A two-sided model of paid peering

Internet users have suffered collateral damage in tussles over paid peering between large ISPs and large content providers. Paid peering is a relationship where two networks exchange traffic with payment, which provides direct access to each other’s customers without having to pay a third party to carry that traffic for them. The issue will arise again when the United States Federal Communications Commission (FCC) considers a new net neutrality order.We first consider the effect of paid peering on broadband prices. We adopt a two-sided market model in which an ISP maximizes profit by setting broadband prices and a paid peering price. We analytically derive the profit-maximizing prices, and show that they satisfy a generalization of the well-known Lerner rule. Our result shows that paid peering fees reduce the premium plan price, increase the video streaming price and the total price for premium tier customers who subscribe to video streaming services; however, the ISP passes on to its customers only a portion of the revenue from paid peering. ISP profit increases but video streaming profit decreases as an ISP moves from settlement-free peering to paid peering price.We next consider the effect of paid peering on consumer surplus. We find that consumer surplus is a uni-modal function of the paid peering fee. The paid peering fee that maximizes consumer surplus depends on elasticities of demand for broadband and for video streaming. However, consumer surplus is maximized when paid peering fees are significantly lower than those that maximize ISP profit. However, it does not follow that settlement-free peering is always the policy that maximizes consumer surplus. The peering price depends critically on the incremental ISP cost per video streaming subscriber; at different costs, it can be negative, zero, or positive.     

How much more do growers receive for Fair Trade-organic coffee?

I use a representative sample of coffee growing households in southern Mexico to estimate the price premium and gross income gain from participating in Fair Trade-organic markets through grower cooperatives. For the 2004–2005 season, FT-organic growers received an average premium of 12.8 cents per pound, yielding a gross income gain of 5% of total household income or about 26 dollars per household member. The gain is net of the costs of cooperative participation but not of other costs incurred to become certified and suggests that price premiums alone have a limited potential to increase household returns from growing coffee. More broadly speaking, the finding raises questions about the persistence of substantial price premiums associated with social or environmental labeling initiatives.     

Price and quality discrimination in durable goods monopoly with resale trading

We examine a durable goods monopolist’s optimal dynamic price and product quality strategy when buyers are rational and can trade used durables among themselves. In contrast to the usual credibility problem of the durable goods monopolist, intertemporal quality discrimination introduces a time-inconsistency problem of not raising prices against high-valuation consumers who delay purchase for quality upgrades. Resale trading ameliorates this time-inconsistency problem and allows the monopolist to effectively price discriminate, especially when the buyers are patient. The monopolist’s optimal price and quality offers in the new good market exhibit complex dynamic patterns, and new good prices can fall as product quality improves even in the absence of entry threats or learning economies. Initial quality distortions are followed by steady-state quality allocations that are always efficient for the high-valuation buyers, but sometimes also for the marginal consumer-types. Both the resale trading frequency and the price discount for secondhand goods are driven by the pace of strategic quality obsolescence in the new good market.     

Price Discrimination with Demarketing

We study how demarketing interacts with pricing decisions to explain why and when it can be employed as the seller's optimal strategy. In our model, a monopolistic seller offers different price‐quality bundles of the product. A consumer's preference is private information. With demarketing, consumers must make a costly effort to purchase and/or utilize the product, whereas with marketing, the seller instead makes the effort so that the consumer's purchasing decision is independent of the cost of effort. Our result suggests that, for small or large effort costs, it is optimal for the seller to engage in marketing. For intermediate effort costs, however, demarketing can be optimal. With demarketing, the seller induces only the consumers with high valuation to make transaction effort. By doing so, the seller can price discriminate more effectively, thus extracting more surplus. We extend our analysis to the case where the seller can offer special deals through exclusive sales channels along with demarketing. Then, demarketing can be optimal even for large costs of effort.     

The Capitalization of School Quality into Renter and Owner Housing

Residential property amenities including school quality should be capitalized into both rent and property sale prices. Evidence of price and rent premiums for higher school quality is provided. The price premium for school quality for owners exceeds the premium for renters. The premiums paid by renters and owners vary with the likelihood the household directly uses school services, housing market conditions, whether the property is in an urban or suburban area and by the observed school quality in the years leading to the transaction. The larger price premium paid by owners is supported by enhanced liquidity and tempered price volatility for properties located in quality school districts.     

