Experimental Evidence on Product Adoption in the Presence of Network Externalities

The benefits accruing to a purchaser of a product due to the existing base of consumers of the same or compatible products are known as network externalities. This paper studies Katz and Shapiro's (1986) model of network externalities in an experimental setting. Two sellers choose prices for competing technologies sold to two groups of four buyers purchasing sequentially in two stages. The results are qualitatively consistent with Katz and Shapiro's equilibrium predictions. In certain sessions over three-quarters of first stage buyers purchase the more expensive technology anticipating that later arriving buyers will also buy this technology. In periods where a strong network has been established for a technology in the first stage, over 80 percent of second stage buyers buy that technology, even though in most cases it is priced higher. The data, however, differ from the point predictions of the model.     

Biases in optimal pricing with network externalities

Access and usage externalities affect consumer welfare and behavior in regulated communications networks, but nobody has ever adjusted prices to allow for externalities with a binding revenue constraint. If we fail to account for network externalities when we set (profit-constrained) welfare-maximizing access and usage prices, are the resulting prices too high or too low? This article demonstrates that the outcome depends upon what size of customer is likely to exit the network. It determines ranges where the access price increases and the usage price decreases, as well as the reverse.     

ENDOGENOUS COSTS AND PRICE‐COST MARGINS: AN APPLICATION TO THE EUROPEAN AIRLINE INDUSTRY*

This paper allows for endogenous costs in the estimation of price cost margins. In particular, we estimate price‐cost margins when firms bargain over wages. We extent the standard two‐equation set‐up (demand and first‐order condition in the product market) to include a third equation, which is derived from bargaining over wages. In this way, price‐cost margins are determined by wages and vice versa. We implement the model using data for eight European airlines from 1976–1994, and show that the treatment of endogenous costs has important implications for the measurement of price‐cost margins and the assessment of market power. Our main result is that observed prices in Europe are virtually identical to monopoly prices, even though observed margins are consistent with Nash behavior. Apparently, costs had been inflated to the point that the European consumers were faced with a de facto monopoly prices.     

The Year in Economics at the FCC: A National Plan for Broadband

The past year in economics at the Federal Communications Commission (FCC) has focused on encouraging the adoption and deployment of high capacity Internet access and the associated networks, commonly termed “broadband.” Our article sketches important economic themes in the FCC’s National Broadband Plan to show how the application of basic principles of regulatory economics takes account of rapid technological change. We discuss natural monopoly regulation, externalities and cross-subsidies, network effects and interconnection, the allocation of scarce inputs, protecting and fostering competitive markets, and consumer protection and transparency as they apply to the development of broadband.     

Incorporating Network Externalities into the Technology Acceptance Model*

Research on network externalities has identified a number of product categories in which the market performance of an innovation (e.g., unit sales and revenues) is an increasing function of that innovation's installed base and the availability of complementary products. Innovation scholars have attributed these findings to the positive impact of network externality variables on consumer perceptions of innovation attributes. This paper provides the first empirical examination of these perceptual linkages by extending the Technology Acceptance Model to include consumer perceptions of network externality variables. The authors hypothesize that, when direct and indirect network externalities exist, consumer purchase intentions and consumer perceptions of an innovation's usefulness and ease of use will positively reflect perceptions of installed base size and the availability of complementary products. To test this reasoning, the authors developed new measures of consumer perceptions of network externality variables. These measures were incorporated into a survey that explored the attitudes in Japan of potential adopters toward digital music (DM) players at an early stage in the product life cycle. Findings reveal a direct positive relationship between ease of use and the perceived availability of digital music. The authors also find positive and significant relationships between both purchase intention and perceived usefulness and (1) the perceived size of the DM player installed base and (2) the perceived availability of digital music. An application of the Baron‐Kenny test for mediating variables reveals that (1) ease of use partially mediates the relationship between the perceived availability of digital music and perceived usefulness and (2) perceived usefulness partially mediates the relationship between the perceived availability of digital music and purchase intention. The research has important implications for future research on new product adoption and for the management of innovations that involve network externalities. The conceptual model provides a framework for testing alternative explanations of observed variations in the impact of network externalities within and across product categories. The empirical analysis provides guidance for managers who wish to manage the impact of network externalities on adoption. In addition to stimulating the size of the installed base and the variety of complementary products, executives must also manage consumer awareness of network externality variables and consumer understanding of the relationship between those variables and innovation attributes. Finally, traditional adoption models link consumer adoption decisions to perceptions of innovation attributes. The findings provided here imply that predictive accuracy of these models can be improved by including consumer perceptions of network externality variables.     

