or profits.     

Piracy and limited liability

This paper analyzes the effects of end-user piracy on a monopolized software industry with network effects in which consumers have heterogeneous income and limited liability. Limited liability produces a piracy cost which increases with income. The monopolist thus may be able to exploit the network effect brought about by the piracy of low-income consumers to charge a higher price to high-income consumers thereby earn a higher profit, especially when the monopolist can prevent the network effect from spilling over to the high-income consumers. If intellectual property rights policies are severe enough, then the monopolist can avoid the spillover. Otherwise it may become a case where each high-income buyer benefits from the piracy but the monopolist is hurt. However, a severe policy may bring about a high piracy rate since it invites the monopolist to raise the price.      

SEQUESTERING CARBON ON AGRICULTURAL LAND: SOCIAL COST AND IMPACTS ON TIMBER MARKETS

Planting trees to sequester carbon has broad political appeal. However, effects of a major tree planting program on the agricultural sector and on timber markets are unclear. This paper examines social costs of sequestering carbon in tree plantations on U.S. agricultural land and investigates harvesting's effects on timber prices and on private timber producers' welfare. The analysis links a model of the U.S. agricultural sector that includes the land base in major production areas with a model of the U.S. softwood economy. Using current data on planting, maintenance, and harvesting costs for tree plantations and carbon sequestration rates, the models estimate the price and welfare effects of alternative carbon sequestration goals. Results indicate a range of outcomes. Consumers pay higher prices for food as farmers divert land from crops to trees. However, wood products consumers gain from falling timber prices if the trees enter commercial markets. Agricultural producers and landowners gain from higher commodity prices, but private forest owners lose. Large tree planting programs imply that policymakers must compensate private commercial tree planting to prevent farmers from displacing present tree plantations.     

A study on financial opportunity costs of growing local varieties of sorghum in Ethiopia: Implications for on-farm conservation policy

The increasing interest in on-farm conservation is driven by its diverse attractive features — its participatory nature and its flexible and dynamic features; its capacity to maintain not only crop diversity but the knowledge that evolves with it; and the chance it offers to link conservation with utilization and farmers' livelihoods. To implement this strategy on a sustainable basis, policy incentives are crucial. This paper argues that opportunity costs farmers face have a role to play to design sound policy incentives. Taking sorghum as an example, opportunity costs have been examined in this paper using data collected from 198 farmers in Eastern Ethiopia. The average opportunity costs suggest the size of the required policy incentives and they are the basis to estimate the national conservation costs for on-farm conservation. The regression analysis shows that opportunity costs increase with access to output markets and extension, output price, access to input supply, experience in growing improved varieties, and the relative importance of the crop. On the contrary, plot quality, input price, and oxen ownership are reducing the opportunity costs. The paper then concludes outlining the policy implications of the empirical findings to incentive design for on-farm conservation.     

Monopolists and viscous demand

We characterize the optimal dynamic price policy of a monopolist who faces “viscous” demand for its services. Demand is viscous if it adjusts relatively slowly to price changes. We show that with the optimal policy the monopolist stops short of achieving 100% market penetration, even when all of the consumers have the same long-run willingness to pay for the service. Furthermore, for certain parameter values in the model, the price policy requires rapid oscillations of the price path.