Canceling the admission priority of private schools enlarges housing price gap in public school districts: Evidence from Shanghai's new admission policy

In 2018, Shanghai implemented an admission policy that canceled the admission priority of private schools to promote education equity. Since this policy is a unique measure for adjusting private and public school competition and discouraging private school choice priority, little is known about the policy effects. In this research, to examine the impact of the new admission policy on the capitalization of public education quality, we apply boundary fixed effect and Difference in Differences (DID) analysis to housing transaction records before and after the policy. The admission policy on average led to an additional 2% housing price premium for every standard deviation increase in public school quality. However, this average increase in premium was mainly driven by elite (top 5%) school districts, where an additional 8.6% housing price premium was generated by the policy. Housing prices in nonelite school districts, on the other hand, demonstrated no significant changes. These results indicate that the policy enlarges the housing price gap among school districts with different education quality. Thus, rather than promoting education equity, this policy may overall worsen the housing affordability in good public-school districts and make access to quality education more exclusive.     

Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Values

This study investigates the price effects of environmental certification on commercial real estate assets. It is argued that there are likely to be three main drivers of price differences between certified and noncertified buildings. These are additional occupier benefits, lower holding costs for investors and a lower risk premium. Drawing upon the CoStar database of U.S. commercial real estate assets, hedonic regression analysis is used to measure the effect of certification on both rent and price. The results suggest that, compared to buildings in the same submarkets, eco‐certified buildings have both a rental and sale price premium.     

The Effect of Refinancing Costs and Market Imperfections on the Optimal Call Strategy and the Pricing of Debt Contracts

This article, which was originally written in 1986, develops a methodology for valuing mortgage-backed securities with refinancing costs. We solve simultaneously for the valuation of the mortgage-backed security (loan) and the borrower's refinancing strategy, pricing all coupon levels simultaneously. Because the borrower may refinance his or her loan and incur costs at many times in the future, the optimal refinancing decisions arise from an optimal dynamic strategy that reflects the costs of all potential future refinancings. Though the borrower faces multiple rounds of refinancing costs, the market value of the loan cannot exceed the call price plus a single round of refinancing costs.     

A practical approach to quality-adjusted price cap regulation

Price cap regulation is often combined with service quality regulation since price caps may create incentives for quality degradation. A service quality adjustment factor (the Q-Factor) in the price cap formula ensures that allowed prices fall as quality declines. This paper discusses some considerations in determining the appropriate form of the Q-Factor. The paper examines the difficulties involved in exploiting the price/quality tradeoff. In addition, the paper presents a quality-corrected price cap procedure—possessing desirable properties—that can be implemented with reasonable informational requirements.     

Brokerage commissions and margin requirements: With special reference to Japan

In Japan, brokerage commissions and margin requirements are currently regulated by the Ministry of Finance. However, commissions may soon be deregulated. This paper examines several economic factors which determine commissions and margins in a deregulated environment. The analysis is motivated by the observations that for Japan's securities companies, 1) brokerage commissions constitute a large component of their revenues; 2) margin transactions account for a significant proportion of their trading volume; 3) their gross income exhibits a great deal of volatility; 4) income tax is one of their two largest expenses; and 5) they face a significant tax asymmetry.While executing an unmargined long transaction for a customer is a riskless activity, executing either a margined long or a short transaction exposes the firm to some risk and possibly negative profits. While the commission charged by a brokerage firm for executing a riskless (unmargined) long transaction is simply equal to the marginal cost of producing the firm's total number of transactions, it is demonstrated that the gross commission charged for executing either a margined long or a short transaction includes two other components. The first additional component is a risk/tax premium that is determined by the brokerage firm's tax rate and degree of tax asymmetry, the security's volatility, and the customer's margin deposit. The second additional component is the premium required for the implicit put option associated with a margined long transaction, or for the implicit call option associated with a short transaction. The option falls in-the-money if the security's price changes significantly, so that it is optimal for the customer to default on his contract with the brokerage firm.The determinants of the customer's optimal margin, for both long and short transactions, are also examined. The benefit to the customer of depositing a higher margin is that his commission cost declines. For example, with short transactions a higher margin increases the exercise price of the implicit call option, causing both the risk/tax premium and the implicit option premium to decline. However, a higher margin may increase the customer's opportunity cost of capital. Consequently, the optimal margin increases with the firm's tax rate and degree of tax asymmetry, and decreases with the customer's opportunity cost of capital. An increase in the security's volatility has an ambiguous impact on the optimal margin.The authors are from York University, Canada and International University of Japan, respectively. Part of this paper was written while the first author was on leave at Kyoto University, Japan. We acknowledge helpful comments by Richard Arnott, Lawrence Harris, Hiromitsu Ishi, Eliakim Katz, Johannes Raaballe and Lim Kian Guan (the editor).     