Housing Regulation,Externalities and Residential Property Prices

This article examines the effects of quantity restrictions on residential property prices in the presence of neighborhood externalities. A Brigham Young University policy limiting students’ location choices provides a natural experiment for studying the externality and quantity restriction effects on property values. A flexible hedonic model is used to control for nonstudent population spatial sorting by type. The estimates show significant positive quantity restriction and student agglomeration effects on student housing prices. There are also significant differences in the negative student externality across nonstudent neighborhoods, with the quantity restriction reinforcing (offsetting) the student price premium (discount) at the boundary.     

The economics of networks

I analyze the salient features of networks and point out the similarities between the economic structure of networks and the structure of vertically related industries. The analysis focuses on positive consumption and production externalities, commonly called network externalities. I discuss their sources and their effects on pricing and market structure. I distinguish between results that do not depend on the underlying industry microstructure (the ‘macro’ approach) and those that do (the ‘micro’ approach). I analyze the issues of compatibility, coordination to technical standards, interconnection and interoperability, and their effects on pricing and quality of services and on the value of network links in various ownership structures. I also briefly discuss the issue of interconnection fees for bottleneck facilities.     

Collusion between two-sided platforms

We study the price and welfare effects of collusion between two-sided platforms and show that they depend on whether collusion occurs on both sides or a single side of the market, and whether users single-home or multi-home. Our most striking result is that one-sided collusion leads to lower (resp. higher) prices on the collusive (resp. competitive) side if the cross-group externalities exerted on the collusive side are positive and sufficiently strong. One-sided collusion may, therefore, benefit the users on the collusive side and harm the users on the competitive side. Our findings have implications regarding cartel detection and damages actions.     

Competition reform and household welfare: A microsimulation analysis of the telecommunication sector in Ethiopia

This paper presents a novel simulation method for estimating the likely welfare effects of policy reforms aimed at increasing competition in strategic economic sectors such as mobile phone services. The proposed method relies on a partial equilibrium simulation approach and estimates the welfare impacts on current consumers and the potential welfare effects among new consumers brought into the market by changes in prices due to competition. This approach is applied to the information and communication technology (ICT) sector in Ethiopia, one of the three countries in the world with a monopoly in the market for mobile phone services. Based on household budget survey data for 2015/16 and departing from a baseline reform scenario that dilutes the market share of the state-owned monopoly to 45 percent, the simulation model estimates a 25.3 percent reduction in the price of mobile services and an increase in 5.7 million new users of mobile services. The predicted drop in prices and increased users would generate a combined relative welfare gain of 1.18 percent (1.09 percent among current users and 0.09 percent among new users), that could be translated into a 0.31 percentage point decline in the national poverty rate and equivalent to lifting about 275,000 people out of poverty. Alternative reform scenarios that dilute the market share of the monopoly to 75 percent and to 30 percent are expected to reduce poverty rate in 0.13 and 0.52 percentage points, respectively. The method proposed in this study represents a useful tool for promoting competition reforms in developing countries, particularly in sectors known for excluding significant segments of the population because of high consumer prices.     

Network effects,aftermarkets and the Coase conjecture: A dynamic Markovian approach

This paper investigates the expansion of the network of a monopolist firm that produces a durable good and is also involved in the corresponding aftermarket. We characterize the Markov Perfect Equilibrium of the continuous time dynamic game played by the monopolist and the forward-looking consumers, under the assumption that consumers benefit from the subsequent expansion of the network. The paper contributes to the theoretical discussion on the validity of the Coase conjecture, analyzing whether Coase's prediction that the monopolist serves the market in a “twinkling of an eye” remains valid in our setup. We conclude that the equilibrium network development may actually be gradual, contradicting Coase's conjecture. We find that a necessary condition for such a result is the existence of aftermarket network effects that accrue (at least partly) to the monopolist firm.     

Multi-sided platforms in B2B contexts: The role of affiliation costs and interdependencies in adoption decisions

Multi-sided platforms, enabling interactions between different user sides, hold an important place in the contemporary economy. Current literature, focusing on established and successful platforms, has neglected to study B2B multi-sided platform adoption mechanisms. In this article, we analyze these mechanisms by investigating the case of dematerialization platforms for B2B transactions between the multiple actors involved in public works contracts. Various qualitative materials, including 28 semi-structured interviews, were gathered over a thirty-month period. Adopting a business user perspective, this study contributes to the literature on multi-sided platforms in various ways. We show that platform adoption, in project-based B2B contexts, is mainly constrained by a high level of affiliation costs and the existence of tight-interdependencies between users' activities at project level. Thus, a consecutive adoption path would result in negative cross-group network externalities and undermine the platform's attractiveness. Conversely, a concurrent adoption path would activate positive network externalities and encourage platform adoption decisions.     