Measuring maintenance performance – in search for a maintenance productivity index

A partial maintenance productivity goal is that the firm should seek to maximize its maintenance productivity in economic terms, and should aim at producing any level of output which is decided upon at minimum maintenance cost with respect to the production system's state. The state of objects or production systems is such a property, i.e., a multidimensional property. In this paper we amalgamate these various dimensions into a single measure of the property involved. All things considered it would seem, that in measuring partial maintenance productivity, minimization of maintenance costs is incorporated as a subgoal, based on the maintenance inputs called for an “optimal budget”. These imputed maintenance costs do not have to be calculated separately, but emerge as a by-product of finding a high productivity index. In our partial productivity model, the output prices of the produced products and input prices (maintenance costs) will change over time. Expected changes in the prices of outputs and of current inputs would be built into the model.     

Commitment,flexibility and market outcomes

An n-firm oligopoly model, parametrized by the degree of flexibility of the technology and where firms choose the optimal scale of production (capacity) first and then a competitive stage follows, is presented. It is shown that in (Nash) equilibrium as one moves from non-flexible to flexible technologies the resulting price ranges from the Cournot price to the Bertrand price. Furthermore, if the slope of short run marginal cost is bounded, the order of magnitude of the margin of price over long run unit cost is 1/n² and the speed of convergence to the efficient outcome as the number of firms grows is, in a finer sense, faster the more flexible is the technology.     

DYNAMIC PRICE DISCRIMINATION WITH ASYMMETRIC FIRMS*

This paper considers variants of a dynamic duopoly model where one firm has a stronger market position than its competitor. Consumers' past purchases may reveal their different valuations for the two firms' products. Price discrimination based on purchase histories tends to benefit consumers if it does not cause the weaker firm to exit; otherwise it can harm consumers. The effect of price discrimination also depends on firms' cost differences, market competitiveness, and consumers' time horizon. The stronger firm may price below cost in the presence of consumer switching costs, with the purpose and effect of eliminating competition.     

Unimodality of price-setting newsvendor's objective function with multiplicative demand and its applications

We present a general solution framework for the price-setting newsvendor problem with a multiplicative stochastic demand. Under mild assumptions, such as increasing price elasticity on the mean demand function and increasing generalized failure rate on the distribution of the random factor, we first prove that both the profit function with respect to price and its derived function with respect to order quantity are quasi-concave. Three applications are then studied under our solution framework: (1) We consider a wholesale price only contract by which a manufacturer sets a wholesale price and a newsvendor determines an order quantity and the retail price, and show that the manufacturer's profit function is unimodal with respect to retailing price or stocking factor under certain conditions. (2) We consider a newsvendor problem in which the demand depends on both the retail price and the level of sales effort, and the cost exerting the sales effort is proportional to the order quantity; we prove that there exists a unique pair of price and sales-effort levels that maximize the total profit. This result is established under a set of mild assumptions on the demand and cost functions. (3) We identify a property in the single-period profit function that satisfies Condition 1 of Huh and Janakiraman (2008), which in turn guarantees the optimality of (s, S) policy for an infinite stationary dynamic inventory-price control system with lost sales and fixed order costs. Finally, the unimodality of the newsvendor problem with a general stochastic and price-sensitive demand is studied.     