Network modeling approaches for calculating wholesale NGA prices: A full comparison based on the Greek fixed broadband market

According to the European Commission Recommendation for setting copper and fiber wholesale prices where cost orientation is imposed as a remedy, National Regulatory Authorities (NRAs) should adopt a Bottom-UP Long-Run Incremental Cost Plus (BU LRIC+) costing methodology that estimates the current cost that a hypothetical efficient operator would incur to build a modern efficient Next Generation Access (NGA) network. The starting point of modeling an efficient operator investing in NGA networks is the network modeling approach. In this paper, we compare the most widely adopted network modeling approaches in terms of wholesale fiber-to-the-home (FTTH) prices. In particular, the modified scorched node approach is compared to the extreme cases of the scorched node and the scorched earth approaches. The comparison between the aforementioned scenarios sheds light on the impact of each approach on the wholesale FTTH prices. The main finding of this paper is that the scorched earth approach leads to a maximum of 10% reduction in the short-term access prices compared to the most inefficient scorched node approach, whereas further extending its optimizations by optimizing the number of central offices, both the short-term and long-term wholesale price reductions are quite significant (more than 20%) regardless of service speeds. Consequently, NRAs should consider a geographically differentiated modeling approach when regulating the wholesale market by adjusting the level of scorching in each area and network segment according to the investment plans of telecom operators. An appropriate variation of the modeled network operator's efficiency is expected to more accurately represent the costs of a reasonably efficient operator based on the real market conditions and a forward-looking perspective. These findings provide valuable information to both network operators and telecom regulators.     

Telecommunication in the US: From Regulation to Competition (Almost)

Alfred E. Kahn was an observer and practitioner of telecommunications regulation as technology changed the industry from a natural monopoly to a platform-based oligopoly among telephone, cable, satellite, and wireless carriers. Regulation and legislation were slow to recognize these changes, and large welfare losses occurred, some of which could have been avoided if regulators, legislators and economists had followed Fred’s economic advice: Prices must be informed by costs; the relevant costs are actual incremental costs; costs and prices are an outcome of a Schumpeterian competitive process, not the starting point; excluding firms from markets is fundamentally anticompetitive; a reliance on imperfect markets subject to antitrust law is preferable to necessarily imperfect regulation; and a regulatory transition to deregulation entails propensities to micromanage the process to generate preferred outcomes, visible competitors, and expedient price reductions.     

The Estimation of a Cusp Model to Describe the Adoption of Word for Windows*

This article revisits earlier work in this journal by Paul Herbig (1991) that proposed a catastrophe model of industrial product adoption under certain conditions. Catastrophe models are useful for modeling situations where organizations can exhibit both smooth and abrupt adoption behavior. It extends Herbig's work by focusing on organizations' adoption of new products when network externalities are an important part of the decision process, and it presents an empirical estimation of the model. Network externalities occur when firms do not want to adopt a new innovation or product unless other firms do. The reason is that they do not want to end up with an innovation that ends up not being a standard of some sort. Mistakes of this nature can be costly as the firm must invest twice and loses time relative to competitors who have not made such a mistake. However, when such externalities exist, for example with regard to technological adoptions, then normal diffusion gives way to sudden discontinuous shifts as all firms seemingly act together an move to a new technology. Since, technology is an area where the authors expect network externalities to exist, that is the focus of this article. The specific application is developed from two sets of panel data on the organizational adoptions of Microsoft's (MS) Word for Windows software by organizations that previously were using either Word for DOS or Word for Macintosh (Mac). The theoretical framework for the analysis is based on work in the economics literature on network externalities. However, the organization and new product development catastrophe model comes primarily from Herbig (1991) . The article focuses on an area of organizational adoption where relatively little empirical research has been done, namely organizational adoption “for use.” Longitudinal data provided by Techtel Corporation is used to develop the estimations. Results of the empirical analysis are consistent with the theoretical framework suggested in Herbig's article and in those found in economics and catastrophe theory literatures. This lends clear support to the idea that organizations will adopt a bandwagon‐type behavior when network externalities are present. It further suggests that in such markets, the standard S‐shaped diffusion curve is not an appropriate model for examining organizational behavior. From a managerial perspective, it means that buyers and sellers may face nonstandard diffusion curves. Instead of S‐shaped curves, the actual curves have a break or rift where sales end, and there is a sudden shift to a new product that is relatively high very early on. Clearly, for new product development (NPD), it suggest that organizations' “for‐use” purchases may be similar to regular consumers and may change rapidly from one product to another almost instantly, as in the case of the switch from vinyl records to compact discs (CDs). From an old product seller's viewpoint, the market is here today and gone tomorrow, while for the new seller it is a sudden deluge of sales requests. To put it in more everyday terms, sudden changes in adoption behavior are a September 11‐type experience for the market. It is the day the world changes.     