Time-driven activity-based costing for health care provider supply chains

ABSTRACT

Health care providers currently operate in an environment of complex supply chains and increasing costs where approximately one third of hospital operating expenses are related to supplies. It is pertinent that health care providers have a clear understanding of their supply chain process costs. Knowing how these costs are driven and where opportunities for cost reduction exist can support health care provider supply chain (HPSC) efficiency. In this article, we present a time-driven activity-based costing (TDABC) supply chain cost methodology for health care providers. A TDABC management system can provide health care providers with valuable product and process supply chain cost information by investigating logistics activities, resource consumption, and time drivers. Our HPSC TDABC methodology is demonstrated in a case study conducted for the supply chain department of a 200-bed, not-for-profit hospital.     

CUSTOMER POACHING AND ADVERTISING*

This paper is a first look at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm which advertises the highest price in the first period will engage in price discrimination, a practice that clearly benefits the discriminating firm. This poaching gives rise to ‘the race for discrimination effect,’ through which price discrimination may act actually to soften price competition rather than intensify it. As a result, all firms may become better off, even when only one of them can engage in price discrimination. This paper offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing firms to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, might firms overadvertise. Regarding the welfare effects, price discrimination is generally bad for welfare and consumer surplus, though good for firms.     

Bill-and-Keep peering

Peering arrangements between Internet Service Providers (ISPs), in which providers agree to carry traffic originating from a peer, are common in the Internet. A common contractual peering agreement between smaller ISPs is “Bill-and-Keep”, where no money changes hands between the peers. This paper first investigates a situation when ISPs who have access to a transit ISP capable of handling their traffic for a fee, decide to peer incurring some fixed peering cost. Using a simple model it is shown that Bill-and-Keep peering is the fair and efficient outcome if the transit ISP charges for both inbound and outbound traffic and transit charges as well as costs of peering are symmetric. Next, complementarity between providers at the operational level, as measured by improvement in quality of service (QoS), is analyzed using an idealized model. Assuming that each provider incurs costs, or degradation in QoS, from its traffic traversing its own as well as the peer's links and chooses the amount of traffic to send on its peers’ links in its self-interest, the Nash equilibria of the resulting one shot game and then of an infinitely repeated game are analyzed. For the one-shot game, it is established that, while it is not possible for all the providers to be worse off, it is certainly possible for all of them to be better off. An intuitive sufficient condition for each of the providers to be better off in Nash equilibrium is then derived. Further, it is shown that providers that are better off in the one-shot game can cooperate using threat strategies in an infinitely repeated game and can each be even better off. Coalition formation between peers as a dynamic process is also investigated and some examples and conjectures on some preliminary findings are provided. Finally, the policy implications of the findings are discussed.     

Affirmative action subcontracting regulations in dynamic procurement auctions

I study affirmative action subcontracting regulations in a model where governments use auctions to repeatedly procure goods and services at the lowest possible price. Through using disadvantaged subcontractors, prime contractors build relationships over time, resulting in lower subcontracting costs in future periods. I find that regulation in the form of a minimum subcontracting requirement expands bidder asymmetries, favoring prime contractors with stronger relationships over those with weaker ones. Simulations show that the manner in which relationships evolve determines not only the utilization of disadvantaged subcontractors but also the procurement costs attained under affirmative action.     

Inducing Innovation in the Environmental Technology of Oligopolistic Firms

This paper characterizes environmental regulations which induce polluting Bertrand competitors to invest efficiently in environmental R&D. Post–innovation benefits to raising rivals' costs provide firms with incentives to innovate. Although optimal behavior cannot be elicited with pollution taxes alone, an optimum can be achieved by combining emission taxes with environmental performance standards that are higher for firms which reveal superior environmental technologies. Faced with this policy, successful innovators voluntarily reveal their technological discovery to the government, despite the apparent regulatory penalty that results. Implications for automotive fuel regulation are discussed.     

Obfuscation and Rational Inattention*

We study the behavior of duopolistic firms that can obfuscate their prices before competing on price. Obfuscation affects the rational inattentive consumers' optimal information strategy, which determines the probabilistic demand. Our model advances related models by allowing consumers to update their unrestricted prior beliefs with an informative signal of any form. We show that the game may result in an obfuscation equilibrium with high prices or a transparency equilibrium with low prices and no obfuscation, providing an argument for market regulation. Obfuscation equilibria cease to exist for low information costs and if one firm seems a priori considerably more attractive.