产业外部性对全要素生产率及其分解的实证研究

本文构建关于MAR外部性、Jacobs外部性与Porter外部性与全要素生产率的空间计量模型,实证检验了以2004年为基期的2005~2015年中国省域制造业的产业外部性对于全要素生产率的影响,同时将产业细分为劳动密集型、资源密集型以及技术密集型进行探讨研究 。通过构建空间计量模型,发现雅各布斯外部性与波特外部性对于制造业整体以及3个细分产业的全要素生产率的影响非常显著,都对全要素生产率的增长具有促进作用。针对生产率分解后的技术进步与技术效率的实证证明,产业多样化可以促进制造业技术效率改善而对技术进步具有抑制作用,市场竞争可以促进制造业技术进步,与波特外部性不谋而合。提高产业专业化以及保持产业的区域垄断更能促进劳动密集型产业技术进步,支持了MAR外部性的观点。劳动密集型产业技术效率的变动则主要是通过区域的竞争来影响;资源密集型产业的技术进步与技术效率只有波特外部性在发挥正向效应;技术密集型产业的技术进步需要保持产业的专业化,而提高产业的多样化与有效的市场竞争更利于技术效率的改善。     

Taking industry structuring seriously: A strategic perspective on product differentiation

Given legal impediments to consolidation and collusion, firms often resort to product differentiation to attain market power. This paper provides a formal analysis of product differentiation as a tool for such industry structuring at both the firm and industry level. We examine: how industry structure differs when firms collaborate on their differentiation decisions, and when the profitability of such collaboration is greatest; how an individual firm's differentiation decisions affect subsequent market outcomes under price competition, such as margin, market share, and profit; how mere differentiation differs from a ‘differentiation advantage’; and how changing a firm's differentiation affects its rivals through both positive externalities (by restraining rivalry) and negative externalities (by shifting competitive advantage). Our results have implications for empirical research, strategy theory, and pedagogy.     

A retrospective study on the regional benefits and spillover effects of high-speed broadband networks: Evidence from German counties

This study aims to assess the economic benefits of high-speed broadband within and across neighboring counties in Germany. Utilizing a balanced panel dataset of 401 German counties with data from 2010 to 2015 as well as different panel estimation techniques, we find that an increase in average broadband speed has a significantly positive effect on regional GDP in the average German county. Furthermore, we find that broadband deployment in German counties induces not only substantial economic benefits in terms of direct effects within counties but also positive regional externalities across counties. According to our estimation results, an increase in average bandwidth speed by one unit (1 Mbit/s) induces a rise in regional GDP of 0.18%. This effect is almost doubled if we also take regional externalities into account (0.31%). Moreover, we find that regional agglomeraton effects are of particular relevance for rural counties. Our cost-benefit analysis of subsidies based on conservative estimates suggests efficiency gains, as the total economic per capita benefits (€164) of subsidy programs to encourage broadband expansion exceeded their associated per capita costs (€114).     

Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination

Rey and Tirole [Handbook of Industrial Organization. Amsterdam: Elsevier (2005)] considered a model in which a monopolist sells to downstream firms using nonlinear contracts. They showed that banning price discrimination fully restores the supplier’s ability to leverage its monopoly power by enabling it to commit not to offer side discounts. I show that the situation changes when the supplier competes against a fringe of less efficient rivals rather than being a monopolist. Then banning price discrimination may cause per-unit prices to fall and welfare to increase. The dominant supplier can take advantage of a strategic bargaining effect: reducing the per-unit price makes the outside option of buying from the fringe less profitable, allowing the dominant supplier to extract more bargaining surplus through the fixed fee.     

How do Brands’ “Own Generics” Affect Pharmaceutical Prices?

This paper examines the price effects of generic drugs that are produced by brand-name drug firms and that are labeled, priced, and marketed to compete against independent generics. The strategy of introducing such “pseudo-generics” – also known as “authorized generics” – has raised some antitrust concerns. One defense of this strategy has been that the additional competition created by pseudo-generics should lead to lower prices. This paper develops a simple model to show that pseudo-generics can be expected to have exactly the opposite effect. It then examines empirical evidence on this point from the Canadian pharmaceutical market, showing that there appears to be a positive relationship between drug prices and the share of generic sales made by the brand’s own pseudo-generic.